One could argue all day about this subject, so, for the sake of being simple I will provide you a peak into my portfolio ( what types of stocks and bonds and such make up my investments), and how I decided upon my current mix. But before that, here are some general rules you can use to figure out your mix:

There is a general rule you can use to determine what mix of stocks and bonds you should have and it is as follows: 100 less your age = % Stock / Bonds. So, let’s say you are 20. 100-20= 80 or 80% of your mix should be stocks, and the other %20 should be bonds. This is a conservative rule. The rule I use, which is quite a bit more liberal, is 120 less your age. So, for me, 120-30 = 90. So, around 90% of my portfolio is invested in stocks, the other 10% is in bonds. Keep in mind that stocks, over the long haul, will beat the heck out of bonds.

I would suggest using somewhere in between, but you should consult a liscensed professional before you make a mistake on your own. This is only to show you what I have done and what others have, not necessarily what you should do - as your situation may be different than mine.

Now, for my portfolio:

First, I must provide you a background of myself:

• I will be 30 this Sept. 6, 2008.
• I want to retire comfortably by the time I am 55. So, I have 30 years to invest and generate a stream of cash for my retirement (even though my investments will still generate money when I go into retirement).
• I plan on living until I am 85 (to play it safe), if I die earlier someone else will get my free loot (I have 3 kids, so this wont be an issue)
• My house will be paid off by then. The only bills I anticipate are normal living expenses and helping the kids out if needed.

I want to have $4,166 or so per month to support my wife and myself (I need my damn golf money) or I need $50,000 per year for 25 years (1.25 Million dollars) to live comfortably after retirement (I am not even considering inflation here).

I would need to invest (assuming I am starting today) about 10,000 per year until I retire (If I were earning 11% return on my investments. Now, the stock market over time has netted investors around 10% return, so, I don’t think my assumptions are too unreasonable. How did I calculate this? You can either do it manually, which would look like this (10,000 x 1.11) = 11,100 X 1.11 = 12,321 X 1.11 …. and so on until you are up to year 25 in this case and you will come back to 1,144,133 after 25 years of compund interest, which meets my goal. Or, you can use a nifty tool in Microsoft Excel. The tool in excel is called the FV (future value) function. With this tool, you simply enter the interest rate you are earning, the amount of time you will be investing, and the annual payment or contribution you would make. Voila, excel is much faster. If you need more help with using this tool let me know in the forums.

Now, my current portfolio is 91% stocks and 9% bonds. I would be considered an extremely agressive investor by some, and others would just say I’m aggressive. I would think I’m somewhere in between those two descriptions. In future lessons, I will be more specific as to what I invest in and why.

Skip this if you are only interested in 401k’s

So, many of you by now are asking me “What about us guys that aren’t offered a 401k by our company.” And others who run their own small business are asking the same thing. No problems, our trusty old government knew a while back that they wouldn’t hold true on their obligations on social security (I’m 30 and do not anticipate getting a dime back that they are taking from me now - and you should think the same way), so they gave us citizens a break on our taxes, so we could do it on our own. Back to my point, for those of you who don’t have a 401k option, you can invest in a few similar plans to the 401k, they are as follows:

• 403b-just like a 401k, but this is for government and non profit companies (like hospitals and schools).
• Keogh plan: This is for people who run their own business, it is their own benefit plan (just like company pension plans).
• IRA or Indiviual retirement account - the government allows you a certain maximum amount of money you can contribute (this money will be invested before you pay taxes on it-so it will be taxed at retirement, making this a smart decision if you have lower income when you are retired - which most of us will). The 2008 limits are $5,000 if you are under 49, and $6,000 if you are over 50. You can invest in brokerage firms (places that are licensed to sell stocks), or banks and such.
• Roth IRA or a Roth Individual Retirement account - same as an IRA, except you pay the taxes now instead of at retirement.

For the small business owner interested in looking into the benefits of offering a 401k for your employees as a recruitment and retention tool check out:ShareBuilder 401(k)  . It’s completely free to get a quote, and there are numerous tax benefits for your company (even if it is only for you).

Here is my roadmap to understanding investing, whether it be a 401k or any different type of investment offered by your employer or available by banks or brokerage firms and such. The lessons I offer will teach you step by step, what you need to know or consider before you start investing. By following these simple lessons, you will learn many things, but most importantly it will help you set your objectives and goals and provide you with a clear direction you need to take in order to start investing properly. So, follow the lessons in order, they are setup in chronological order (starts with the basics and then gets more detailed). Here they are:

1. Learn about 401k’s in general and why you should invest.

2. Learn about the importance of Compound Interest and how it can make you money.

3. Learn about diversification and the keys to being sucessful in all market conditions.

4. Learn about how to make a retirement plan for yourself and family, and how to determine what your risk tolerance is and what approach you will need to take in investing. Determine how much money you will need for retirement.

5. Learn the difference between retirement savings and benefit plans and the different investment types available to different types of workers (government, private companies, indiviuals not being offered a 401k by their employer, etc.)

6. Learn about the different types of investments you can buy (stocks, bonds, cash, real estate, etc.).

7. Your company doesn’t offer a 401k, no problem. Expanding on lesson 5, detail about plans available to those without a company sponsored 401k plan.

8. Getting down to the details. This lesson talk about how my 401k plan is setup and general rules that can be used to setup your plan (deciding your asset mix).

9. What stocks should I buy discusses how it is impossible for anyone without your details to know if a stock is right for you or not.

10. Mutual funds are what 401k investors must choose from, learn what they are in general here.

11. Mutual funds detailed discusses in depth the various types of funds offered by all mutual funds.

12. Selecting which mutual funds suit your needs best should be fairly simple and straight forward now, with what you have learned.

13. You’ve decided to invest outside of your 401k, and need advice on how to get started. This lesson will touch ono the basics of analyzing stocks and bonds.

14. Lessons will continually be added.

In our first three lessons we talked about the types of risks people should be taking depending upon their ages, and how to play it smart when you want to be risky and or when you are close to retirement. This lesson will focus on categorizing your major investment choices in your 401k. Within your 401k plan you will be able to select to invest in Bonds, Stocks, Cash, and or other small categories like Real Estate and such (considered long term choices).You can invest in all or one, or none for that matter. In addition, you have shorter term choices such as money markets, CD’s from your bank and or other savings type accounts. For now, we will discuss the long term options in greater detail, because we are focused on retirement planning here. So, what are these different types of assets and how much of each would be the best for you?

First, let’s start with talking about what each category or asset type within your investment choices are:

Bonds: this type of asset is the rather secure or less risky than stocks. In general, bonds offer set interest payments for your investment. Bonds are typically sold by governments and corporations to pay for different things. The US federal government sells all sorts of different bonds to help build bridges, highways, and a bunch of other stuff. Government has a plan to generate the money to pay off the bonds through different means and in case of the US government, they have an excellent track record of paying back what they are supposed to. Because these payments have almost always been paid back, they aren’t considered very risky, and the amount of money they pay you in return for investing in them is substantially lower than other more risky asset options. Corporations and other types of entities have these same investments that governments offer, however, they may be slightly riskier as they are only backed by townships and or a Corporations good name.

Stocks: Stocks are the biggest chunk of an average investors portfolio (or mix of assets). You can find so many different types of stocks it would blow your mind. Stocks offer the greatest potential for growth and at the same time loss. Stocks can be very risky or not risky at all, it depends on the nature of the stock in question.

Cash: This is less risky than Bonds and is even backed in some cases by the Federal Government of the USA, but it is the least profitable. When you put some of your money into cash, you are typically investing in different types of savings accounts, money markets, or other things like Treasury Bills. The biggest problem with investing in cash is the risk of inflation (when your money buys less and less due to the sinking value of our money compared to other coutries money).

Real Estate and other types of Investments: The are man ysmall investments you may elect to invest your assets in, however, keep in mind that each one of these has their own set of risks and rewards.

Now that you understand what each of the major categories you can start to think about how to allocate your assets within your 401k based upon your retirement needs and your risk tolerance. So, when we talk about “asset allocation,” we are really talking about how you should spread your investments among the different options available.

In lesson 8 we will discuss how you determine what mix of assets would best suit you, or a typical person of a certain age.

We have tools available to help you. We will discuss this in greater detail later.

My guess, you are thinking - no technical jargon, please. Well, Compound interest sounds more complicated than it really is. In a nutshell, compound interest is making money off of the money you already made, or interest off the interest you’ve already made (this is why credit card companies have gotten so rich).

Let me make this even simpler for you: When you invest $1000 at 5% interest, at the end of the year (assuming the interest is compounded annually, some places compound more frequently, results in better return for you) you will have $1050 ($1000 times 1.05). So, you made $50 interest on your money.

If you keep that same investment in for another year and at the same rate, you will have $1102 ($1050 times 1.05). So, you will have made $52 in interest the second year, or a couple of dollars more that the first year, on the same intial investment.

The third year, you take that $1102 and reinvest it once again, and now you have $1157, or you’ve made $55 in interest. The following year you do the same, take the $1157 and reinvest it at 5% interest. The results are you now have more than $1214, or over $57 in interest made in one year.

Do this for several more years and your interest earnings will grow exponentially and you will be happy as heck.

So, why is this important you ask? Well, as you see in the above example, if you keep reinvesting your money - you will get greater and greater returns (for doing nothing more than reinvesting your money)!

Chances are, you came here because your employer offers some sort of retirement savings plan, specifically a 401k. However, it may be beneficial for you to understand the several different types of savings plans offered by various employers; These plans can be split into a couple of different major categories - Defined Contributions and Defined Benefits. Defined contributions are things such as your 401k, where you are responsible for managing how your money is invested. Defined benefits are like pension plans, where your employer guarantees you a set amount of money upon retirement, to be paid in fixed increments (similar to social security, but this is managed privately instead of by the government) and managed by the employer.

Other defined contribution plans include 403(b)s (similar to 401(k)s, however, these are only used by non-profit orgainzations), 457 plans (available to state and municipal empoyees and similar to 401(k)s and 403(b)s, however these allow larger catch-up adjustments), and SIMPLEs (Savings Incentive Match Plans for Employees for organizations with less than 100 employees).

Some employers do not offer any of the above, in which many people choose to “create their own” by using IRAs (individual retirement accounts). Here is a great article on Traditional IRAs.

I will expand upon this subject in my later lessons.

Very simply put, a 401k plan is a company sponsored retirement tool. More or less, your company will allow you to deduct a portion of your wages to be invested. More important, your company will match a portion of what you invest and this is free money to you.

Let me show you a quick example:

Below, I will talk about two brothers, one whom chooses not to invest through his 401k plan, rather into savings after he gets his paycheck - and the other whom knows he will have more money than his brother at the end of the day by investing pre-tax:

Billy Bob makes $30,000 a year, but invests no money, rather he saves about $1,500 a year from his paychecks. His taxable income would be $30,000. Let’s say his tax rate is 25%. He would pay about $7,500 in taxes, and his take home pay for the year would be $22,500 (30,000 X .25 = 7,500 and 30,000 - 7,500 = 22,500). Billy Bob then puts aside 1,500 in savings, for a net of $21,000 for living expenses at the end of the year.

Freddy, Billy Bob’s brother, makes the same amount of $30,000 per year, however, Freddy participates in his companies’ 401k plan, and he contributes 5% of his wages to be invested. So, Freddy’s taxable income would be $30,000 less 5% or $1,500 (30,000 x.05 = 1,500 and 30,000 - 1,500 = 28,500) or $28,500. Taxed at the same 25%, Freddy would pay $7,125 in taxes (28,500 X .25 = 7,125). Freddy’s net pay for the year after investing would be $21,375.

The two brothers would have both set aside the same amount, however, Freddy would actually have $375 more in his pocket at the end of the year than Billy Bob (not to mention whatever amount his company matched in addition to what he invested! Billy Bob thought he was doing fine saving on his own, but actually he was hurting himself!

Do you believe me now? It truly pays to invest, especially when your company matches what you put in for FREE!

Now, some are still wondering or swearing at me: “What about the taxes on the 401k investments?” Yes, it is true you will have to pay these taxes some day. The above example shows the man chose to have his money deducted from his pay and invested pre-tax (in other words, the IRS will allow you the option, pay taxes now or later). The key here is, you would rather pay taxes later when your income is much lower (as it is when you retire), because you will be in a much lower tax bracket by then. Not to mention - you get the benefit of having all of those dollars you invested making you money instead of making the government money.

Not to mention, there is the potential that by investing you would even lower the tax bracket you are in, according to your taxable income, further raising your take home pay.

Per Wiki The term “401(k)” has no intrinsic meaning; it is a reference to a specific provision of the U.S. Internal Revenue Code section 401. However the term has become so well-known (it is almost a “brand“) that some other nations use it as a generic term to describe analogous legislation. E.g., in October 2001, Japan adopted legislation allowing the creation of “Japan-version 401(k)” accounts even though no provision of the relevant Japanese codes is in fact called “section 401(k).” India, Hong Kong, and Singapore refer to their equivalents of the U.S. 401(k) plan as Provident Funds. Egypt and Lebanon have a similarly structured retirement fund, and Israel has its own retirement fund.

Now you see the benefits of investing, check out all of my lessons and articles for help in making sense of setting up your investments and help in selecting what investments are best for you.

I just started a new job, please help me pick my 401k portfolio!

For the majority of people investing in their companies’ 401K plan, none have a clue of what they are doing or for what reasons. Rather than asking a neighbor, or your distant cousin - you have decided to take this chore upon yourself. First, let me congratulate you on taking some time to try and understand this sometimes complex task. Now that’s out of the way, let’s move on to making some sense of this mess.

Just like selecting a healthy diet, defining what is healthy or accpetable to you or me may not be true for the other guy. Your diet, like your investment plan, should change over time to accomodate your health (or wealth). Not too many young people care what fast food they stuff in their mouth, but as they get older - those same foods do different things to your body - leaving you no other choice but to eat what your body will allow you. Younger people can afford to be riskier, they have time to correct mistakes as they get older. However, as those kids get older -they must be more careful how risky they are with their money, as they have much less time to make up for mistakes.

Keeping this in mind, allow us to start our first, and potentially most important lesson for the begining investor- Calculating your retirement needs and understanding your risk tolerance: Basically, the younger you are the riskier you should be, as you get older your investment portfolio should change to protect your newly accumulated wealth and you should move your investments into less risky options. Pretty basic huh? Yes, I would agree - however too many people skip this first step all together and or don’t understand it at all.

Let’s shed some further light on exactly what this means. Let’s take two separate people ( a mother and daughter) and compare what their investment strategies should be. The first investor, Mother, just turned 50 years old and has been investing now for about 10 years. The Mother’s daughter, whom just turned 30, has been investing for almost 10 years now too. These two people have very different objectives and goals to achieve from their investments, even though they started at the same time.

When Mother started to dabble in investing - she was 40, and she wanted to retire in about 25 years, and have the ability to support herself for 20 years without working. Mother knows this is a lofty goal but thinks there will surely be increases in life expectancy - so she wants to cover herself for as long as possible. She estimates she will have her home paid off by the time she is 60, and the only other income she will need to support herself will be for living expenses of which she estimates however many dollars per year she will need. She estimates those dollars to be 10,000 per year for 20 years - So, by the time she hits 65 she wants to have $200,000 in savings. Even though Mother could potentially make a bunch of money by investing in riskier stocks, she could potentially lose everything - thus preventing her from doing anything other than selecting a mix in her portfolio that will guarantee the outcome she wants. So, Mother picks mutual funds that guarantee a certain level of return with a certain level of risk.

So, Mother did the following:

1. She estimated when she could retire based upon when all of her major bills would be paid (cars, homes, credit cards,etc.) off.
2. She estimated how much money she would need to maintain a comfortable lifestyle for the remainder of her life after retirement.
3. She then set her investment goals to obtain and protect the amount of money she will need at retirement (We will get into further detail later as to what types of mutual funds would best fit her needs).

Now, her daughter on the other hand has nearly 35 years until she will ever consider the possibility of retiring as she is only 30. Her daughter started investing much earlier than her mother and has very different objectives and goals. Her daughter determined that she will have her house paid off by the time she is 50 and that she wants to live modest now in hopes of a fun life of travel during retirement. Her needs though come at a price, unlike her mother, the daughter will want 50,000 a year for the 25 years she expects to spend in retirement, or 1.25 Million dollars - so she can see all the things her mother didn’t get to and so her children can come along too. Not to mention, her daughter has to plan for her children’s college needs. Since the daughter began investing at such and early age, and has the ability to stay in the market for the long term, she has chosen an option that will make her much more money in the long run - however, it is much riskier. However, the Daughter understands, as she get’s older she will simply change her investment strategies to protect her money as needed.

Let’s summarize the Daughter’s plan:

1. She caluclated when she wanted to retire and how much money she would need to maintain the lifestyle she wants after retirement. She figured out how much money it would take to pay off all of her bills and fund her childrens tuition needs.
2. She then set out to find a portfolio that matches her age and risk tolerance. She knows, as she accumulates more and more wealth and get’s older and older, she will have to sell off the riskier stocks and bonds for one’s with more certainty and less risk.

The above Mother and Daughter example shows you how two different people correctly go about gauging their retirement needs and start thinking about their abilities to take on risk. Riskier investments = higher returns, safer investments = lower returns.

This is the extreme basics we will build our knowledge upon going forward.

In addition, we have a Retirement Calculator that will help you figure out what your needs will be when it comes time to retire.

Please move on to the next lesson at your own pace, but don’t wait too long - or it may cost you!

What does diversification mean and why did my finance professors stress this word so much? I’m certain you have heard of diversity by now, as it is stressed in most every company. Well, diversity in your stock portfolio is extremely important. Essentially, diversification means don’t put all your eggs in one basket. Now before you run off and claim you understand, let me further explain this important point: Diversification is just as important for the old as it is for the young. For example, just because you are young and wanting to take risks, you shouldn’t take all of the risks with one company or mutual fund or whatever your investment may entail, rather spread those risks over several funds or investments. If I invest in one risky company, I could make a ton of money - however, I could lose it all too at any time. How can you combat that? Well, try investing in several different “risky” stocks, young buck.

You can accomplish this task by spreading your risks against multiple types of investments: Stocks, bonds, mutual funds, and money markets for example.

Furthermore, within the mutual fund field (for 401k investors) you have the ability to build a diversified portfolio of different types of funds; Such as value or growth funds, index funds, large and small cap funds and various other types of funds (I will later explain what these different types of funds are).
The key here is, if one is losing, chances are another will win - offsetting the chances of large losses.

Finally, diversify your security holdings by industries or geography. It is important to invest in several different types of companies across various regions to diversify your portfolio. If I were to show you a quick snapshot of my portfolio, you would see a portion of my assets are allocated across the world, to combat the falling dollar. International markets are a great way to combat local issues or currency problems.