In my previous article, I wrote why helping these failing companies is a recipe for disaster and how giving them money hurts everyone more than simply allowing them to fail. However, if the determination by congress is made to help the Big three auto companies with a bailout, for the sake of keeping the jobs, tell me why it wouldn’t make more sense to just give that money to the employees rather than the company?

Let’s break this down: Between the big 3 automakers there are an estimated 628,699 employees working at these companies. The request is to give these guys 25 billion dollars (25,000,000,000) in aid. This equates to roughly $39,675 per employee, right at the average annual income for all Full time workers between the age of 25-64 in the US per the census bureau.

With money to hold them over for at least year, they could surely find equal paying jobs in other, more efficient and effective industries.

My Dear investor,

By now you are asking me to make some sense of all the different mutual fund choices available to you, so I will try. Let’s recap them from our previous lesson; We have Money Market funds, Bond funds, and Stock Funds to choose from. Within each Major fund type, we have in some cases extremely different choices, however, the majority of your decision making will take place in selecting your stock funds. So, let us move our efforts to a discussion around the multiple stock fund choices (growth, value, blend, index, international, sector, and other). Keep in mind, your company has picked the major funds you can invest in, you more or less decide percentages.

While I went into depth in the previous lesson about your stock fund choices, I didn’t discuss how to choose or select the best ones. Your mix of choices should depend on your risk tolerance. For example, as an agressive investor my portfolio (90% of my 401k is in stock funds) is heavily weighted towards growth, small cap, international and index funds.

No matter what you end up selecting, as a general rule pick at least 10 different funds and keep your percentage in each fund around 10% for optimal diversification. In addition, choose only funds with no-loads (unless a loaded fund is outperforming no load funds, which is highly unlikely). No-load funds (such as Index funds) have consistently outperformed loaded funds year after year for many reasons. Loaded funds are actively managed funds (meaning the company pays investment managers to monitor, and in some cases change what stocks they are investing in for the fund), and and no load funds refers to funds that are setup and left alone. Why don’t you want someone else managing the fund your invested in? Because they have proven to do no better than funds that are left alone, in most cases, you will lose money having your funds actively managed rather than left alone. In a nutshell, choose funds with low management expenses, it will mean more money to be invested versus in some investment managers’ pocket.

Use common sense when selecting from the funds available to you that are suited around your risk tolerance. You can request a prospectus (basically information provided about the funds past performance and future expectations) from Investment providers like Vanguard or Fidelity or whomever you are working with. Look and compare fees within the different funds. Compare their past performance with how long you will be investing to see if it fits your risk tolerance. Make sure the fund is what it says, look at the companies it invests in. Take the time to do research for a couple of hours, it will pay off big time in the long run.

In our previous lesson, we discussed the three major fund types (stocks, bonds, money markets) and what they consisted of, now we will drill down and talk about them in greater detail (as this lingo will be prevalent when you go to choose your plan).

Money markets (funds) are often used when you sell off your investments and the investment firm deposits your proceeds in an interest bearing account (versus sending you a check and you lose out on the interest, while you decide what to do with your money).

The major types of Bond funds include:

U.S. Government Bond Funds are U.S. treasury or government securities.

Municipal Bond Funds are tax-exempt bonds issued by state and local governments.

Corporate Bond Funds are the debt obligations of U.S. corporations.

Mortgage-Backed Securities Funds are securities representing residential mortgages. (from government lenders like Fannie Mae and Freddie Mac).

Stock funds are by far the most complicated of your fund options (in my case they make up 90% of my 401k portfolio). The investment firms have a number of ways they label their different stock funds, which are supposed to help you categorize the different strategies you can follow depending upon your risk tolerance. They are as follows:

Value Funds - The key here is the investment firm considers these stocks to be undervalued. Think of this fund like a real estate investor does when he finds a home that is way under priced, with a little polish, these suckers could make a ton of money. These funds invest in mid to larger sized companies. Stocks in this fund usually pay dividends (some companies pay cash back to their shareholders on an annual (or a variation of) basis in the form of cash and or additional shares based upon the money that they make (so, instead of the price of the stock going up, they opt to pay the shareholders now). These are considered typically safe investment (as there won’t be too much swing in prices).

Growth Funds - These funds invest in stocks that are thought to be the quickest growing companies in the market. Growth funds hardly ever provide dividend income because they are focused on expanding their businesses. These are considered risky investments with an investment horizon of 5-10 years (meaning you better plan to stick with these guys for that time to get the most out of the stocks).

Blend Funds - These funds are a mix or blend of both growth and value stocks. Below are the different types of blend funds by size:

Large-Cap Funds - These funds invest in companies whose value is greater than $5 billion dollars. These are usually companies that have been around for a long time and have a proven track record.

Mid-Cap Funds - These funds invest in companies whose value is greater than $1 billion, but less than $5 billion.

Small-Cap Funds - These funds invest in companies whose value is less than $1 billion. These companies, like the growth fund companies, reinvest profits to expand, versus raising additional money through other methods.

Index Funds - These funds are representative of different stock markets indexes, like Dow Jones, Standard and Poors, etc. Instead of hand picking stocks from different markets (there are thousands); the investment managers of this fund select portfolios built around the entire market. These are very cost efficient funds with this hands off approach to investing, however, they maybe risky too.

International Funds having been doing quite well as the dollar has plummeted.

Global Funds - invest in stocks around the world.

Foreign Funds - invest in stocks outside of the U.S.

Country Specific Funds - invest in one country or physical region of the world.

Emerging Markets Funds - invest in smaller, developing countries and are considered very risky, however very rewarding in some cases.

Sector Funds invest in different industries or segments of the market. Such as utilities or technologies or healthcare.

Now, keep in mind the above is the extreme basics, and there are multiple types of funds out there that could take me hours to discuss. The point here is, now you have an idea of what you are looking at, when you start to analyze your different 401k plan options.

First, let us define a Mutual fund; In a nutshell, a mutual fund is a collection of multiple stocks and bonds and other investments. Basically, an investment firm starts a fund by going out to the stock market and buying a bunch of different shares of companies and various different bonds. They then sell shares of their funds to you through your company (and out on the stock market).

So, you start your job and your company tells you to join their 401k plan. For example, my company uses Vanguard (an investment firm), however, their are many more large investment firms used accross the country like Fidelity. Now, Vanguard has gone out and built a bunch of different funds that invest in very different things. For example, one fund might invest heavily in technology stocks (like google, or yahoo), while another fund may be invested in international food markets, while another fund is invested in utility companies.

So, you decide it’s a great idea to join the company plan as you will defer a portion of your taxes and make free money.

You are then given a list you are supposed to choose from, of different funds. This is where it get’s tricky. What are the major types of funds? What funds should you buy? How to decide what funds are best? Should you choose the growth, value, index, bond, some other fund, or a combination thereof? Don’t worry, we’ll make some sense of this now.

The different major types of funds offered are Stocks, Bonds, and Money Market funds (Cash). Looks familiar huh? We talked about these in lesson 6.

Stock funds are wide and varied based upon economic sectors and geography.

Bond funds consist of various types of government, municipal, and corporate debt obligations (meaning they are additional ways for organizations to raise money for one reason or other.

Money Market funds invest in things mentioned in previous lessons, like CD’s offered by banks along with savings accounts. These are easily converted back to cash, however, they have a hard time keeping up with inflation (meaning the interest you are given for investing in them may be less than the dollars devaluation).

In the nest lessons, we will discuss in greater detail the different types of Bonds offered by your 401k.

Many people want to start off investing by building their own portfolio of individual stocks, which is perfectly fine, however, it can be much more confusing and difficult than simply investing in mutual funds (we will discuss mutual funds in the next lesson) offered through your 401k plan and or other defined contribution plan like an IRA or Roth IRA (if your company doesn’t offer a 401k). Basically, with your 401k plan, you must choose from various mutual funds offered by the investment firm your company is working with (so, you don’t have a choice here, if you want to invest additional money over and above what you are contributing to your 401k plan - you can and should do so by building a larger portfolio of additional individual stocks and bonds).

Back to the question I hear (about picking individual stocks) so often, it’s probably more common than screaming is in my house. The problem is this, I can’t answer that question for you - and neither can anybody else without your specific information, only you can. Now hold on, don’t call me a jerk or retard or whatever else because I’m not giving you the information you think you want, listen to my reasoning:

Without knowing your age, the amount of risks you are willing to take, what your current portfolio of stocks and bonds are, how long you want to invest, and various other factors - I, nor anyone else could tell you if one stock is better for you than another. In future lessons however, I will teach you much more about investing through buying individual stocks (for those who don’t have a 401k, or whom want to invest additional money outside of their 401k or other defined plan).

An example of my above thoughts: An uncle of mine was asking me about various specific stocks and if I thought they were good buys. In many cases the stocks were good buys for me, but not for him. How could that be? Well, many of the stocks he was looking at required a much longer time commitment than he had. He is only 5 years from retirement and the stocks he was looking at were long term investments (meaning he would have to remain invested with them for a long time - maybe over 10 years in some cases to realize the returns on his investments that he wanted). In his short time frame, it was not likely he would generate the returns he was wanting. On the other hand, I could hold on to the stock for 10 years, and would likely make good money doing so.

It is worth repeating a million times, if anyone gives you advice on specific stocks without knowing a damn thing about you, their advice is pretty much worthless to you. The information you use to decide if one stock is better for you than another should be based upon your needs, not somebody elses or what they think is “the hot stock” of the day, month, year, or whatever.

So, you are asking, “then what good is this site if it can’t help me pick a stock.” Once again, in future lessons, I will help you learn about the tools you can use if you choose to build your own portfolio. But for now, we will move our focus to the options an average new/existing 401k investor has to choose from (mutual funds) when they go to setup their 401k plan.

Please proceed to the next lesson, this will become much more clear after that, I promise.

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)!