avsdS:nelson (01/25/83)
I am suprised at the ignorance of most people regarding IRAs. Anyone stashing money in an IRA ought to have enough to at least open a money market account (not neccessarily the bank type); if you don't have $2000 to throw away until you're 55, you should be saving for more immediate needs. Given that you do want to open an IRA, why not open it with a stock broker? Some (Schwab, for instance) only require $2000 to open a money market account, and that money can be switched daily to other investments - stocks, bonds, even futures. The only difference between this and a normal account with them is in the eyes of Uncle Sam - Schwab does not care, other than that you sign a paper saying that this is an IRA account. Why give your money to a credit union that pays lousy interest and does not give you the flexibility of those other investments? Why give your money to a bank that may charge you a maintenance fee for this account? I should point out however that bank money market funds are paying 10.5% now, while my Schwab account is paying 8.2% (and has in the past been one of the highest of MM funds). Nevertheless, this discrepancy may moderate in time. Almost anything you want can be part of your IRA (as far as I know). If you really do want an IRA, why not have fun with it? After all, we're all young on this net - it doesn't make sense to be too cautious. (Actually it doesn't make much sense to me to open an IRA until you've made all the other major investments you want - house, obligitory Silicon Valley engineers sports car). Glenn Nelson, Ampex, CA
as (01/27/83)
Regarding opening an IRA with a broker: Remember that the broker gets a commission (from your funds) every time you buy anything. If you buy a mutual fund with a broker, it will cost you over 9% on the funds actually invested (8.5% taken off the top). If you decided to move the funds to another broker or company, that money is gone and you may have to pay new commissions. If you buy stocks or bonds not in a mutual fund, not only do you pay commission, but you're left with a problem of what to do with dividends as they are paid to you. You want to reinvest them (easy in a mutual fund) but the amount are usually too small to buy additional shares. To avoid both problems, the answer may be in no-load mutual funds. These are available in many flavors (bonds and/or stocks in anything from aggressive growth to lower payback but less volatile income or bond funds). They have people making investment decisions who know more than we do about investing (and have the information and means to really deal in the markets), so the only real decisions you have to make are what your investment objectives are in terms of potential for risk and for reward and which funds are likely to do the best with respect to those objectives based upon past history. Of course there are no guarantees that the fund you choose won't start making terrible decisions after you buy in, but at least mistakes (as well as successes) are spread out over more stocks and your share of any mistake (or correct decision) is much smaller than if you had bought 100 shares yourself. Since they have no sales commission, you have to do a little digging to get the names and toll free numbers of the companies. Any good public library has publications on mutual funds (including no-loads) in its financial section. Watch out for some of the books (especially older, out of date ones) with particular axes to grind. There's one publication that I like that I haven't seen in the library. It's "The No-Load Fund Investor," P.O. Box 283, Hastings-on-Hudson, N.Y. 10706. You can subscribe to their annual book (highly recommended to learn all about these kinds of investments) and/or their quarterly updates (useful for tracking your decisions).
eager (01/27/83)
There are several very good reasons to place money in an IRA or Keogh plan: 1. The money placed in either plan is deducted from current income and thus defers tax payment until the distribution. This gives me a $300+ tax reduction for each $1000 placed in a plan. 2. Income from the plan is also tax defered. In a more conventional investment, interest is taxed, reducing the net return. For example, investing in a ten percent savings account gives a real return after taxes of less than seven percent. 3. Distributions after age 59 1/2 (not 55) do not have a penalty. Distributions before that have a 10% penalty which deductable from income tax (a real penalty of <7%). Funds may be withdrawn once a year for up to two months without any penalty. When the $300 per $1000 tax reduction earns 10% ($30), the actual penalty drops further. Not to say it is good choice to incur the penalty, since you have to pay taxes as well, but it ain't that bad. 4. The plans are intended to provide retirement income, not investment income. But they can be used in a wide range of applications. Through stock broker plans, the funds can be invested whereever you direct, without beating you to a pulp with paper gains which you don't have the real dollars to pay taxes on. A self administered plan (offered by Pacific Home Natl Bank, Mass., and others) offers even wider range of investment opportunities. Avoid investments which give tax loss (e.g., depreciation) credits -- a Keogh or IRA cannot use them. 5. They give a good buffer for hard times. If you are unemployed, or otherwise on a very much reduced income, the tax paid on the funds distributed may be minimal. Much better to pay 10% than 30% when you most need the money. -- Mike Eager AMD ~v [B[B
cvw (01/27/83)
An interesting book to read, even if one isn't an investor, is Burton Malkiel's "Random Walk on Wall Street." He explains why academic economists believe that neither technical nor fundamental analysis can do better than a "buy-and-hold" strategy. He also explains the academic economists' alternative theory of the market, the Capital Asset Pricing Model, which is basically a formal version of the folk wisdom that one earns more on riskier investments than on less risky ones. The book is fun because it is not as dry as most economics texts I have seen, and because it does more than tell the mechanics of different kinds of investment: it explains other factors one might want to consider in choosing among available vehicles.