You landed a new job and got a shiny new 401k. Which fund are you to invest in and what should you do when switching jobs? What if there is a down turn, would you be inclined to pull it out after you see it down 50% for a year and the market seems to be lagging for forever? Let me discuss the strategy behind how you are suppose to invest so you can be prepared in case any of this happens.
How’s it goin everybody visitors feed the bush today i’m going to talk about investing for absolute beginners now you could be a teen or just graduated college and you’ve got a job where they offer you a 401k option most the time they just go here you go and then there’s a bunch of investment options and then you just pick one of them and then they go oh what’s
The division between this fund and that fund and then you’re left to try and figure it out yourself there’s actually a lot more going on with the fund then you’re just picking whatever percentage and just leaving it alone today i’m going to cover the things they don’t actually tell you but it’s very important for you to know the background the psychology behind it
Just so that you are in informed a investor and you know what to do when certain events happen the first thing to know is sometimes if you change companies they might boot you out of the plan and they might cash you out when that happens actually withhold taxes from it and they send you a check that’s very very bad if you ever let that happen you essentially have
To open up a new ira account put money in there including the withholding that you don’t have anymore and also the penalty so let’s say it’s ten thousand dollars in the 401k account and you got a check for like six thousand somehow you have to come out with another four thousand and put it in an ira that might be really hard for someone just starting an invest so
If you ever change companies and be kind of warned you they’re going to close your account be very certain to roll it over as soon as possible because if you forget or fail to do it in time they will catch you out and you’re going to end up having to pay a lot of upfront money in order to avoid any penalties these company 401k plans usually have a lot of different
Funds that you can pick from generally i have seen anywhere from ten to twenty or thirty funds it’s usually these target date funds sometimes they do have low expense ratio etf funds or the indexes or whatnot but this really depends on the plan that you have if you’re just beginning to invest and you got a total portfolio of maybe zero to twenty thousand dollars
Let’s say the expense ratio is not going to be that bad on your total portfolio especially in the beginning because you don’t have that much to compound yet so you shouldn’t be too worried about the expense ratio but just keep note of that whenever you have the chance to get a lower expense ratio do it if you’re stuck in a plan that has high expense ratios don’t
Freak out or anything let it invest if you ever changed up just roll it into an ira and then at which point you can buy the low-cost index ones that you like a typical novice thing to do would be to time the market now i’ve done this myself i try to buy and sell a fun you essentially buy one fund within that 401k plan and then as soon as you sell it you actually
Cannot buy back into it for 30 days so what i actually did before was i just buy a different fund because i know several of those funds would actually move with the market so i’m just trying to time the market i know you’re not supposed to do that but that’s what i did i had okay success with it i wouldn’t say i beat the market or anything but it was just something
I was experimenting with so a lot of studies have been done saying you shouldn’t try to time the market essentially gambling when you try to time the market maybe if you have some really really good insights or maybe you get lucky then you can outperform the market but the thing to know is it’s really hard to outperform the market for a long duration of period so
If you ever tried the time to market for let’s say five years maybe you would get really lucky the first two three years oh maybe you made like twenty percent which is something i actually was able to do for like a year but when i sold out of the market i didn’t get back in i actually didn’t get all the games that that market was also getting so then i kind of
Average this out maybe i even lost a little bit as compared to if you just put the money in and just kept on investing if you just stay steady and true and just keep on investing most likely you would get better returns than most people the whole idea with this investing is to dollar cost average so as you’re working you’re always investing a little bit in there
Every single month i’d say the most important thing of this investing business is not to freak out that the market ever crashes it’s much harder than you think it is if you’ve never experienced a market crash before i’ve seen the 2001 and the 2008 crash where i saw the whole market go down by 50% you see it unfold before your eyes let’s say you had $10,000 in
There one day it drops 10% it goes down from $10,000 to $9,000 you go oh my gosh that’s $1,000 that’s like you know how many weeks of pay that is then the week after drop another thousand and then the week after drop another thousand and then by the time maybe five or six months you saw your portfolio go from ten thousand dollars to five thousand dollars you know
This will make most investors very very scared so why am i telling you this because you really have to be mentally prepared for your portfolio to go down by a lot and just keep on investing so you just do a mental exercise what is your portfolio goes down by 50% what are you going to do are you going to be the type that would just sell some so that maybe you won’t
Take any more losses or are you just going to keep on going and just invest some more and when you invest some more it’s going to be at the low cost is actually really good for your total total portfolio there has been a lot of blogs out there saying oh yeah you should completely put all your cash into low-cost etf funds that are the indexes of smp or something
The deal with this is that it’s okay to do that if you plan to retire in 30 years with a lot of people saying oh yeah i’m going to retire really early then if your time frame is actually 10 years you may not have the timeframe to fully invest in a smp 500 index one because it’s very volatile and you could get caught in a point where the market dips a lot and by
The time you retire it hasn’t fully recovered and it hasn’t gotten gains so most financial advisors would recommend for you to get less and less aggressive as you get towards retirement because if you’re a year or two within retirement then you don’t want your portfolio to fluctuate by that much you kind of want that to be a short thing however if you are somehow
Really flexible if you say oh i’m going to retire 10 years or 15 years i don’t care it doesn’t matter too much if the market goes down a little bit i can delay my retirement by 5 years by 10 years 5 or 10 more years in delaying your retirement is actually a lot and i think most people that have a target is not willing if they can help it to extend their retirement
By that much more so if you do plan to retire in 10 years you have to pick a target date fund today is 2017 if you plan to retire ten years from now which is 2027 then you need to pick that are it’s fun date of 2027 which would actually get you less gains per year mainly because it’s a lot more conservative it’s not fully invested in large cap stocks and things
Like that that are more volatile so that’s all for today i hope this gives you a little bearing around what you should do with a portfolio it’s not just as simple as oh just picking one target date fund because at some point you might be very very tempted to just sell all of it out and go i’m just going to take the cash and run from the market and not invest any
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Transcribed from video
Investing in a 401k for Beginners | BeatTheBush By BeatTheBush
