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My fiancee and I will be graduating from college soon and have a few questions about mutual funds.
Is there a limit to how much money you can add to your fund, and when? We're looking to invest $10k a year, and add that amount per month.
On a low-to-medium risk fund (medium to long-term bonds, large-cap stocks), what can I expect for an average return, as far as percentages go? (Current financial climate aside, this will be in about 2 years)
Bonus Question: Is it better for my spouse an I to have separate 401k's, or to compile savings into a single IRA/Roth IRA?
None of us knows if the current financial crisis will be resolved in two years. Many think it may get much worse for much longer.
"Is it better for my spouse an I to have separate 401k's, or to compile savings into a single IRA/Roth IRA?"
It depends on a couple things. One, company matching. You should contribute at least up to the company matching percent. But take a look at what kinds of funds are in your 401k. Are they all expensive, actively managed funds? If so, you should probably put the rest of your money into an IRA/ROTH Ira.
Here's a really good site that the Philidelphia Inquirer suggested:
It has risk assessment quizzes (I bet a lot of people are wishing they had done a better job at this about now), information about high fees and 'financial advisors' and how to set up a good asset allocation and all sorts of great information.
I remember seeing a chart that showed historical returns for different asset classes. If I can find it I'll post it, but it's really not important.
Is there a limit to how much money you can add to your fund, and when? We're looking to invest $10k a year, and add that amount per month.
No limits in a taxable account, as Oildog said. But if you'll be investing a little each month, hopefully you'll be buying funds with no transaction fee (NTF) either directly from the fund company or from the discount broker's list of NTF funds. Otherwise fees will be taking too large a bite out of your investment.
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On a low-to-medium risk fund (medium to long-term bonds, large-cap stocks), what can I expect for an average return, as far as percentages go? (Current financial climate aside, this will be in about 2 years)
Long-term, you might normally expect around 8-10% for largecaps and around 6% for bonds. BUT in a mere 2 years, returns could be much, MUCH different.
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Bonus Question: Is it better for my spouse an I to have separate 401k's, or to compile savings into a single IRA/Roth IRA?
In case you're asking about you and your wife contributing to a joint IRA, that's not an option. Must be separate. If you're asking about having a 401k in addition to IRAs, I generally agree with what capitalistpig said. If the 401k is with an ex-employer, it's usually better to roll it to an IRA where you'll generally have more options and more control.
My fiancee and I will be graduating from college soon and have a few questions about mutual funds.
Is there a limit to how much money you can add to your fund, and when? We're looking to invest $10k a year, and add that amount per month.
On a low-to-medium risk fund (medium to long-term bonds, large-cap stocks), what can I expect for an average return, as far as percentages go? (Current financial climate aside, this will be in about 2 years)
Bonus Question: Is it better for my spouse an I to have separate 401k's, or to compile savings into a single IRA/Roth IRA?
I think some of your assumptions are a little bit off the rails, so let's rerail them first.
When you ask if there is a limit to how much you can add, such upper limits apply to accounts, not the securities within them. For example, I can add $5000 to my IRA each year that will be tax-deductible. But within that account, I can hold pretty much whatever cash/CDs/stocks/bonds/mutual funds I care to buy. I think the assumption you might be making here is that a retirement fund must all be invested in one thing. It definitely need not.
There are, however, various minimums for buying individual securities. For example, Fidelity won't fill a mutual fund buy-in order for less than $2500. Scottrade will (or would last I knew). Some funds have their own minimums, too. Sometimes the minimum is different for a retirement account. Most brokers will not let you buy fractional shares of stock (though they may hold them for you if distributed via reinvested dividends), but buying fractional shares of mutual funds is the norm all over because people tend to buy (for example) $3000 of WHATX, but they would buy 500 shares of GE.
Now. You can put such and such an amount per year into an IRA and can invest it however your broker/custodian allows, so pick one who allows what you want. That said, the type of fund you are describing is commonly called a balanced fund, or an asset allocation fund. The idea is it's a mix of stocks and bonds. Looked pretty silly for many years when it was outpaced by stocks. Looks rather less silly now. It is utterly impossible to say what return you'll get over the short term, but if you give it twenty years, it would be fairly normal to get 7-8%.
As far as separate retirement accounts, I am almost certain the government makes that decision for you and the answer is no: you may not combine them. What's yours is yours, what's his/hers is his/hers. But that's okay, because both of you have a chance to qualify to contribute to an IRA of your own, or to a 401k through work.
Now. You can put such and such an amount per year into an IRA and can invest it however your broker/custodian allows, so pick one who allows what you want. That said, the type of fund you are describing is commonly called a balanced fund, or an asset allocation fund. The idea is it's a mix of stocks and bonds. Looked pretty silly for many years when it was outpaced by stocks. Looks rather less silly now. It is utterly impossible to say what return you'll get over the short term, but if you give it twenty years, it would be fairly normal to get 7-8%.
+1 to this. Balanced/asset allocation funds are nice for a number of reasons:
1) It gives instant diversification. You will most likely be in the position I was when starting out investing. You have SOME money to put into a IRA fund, but not enough to sink into each different mutual fund to give you a diversified portfolio to fit your financial plan (for someone your age is should look something like 90% stock/10% bonds) As j_k_k said, you need to have a certain minimum amount before buying into a given mutual fund. By getting into a balanced fund, you only need one minimum amount to invest and you then have all of the diversification you need in a single fund.
2) Being in a balanced fund makes you stick to your investment goals. Right now you might want a 90%stock 10% bond mix. As you age and near retirement, however, you will want the opposite....more bonds, less stock to preserve the growth you've had over the years. The nice thing is that balanced funds will automatically adjust! Just make sure you bought into the correct fund based on your planned retirement age (or switch funds if your retirement plans change).
"Sticking to the plan" is HUGE..as we saw from the recent crisis and how many baby-boomers lost their savings in the stock market. The pervasive idea out there was that the good time were never going to end and so many baby boomers stayed heavily invested in stocks instead of changing their asset allocations to a more conservative mix. The market went into the crapper and they lost a good chunk of their retirement.
This is a good think to keep in mind as our generation retires....the market is very cyclical and we will be due for another contraction/recession before we retire (perhaps many). Sticking to the the plan is a good way to weather these down times.
As you age and near retirement, however, you will want the opposite....more bonds, less stock to preserve the growth you've had over the years. The nice thing is that balanced funds will automatically adjust!
You're actually referring to "target date" or "life cycle" funds here. A balanced fund is just a fund containing a mix of stocks and bonds, like OAKBX & DODBX for example, and these generally do not adjust.
This is a good think to keep in mind as our generation retires....the market is very cyclical and we will be due for another contraction/recession before we retire (perhaps many). Sticking to the the plan is a good way to weather these down times.
At the risk of starting an ad hoc mutual congratulation society, well said yourself. I would add this to your final thought. I have now lived through three tumultuous market swoons, and the third time ought to teach me a fundamental principle or I'm a great fool. Each of those market swoons had something in common: people were so hyped up on avarice they were abandoning good sense, and thus were not doing normal things.
In 1987, paralegals where I worked were bragging about the market killings they were making. It is not normal for that to happen. Much like when in 1929 the elevator operators were doing the same thing, I should have seen that as a sign of real trouble. I know because I was one of the paralegals, and I lost money because I panicked, because I invested money I could not afford to place at risk. I learned from that, but not enough.
In the 90s, venture cap money was being thrown in great sacks at anyone with a ponytail and a domain name. It was the tech boom, and the NASDAQ went to ridiculous levels. This was silly. Venture capitalists should not be flinging money around as they did. I should have seen that as a sign of real trouble. Unfortunately, at that time I was out of the markets. I say 'unfortunately' because I didn't have meaningful savings, but did have credit card debt. But had I been in the markets, I'd probably have taken a hosing.
By 2008, mortgage lenders were lending (in theory)/giving (in hindsight) piles of money to people who didn't show adequate evidence of ability to repay. To do this, they concocted mortgage terms that were a ticking time bomb: loans with low or zero interest teaser rates that would eventually reset, but for now, the payments looked doable. This was idiotic. You only loan money to people who can show ability to repay, and because people are fairly stupid, a banker can't leave that decision to them. The banker has to safeguard his or her assets. I should have seen that as a sign of real trouble.
These markets will recover in time, and just you watch: in fifteen years everyone will be pooh-poohing fuddy-duddy concerns, pointing at all the piles of paper profit and openly insulting anyone who doesn't join in all the excitement. We don't know what the bubble will be, but we will be due for one. I have such a long memory there are people from third grade I still want to slug, and I'm going to use that memory. I will remember this time, and the previous times, and when I see people doing illogical things, I will shelter my assets from the likely collapse. I'll have to. I'll be too close to retirement, with no more time to recover from a market cycle.
The lessons in this are numerous, but for the OP they are straightforward: markets are cyclical, and the planning of youth must differ from that of old age which in turn must differ from that of near-retirement. My older boomer generation siblings paid no attention, and some of them will have to curb their lifestyles in retirement. This concept is called 'investment horizon', meaning the time remaining until you need this money, and it is a key principle to absorb.
You're actually referring to "target date" or "life cycle" funds here. A balanced fund is just a fund containing a mix of stocks and bonds, like OAKBX & DODBX for example, and these generally do not adjust.
Yep, you are right...my mistake!
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