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Dear Money Man:

I'm 38, working with a livable income, no mortgage or rent, two late
model paid-for vehicles which are fully insured and waranteed. My wife
is 34, not currently working, but probably will be soon. We have no
kids. We have no debt. I have about $40,000 to begin investing with. I
don't mind a little risk if the return is promising. What would you
suggest? Thanks.


Reply:

You have no mortgage or rent? One might say that you are already rich. You are probably saving a substantial portion of your gross income, and can spend with no guilt. Since you want to be even more rich, here are some tips.

In http://www.getrichslow.com/investing/invest.html, I suggest investing in your work 401k plan. If your employer does not have one, then invest $2000 per year in an ira account. Your wife can invest $2000 per year in a spousal ira account.

I also suggest putting money into an emergency fund, which you obviously already have done. You should have enough to cover 6 months of unemployment and contribute enough each year to be able to buy new cars for cash when your late model cars becomes too old to keep. After setting aside this amount, get a no load stock fund. This is money that you can afford to forget about for ten or more years. Which fund should you get? Do not try to beat the market. Stock fund managers typically lose out to the Standard and Poor index. If they cannot beat the market, then we probably cannot, either. A Standard and Poor index fund may be the best that small investors can do. Good luck.

                                      MM

Dear Money Man:

I would like to know what I should do about this situation.  I
contribute $200 a month to a deferred compensation plan (457 plan).
I allot 10% of that to a fixed rate account, and 30% each to three
different aggressive growth funds.  For the last 3 quarters two of
those aggressive growth funds have been losing money (to the point that
in my last statement (275.00) appeared in the 'interest earned' column).
I have tried to wait and see if they come back on the plus side, but I
am growing increasingly worried.  I do not know how to determine whether
or not I should stop contributing to these accounts, eliminate them from
my investments altogether, or continue to contribute money in the hopes
they will get better.  What kind of information should I be looking for
to assist me in this decision? 

Reply:

When looking for a good place for your long term investments, keep a few things in mind:

1) Invest so that you will not worry about your money. This may mean that you should put more money in conservative investments. Currently, you have only 10% of it in a "fixed rate account." I assume this is a money market fund.

2) Do not withdraw your money from the stock market after every quick decline. In March, The Standard and Poor Index lost about 7%. It recovered this and more in April. It made about 10% more in May and June. The people who took money out on April Fools Day are ... (I just can't say it. We all make mistakes.) In your case, you waited 3 quarters and are right to be concerned.

3) Do not invest in a market niche investment, for example high tech stocks. I suspect that this is the case with the two funds that are performing poorly. Instead, look for a fund that is similar to the Standard and Poor Index funds. Few funds do as well as these.

4) Avoid commissions, such as loads that you must pay to get into some funds. Often, a return on an investment does not look nearly as good when you factor in commissions.

It sounds like you should put future contributions into your one good fund or a fund that invests more broadly in the stock market or a safe money market fund, or some combination of all three. What about taking money out of the bad funds? Only if you are sure, especially if you are charged for this. Good luck.

                                      MM

Dear Money Man:

My question is regarding the profit sharing funds from my former employer.
I have about $9,000.00 in a pre-tax account that needs to be rolled over
into an IRA or some other pre-tax account.

We have two teenage children (high honor high school students), 14 and 16,
so college costs are looming in our future.

I also have about $13,500.00 in an after-tax general stock ownership plan
which they will send to me in cash.  This money has been saved with the
intention of using it for college costs.  There is also $7,500.00 in Sears
stock that I can have converted to cash or sent as stock certificates.  We
would like to hear your ideas (options and recommendations) as to what we
should do with these monies.  We are not very financially literate and are
not risk takers.


Reply:

Your 401k money can be rolled over into an IRA at a mutual fund company. When you do this, tell the mutual fund company what you want to do and they will send you a form to fill out. This will enable them to take the money directly from your former employer. The money cannot pass through your hands, or the IRS will insist on withholding 20% of it. You say that you are not risk takers, so you should probably get a money market fund for now. Realize that it pays only about 5%, so you will probably want to switch the money later.

College:

Consider a state school in your state. If it has a good program in your childrens' fields of interest, then it is worthwhile. For example, according to US News & World Report, 10/4/93, some colleges in the top quartile, yet relatively cheap, are

  • Boston College (MA)
  • William and Mary (VA)
  • Rutgers (NJ)
  • SUNY at Binghampton (NY)
  • UC Santa Barbara (CA)
  • U of Ill at Urbana-Champaign (Ill)
  • U of Texas at Austin (TX)
  • U of Wisconsin at Madison (WI)

There are many other good, cheap schools. Do not believe that paying big tuition is a magic formula.

You are very generous to contribute to your childrens' college costs, but they should contribute, too. Suggest that you will match their college expenses 1 to 1. For every dollar they contribute, you will contribute. This challenges them to earn as much as possible. Your oldest child is probably ready for a summer job and can earn a great deal in the next five summers.

If you are certain that you want to earmark $13,500 for college, you can put it into one or two CD's that mature just before you need to use the money. Good Luck.

                                      MM

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