Investing can be as simple or complex as you want to make it. With literally thousands of funds to choose from and countless individual stocks it’s easy to see how choosing the investments for your portfolio can be a daunting task. On the other end of the spectrum it can be incredibly easy. With the creation of target date funds and other asset allocation funds you can achieve a diversified portfolio by just choosing one investment.

Unfortunately, there’s more to it than that. Think of all the different rules of thumb you’ve heard over the years. You have the 100 minus your age to determine what percentage you should have in stocks. Then there was the 110 minus your age and so on. Then you have some people that suggest you should have just 10% of your portfolio in international stocks and others telling you to put up to 50%. Who is right? Well, there is no right or wrong answer because creating the right investment mix isn’t as simple as looking at your age and risk tolerance and slapping a model portfolio together. There are plenty of other factors to consider.

Thinking About Risk

Everyone has their own risk tolerance and this tolerance generally changes as a person ages or as different life events occur. Typically the younger you are, the more risk you should be comfortable in taking and as you age you generally become more conservative. While this may may often be true, nobody fits into a perfect mold based on age alone.

The main problem people have is not understanding risk and this leads them to  invest in a way that is either leaving money on the table or causing them to lose money when they can’t afford to. Most people simply categorize risk as the chance they will lose money but there are many other forms of risk to consider with all investment vehicles:

1. Market Risk: The most commonly thought of type of risk. Stocks in the market go up and down so investments in these securities can fluctuate and possibly even drop to zero in extreme situations. This type of risk is easy to see and understand.
2. Credit Risk: Fixed income securities like bonds also carry risk. Just because they pay a fixed interest doesn’t mean they are safe. Just like people, companies carry the risk of being unable to repay the lender which could lead to the loss of your principal.
3. Interest Rate Risk: Going along with credit risk and fixed securities is interest rate risk. Since many of these investing vehicles require money to be locked in for a certain period of time, interest rate changes up or down can have an effect on your underlying holding and/or mean you are leaving money on the table when higher rates become available.
4. Inflation Risk: This is the big one that most people don’t think about. Even if you have a 100% guaranteed investment either through an FDIC insured product or a government issued bond you are still subject to inflation risk. On average, the annual rate of inflation is roughly 3%. This means even if you are earning a guaranteed 4% return on your money you are in reality only earning 1% before taxes. If inflation rises even slightly you are at the risk of actually losing money on a “guaranteed” investment.

Age is Only Part of the Equation

There are many different asset allocation models out there that tell you how you should invest based on your age. Unfortunately, like much of the financial advice out there this is very general and should only be used as a guideline as everyone’s individual situation is unique. Just because a portfolio that is right for most people your age doesn’t mean it’s right for you.

Some people have basic formulas that say 120 minus your age equals the percentage of money you should have in stocks, others say 100 minus your age, and there are even many other fancy calculations you can find on the internet to tell you what you should do. While this general rule of thumb is a good start, it is far from the only thing you should be considering.

For example, these calculations don’t take into account what type of stocks you are holding. You can adhere to the 90% stock and 10% bond rule yet find your allocation either extremely conservative or extremely aggressive. Not all stocks and bonds are created equal and these guidelines do not tell you how to further allocate those investments.

Your Specific Needs Matter Most

Even if you take the time to create the optimal portfolio based on the breakdown of stocks and bonds as well as ensuring it is diversified among those investments it still may be misaligned from your actual needs. Beyond age you need to take a look at your individual situation. Are you single or married? Do you own a home or plan to buy one? Do you have children? Do you have a stable job? What do you plan on doing in retirement?

These are the questions you need to ask yourself. A single 30 year old renting an apartment in a big city with no intentions of getting married, having kids, or buying a house has very different financial needs than a married 30 year old with one child and another on the way while looking to buy their first house. The single person might be in a position to dump every last penny they have in the stock market looking to grow their portfolio as fast as possible while the married couple needs to focus more on safety and security as they try to save up for a house and have to worry about providing for a family and children. As you can see, age plays only a very small role in determining how these people might invest their money.

You Must Adapt as Things Change

The other thing that’s certain is that your needs and goals change over time. In fact, even if your needs don’t change the economy and market climate will and this can also force you to make some changes. A big problem a lot of people have is that they set it and forget it. They create what seems to be a good portfolio and they never touch it for ten or twenty years. While you shouldn’t be fooling around with your investments too frequently you also don’t want to just let it ride forever.

This can be seen in many of the stories you’ve read over the past few years about new retirees who lost a good chunk of their invested money because they were still invested as if they were 10 years away from retirement and the market was on a roll. Now the market reverses and they just retired and realize they were far too aggressive. That’s not a situation you want to be in.

So, it’s up to you to regularly monitor your investments and analyze your situation to see if anything has happened that could force you to rethink your strategy. Getting married, having kids, changing careers, or even external factors in the market and overall economy are all triggers to get you to look over your investment strategy. Don’t be caught by surprise and adapt as changes take place.

What Should You Do?

At the very least you should look at the various allocation models for a starting point. Generally speaking, the younger you are the more you should have in stocks. Just remember that it doesn’t stop there. Take a look at what your actual holdings are to determine the real risk. Then take a look at other aspects of your situation that could affect your underlying investments. Maybe you plan on moving, you could be getting a new job, maybe a child is on the way, a home purchase is in your future or maybe you are shooting for an early retirement to start a business. All of these things are important to consider when creating your portfolio so that you can invest appropriately in order to reach your goals, not just reaching a rule of thumb.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Asset Allocation is Important But There Are More Things to Consider When Investing

Zecco is Offering 20 Free Trades

You may know that I tend to focus on long-term investing through index funds and ETFs, but I also like to do a little trading on the side. For obvious reasons, any trading is done with non-essential assets and won’t negatively impact my retirement if I make a few trades. With that being said, one of the biggest problems with trading individual stocks are the commissions. The more you trade, usually the more you pay.

One way I’ve found to keep my trading costs low was to use Zecco for my stock trading. Zecco already offers 10 free stock trades a month and otherwise very low trading costs, but for a limited time they are offering new customers 20 free stock trades in addition to the rest of their account features!

This has been a great tool for me this year because I’ve been buying a lot of quality stocks in the past few months and have made some nice money on the recovery. I’ve had good luck with a few companies such as GE, INTC, and ABT. In fact, some of those proceeds will be covering some of the down payment on our new house. We didn’t plan on that, but I’ll happily take my profits and run while I can. But thanks to Zecco there is even more money in my pocket since I’m not handing it over for trading fees.

Promo Details

Zecco Trading is offering 20 free stock trades — a $90 value — to all new brokerage customers who sign up by Sunday, September 13th 2009! Use promo code “bonus1” to qualify.

These free stock trades are special, because you have a whole 90 days to use them. Some other brokerages give you free equity trades to use within 30 days of signing up, so by the time you transfer money into your account, the free stock trades might have expired! With Zecco Trading, you have more time to use your free stock trades when it makes sense to trade.

Plus, these trades are completely additional to the 10 free stock trades Zecco Trading customers can earn every month when they keep a balance of $25,000 or make 25 free trades per month. And stock trading commissions at Zecco Trading are a low $4.50 each.

Be sure to use the promotion code “bonus1” when signing up. Be sure to use all lowercase or the code won’t work.

Special terms and conditions:

• New Zecco Trading accounts must be opened and approved by Sunday, September 13th, 2009.
• The 20 free stock trades will be granted on or before September 16th, 2009. The free trades will expire 90 days after the date they are granted.
• Offer not eligible to existing Zecco Trading customers.
• Limit one bonus per household.

Join Zecco Trading and get 20 free trades with bonus code “bonus1“

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Get 20 Free Stock Trades With Zecco – Special Promotion Ends September 13

Most of us didn’t get much of a formal education when it comes to investing. We may have learned some basic concepts in an economics class, but when we’re talking about stocks, bonds, mutual funds and investment strategies, most of us have to learn on our own. But, there is an option out there that can give you a basic investing education that works similar to how a typical course in school is used.  Morningstar has put together a terrific resource to help investors sharpen their skills in various aspects of investing called the Investing Classroom.

The classroom is put together like college courses with 100 level courses being introductory and 400+ level courses being relatively advanced. This allows individuals at all knowledge levels to partake in the courses and work through the material in a progressive manner. The classroom covers four main areas:

1. Stocks
2. Mutual Funds
3. Bonds
4. Portfolio Allocations

You’ll learn about the difference between stocks, bonds, and funds. In addition, you’ll learn more about portfolio construction and different investment strategies, and even gain some tidbits about how to research investments on Morningstar.

Each course is structured with plenty of reading material and examples about the underlying topic and then you are presented with a quiz at the end of each course which are graded. The best part of the courses are that with each correct answer you accumulate points that can be used to obtain many great rewards. There are books, Morningstar fund and stock catalogs and even a free premium membership.

The course is 100% free and you can start taking some of the courses right now. But, if you want to keep track of your accumulated points so you can eventually apply them to the rewards, you will need to create a basic free Morningstar account.  So what are you waiting for, start learning today: Morningstar Investing Classroom

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Take Free Investing Classes at Morningstar and Even Earn Rewards

Morningstar is great, and it is one of my favorite investing research sites out there. They have a ton of tools available for researching stocks, mutual funds, and now options. While some of these tools do require a premium membership, there are plenty of great tools that are free and available to everyone. You may need to create a free account to login with, but one of the best tools is the Mutual Fund Compare tool. This tool allows you to compare one fund against another, or many other funds and display the results in an easy to read format.

If you’d like to walk through this post by using the tool yourself I encourage you to set up your free Morningstar account. It takes just a few seconds and not only will you get the mutual fund comparison tool, but you can access even more tools and save your portfolios to be used again in the future.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Using Morningstar’s Mutual Fund Comparison Tool to Compare Funds

Mutual funds are one of the most common investment tools for the average investor. You’ll find them in your 401(k) plan, in your IRA, and everywhere in-between. Mutual funds are popular for good reason. They provide instant diversification without a lot of money. Instead of having to pick all of the individual stocks you want to own and buy them yourself, you can simply purchase a share of a mutual or index fund and automatically get pieces of all the underlying companies.

Like anything, this convenience comes at a cost. Whether you’re investing in an actively managed mutual fund or an index fund, it costs money to run these investments. Some funds charge up-front fees and recurring expenses, others charge a back-end fee, and some just charge a regular recurring fee. It can get confusing for a new investor but with a little help you can learn how to spot what type of fees you’ll be paying and how to minimize those fees. After all, the less you pay in fees the greater your overall returns will be.

Load vs. No-Load

A load is one of the most important fees to watch out for. A load just means it’s an expense in addition to the underlying fund expenses. Typically these come in the form of front-end loads. You pay the load up-front when you purchase the shares. Loads can vary greatly between fund companies, how much money you’re investing, and more. But it isn’t uncommon to see equity funds with a front load as high as 5.75%. To put that into perspective, if you wanted to invest $10,000 in ABC fund with a 5.75% load, you’d immediately lose $575 to the front-load fee. Ouch!

The good news is that you don’t have to use loaded funds. While nobody will stop you from purchasing shares in a fund with a front-load, you’re typically going to be presented these funds by someone in the financial industry who works on commission. That’s because most of that load is a salesperson’s commission. So if you think about it, it’s no wonder they might try to steer you to a fund with a high load since they are going to instantly put a few hundred bucks in their own pocket. So you have to ask yourself whether the advice they gave you was worth that fee. In most cases, probably not. A fee-only financial planner won’t steer you into loaded funds since they aren’t earning a commission based on how much money you invest and where.

What about if you’re investing on your own? Obviously, you want to stay far away from front-load funds if you’re investing on your own. There’s no need to throw money away to a one-time fee just for purchasing the fund. So, how do you spot funds with fees? Morningstar is my favorite tool for this task. It packages all of the important information on an easy to use page that highlights everything from return, fees, yield, and more. Here is an example of using Morningstar to pull a quote on the Franklin Income Fund (FKINX):

You can easily see the front load listed on the first page. This fund has a 4.25% front load. If you had typed in a no-load fund it would show 0.00%.

Stick to No-Load Funds

It’s probably quite obvious, but you should stick to no-load funds. There’s almost never a situation where it’s worth losing a few percentage points off each investment just by investing in a load fund. Not sure where to start with no-load funds? While there are many options available you’ll probably end up with one of the four main no-load fund providers: Vanguard, T. Rowe Price, Fidelity, and Schwab.

If you’re looking for a more comprehensive search, I’ll again have to refer you to Morningstar and their Fund Screener. Here, you can easily select to only search no-load funds and then further narrow down your search by other criteria. You’ll probably be amazed at how many no-load funds there actually are to choose from.

Expense Ratios

You’ve found a no-load fund so that means you’re all set, right? Not so fast. Loads are only one of the fees to look out for. While not all funds have loads, all funds do have expenses. These expenses are expressed in the form of an expense ratio. This makes it easy to compare apples to apples when looking at multiple funds since the fee is shown as a percentage. Looking at the example above with the Franklin Income Fund you’ll see the expense ratio is 0.62%. That means if you had $10,000 invested in this fund for a year it would basically cost you $62.

Unlike a front load you don’t see this expense deducted directly from your account. Instead, the expenses are built into the fund’s overall return. So if you pull up your account statement and it shows that your fund had a 4.3% return, that is your net return after expenses already. You won’t have a quarterly or annual fee deducted from your account. That’s why these expenses can be tricky because they are almost hidden and people don’t really consider the effect they have on returns.

So, make sure you’re also looking at a fund’s expense ratio before making an investment. The lower the expense the better. If you’re looking for the absolute lowest fees you should probably stick to index funds. Since these aren’t actively managed and simply track an index they can keep costs down. This means you’re looking at usually only 0.10-0.25% expense ratios on index funds. Once you get into actively managed funds it’s a different story. You might find one fund charging 0.3% and another charging 1.3%.

Share Classes

While this won’t apply to most of you simply investing in no-load funds, it is important to be aware of the different fund classes in the event you find yourself talking to a financial advisor or otherwise who might bring them up. While not as common today as they were, there are three main types of share classes. Each share class invests in the same assets, but the difference lies in how the load is applied.

• Class A – Your standard front-end load funds as discussed above.
• Class B – Deferred sales load. No up-front load, but if you sell prior a predetermined holding period you’re charged a back-end load.
• Class C – A fixed load applied every year.

Thankfully, class B and C shares are heading the way of the dinosaurs, but that doesn’t mean they aren’t still used by some financial salesmen. They are often used to encourage an investment where they can still earn a commission by putting you into something that doesn’t appear to have a big front load like A shares. While none of these share classes are good, you most certainly want to stay away from B and C.

In addition to these primary share classes you may also stumble across other odd share classes in your research. You might see something like R shares or Z shares. These are typically special share classes offered by a fund company to be used in employer-sponsored retirement plans, sold by advisors, or to institutions. You may not be eligible to invest in these classes, so make sure you check the details and investment requirements.

Recap

As you can see, understanding the fees associated with your funds isn’t all that difficult, but you can probably also see how it’s easy to underestimate the impact the fees can actually have on your returns. An expense ratio of 0.6% might not sound like much, but when you’re talking about tens or hundreds of thousands of dollars over 30+ years that can significantly eat away at your return. And with the different share classes, loads, and no-load funds available you can see how some people, namely commission brokers, will steer you into a fund that could end up costing you.

Hopefully now that you’re armed with the basics you can make sure you’re getting the most out of your funds, both with new purchases and existing holdings. Now would be a good time to dig into the details of your current investments and see how much they are costing you. If it seems high, you can always use something like Morningstar to explore your other options.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Mutual Fund Fees for Beginners – Loads, Expense Ratios, and Share Classes

Does Lending Club Work?

Peer-to-peer lending has been around for a few years now, and two of the biggest players are Prosper and Lending Club. I’m going to talk a little bit about Lending Club since that’s the service I’ve been using and have the most experience with.

To give you a quick primer on peer-to-peer lending, it’s a relatively simple concept. Individuals use the power of the internet to get matched with others for their lending and borrowing needs. For example, instead of going to the bank and asking for a loan, I could hop on Lending Club and ask for a loan. My request goes up on the site and people who are looking to lend money could personally fund my loan. So instead of relying on a bank, I rely on individuals to provide the financing I need.

The benefits are two-fold. People looking to borrow money can often do so with better interest rates than what a bank would offer or the interest rate on a credit card. People looking to lend money have an opportunity to help people while earning an attractive interest rate.

Becoming a Lender

I’m going to focus on lending money since that’s what I do, and I suspect what most people reading this are looking to do. So, just how easy is it to lend money and start earning interest? To put it simply — very easy.

The sign up process is pretty straightforward and its the same process you’d go through if you were to open any sort of bank or brokerage account. It will ask for your personal information and some basic questions to get started. The main thing you will need to do as a lender is link your Lending Club account to a bank account so you can transfer funds back and forth. I’m not going to walk you through that process as it’s pretty self-explanatory.

Once your account is open and funded you can begin funding loans and there are two ways to accomplish this. You can select a pre-allocated portfolio of loans based on risk level, or you can create your own custom portfolio by picking and choosing the notes you want to fund. There isn’t a right or wrong way to do this, it just depends on how much work you want to put into it.

Finally, Lending Club takes care of the rest. They handle getting the money from the borrowers, calculating interest, collecting late fees, and everything else. Then they go ahead and funnel the money to your account where you’re free to reinvest it in new loans or send it to your linked bank account. It really couldn’t be easier once you’ve created your portfolio.

My Lending Club Account and Experience

Now that you understand the basic process, I wanted to give you an idea of what you can expect once you’re up and running and share some of the things I’ve picked up from it.

My Portfolio

I went ahead and customized my own portfolio by picking and choosing who I lent money to. Loans are graded from A to G with A being those with the highest credit scores and G being those with the lowest. Even so, you need at least a credit score of 660 in order to use Lending Club, so there is some assurance that you aren’t going to have many total deadbeats. That being said, I still didn’t want to get too crazy with my first set of loans so I kept the bulk of my money in A through D which put the average interest rate between 8-14%.

Return So Far

Here you can see my performance thus far. I’m pretty happy with around a 12% annualized return and the fact that all of my loans are still current. It’s still pretty early in my 3-year term for these loans so that could always change, but so far so good.

My Individual Notes

I wanted to give you an idea of how you can track each individual note. As you can see, I invested just the minimum $25 in some, and up to $100 in others. The notes that I put a little more money into were generally funding causes I believed in and wanted to help out with, or for borrowers who I thought were more likely to pay off their loan. The credit grade is helpful, but I know that a credit score doesn’t paint the whole picture and you can learn a lot about the borrower by reading their borrowing statement. As you can see, even someone I invested in with a relatively low grade of D actually paid off their loan in full early.

Trading Notes in the Secondary Market

One of the main drawbacks people have found with peer-to-peer lending is that the loan terms are typically three years. So, what happens if you decide you want out early? You used to be stuck. Now, you can actually trade your notes on an open exchange. This would work pretty much the same as if you were to buy or sell bonds in the market. Here’s what a screen from the trading platform looks like when searching current loans being offered:

You’ll see a lot of good information here. You’ll see the current interest rate, loan status, credit score changes, outstanding payments, and most importantly, the yield to maturity. The YTM basically tells you what you’d earn in total on that note if you bought it for the asking price and if they borrower made the remaining payments. You want to be careful as there are people who put a significant markup on their asking price and it could leave you earning very little or even nothing over the remainder of the loan term. But it’s nice to know that there is an active market out there available if you find that you would rather unload your investment early.

Who Should Invest With Lending Club

The most common question I hear is asking who should invest with Lending Club. First, you need to understand where this type of investment fits in your overall portfolio. It’s important to realize that this is not a place to park emergency savings. Remember, this isn’t an FDIC insured bank account and there are liquidity issues to take into account. So you should go into it thinking about only using money you won’t need for 3 years.

In addition, you should think of Lending Club the same as you would corporate and high-yield bonds. After all, you are lending money just as you would if you were to buy individual bonds. That being said, you can earn decent interest, but there’s also the possibility that your borrower won’t hold up to their end of the agreement and default. While it doesn’t happen all that often, you need to plan for that. You can help minimize default risk by diversifying your investment across dozens of loans or only choosing the highest quality notes.

So, if you have money that isn’t needed for emergency savings but you’re looking for a possible investment where you can earn more than a few percent, Lending Club might be a good fit. At the very least, it’s kind of nice to know that you’re helping real people instead of helping some big corporation somewhere. It is rewarding to know that you helped play a part in helping someone get out of debt or fund their new business. If this sounds like something you’d like to do, I encourage you to give it a shot.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Making Money With Lending Club and a Review of Peer-to-Peer Lending

No Match? No Problem

This is one of the most frequently asked questions I’ve been receiving lately both at work and via email. Companies across the country are trying to find ways to cut costs during this recession and a prime target is the matching program on a 401(k) or 403(b). This is bad news for employees, but the silver lining is that cutting the match may reduce the need for cutting jobs.

That might be a glass half-full way to think about it, but what if your match is taken away? Should you still contribute? Should you switch to an IRA? Or is it time to give up on retirement saving completely? There’s no easy answer that works for everyone. In some cases it may make sense to keep contributing while in others it might make sense to stop. So, let’s look at what you need to consider before making that decision.

Eligibility for IRAs

When it comes to saving for retirement, most people will utilize one of the two most common individual retirement accounts — the traditional and Roth IRA. Without getting into a lesson on the differences between a traditional IRA and Roth IRA, we’re going to work with the most notable difference in that a traditional IRA is funded with pre-tax dollars and qualified withdrawals are taxed, and the Roth IRA is funded with after-tax dollars and qualified withdrawals are tax-free.

Before you give up on your 401(k) you need to make sure you’re eligible for contributing to an IRA. After all, if you’re ineligible to receive the tax benefits that IRAs provide, even without a match it would make sense to keep contributing to your 401(k).

Roth IRA

Eligibility for a Roth IRA depends on your income. As a married couple in 2009 you would qualify for a Roth IRA if your modified adjusted gross income (MAGI) is below $166,000. If MAGI is between $166,000 and $176,000, then you can contribute some, but not the full amount. If income exceeds $176,000, you do not qualify for any current year Roth IRA contributions. Single filers begin phasing out of a Roth IRA at $105,000 and is gone completely at $120,000.

As you can see, depending on your income, giving up your 401(k) in favor of a Roth IRA may not even be an option. It’s a good idea to have a Roth IRA if you qualify, but just keep the income limits in mind before stopping your contributions with your current plan.

Traditional IRA

Here’s where things get a little more tricky. Unlike a Roth, a traditional IRA is funded with pre-tax dollars, so this type of retirement account closely matches your 401(k). If you were looking to mirror what you’re currently doing from a tax perspective, this is your likely candidate. That being said, the IRS doesn’t make it easy for us. There are also income limits and other considerations that need to be addressed before qualifying for tax-deductible contributions.

The deductibility phase out for a traditional IRA for a single filer begins at $55,000 and ends at $65,000 if you’re currently covered under an employer-sponsored retirement plan. Joint filers phase out between $89,000 and $109,000. If married and your spouse is not covered by an employer plan, then there is no limit for you.

I emphasized a piece of information above because there is often a lot of confusion as to what this means. Being covered by an employer-sponsored retirement plan has nothing to do with whether or not you’re contributing to a 401(k). Just because you elect not to doesn’t mean you’re not covered. As long as you have a plan and could contribute to it, as far as the IRS is concerned you’re still bound to the income limits. Furthermore, other pension and profit-sharing plans would also count. So even if your employer eliminated the 401(k) completely but still provided some sort of pension benefit, that’s considered being covered under an employer plan and subject to income limitations.

Other IRA Considerations

Finding out if you’re eligible for an IRA is the first step, so what’s the next step if you are? First, decide which type of IRA would be most beneficial for you. Are you single, no kids, and no major tax deductions? You may enjoy the continued benefits of deducting current contributions from your taxes with a traditional IRA. If you’re looking ahead to the future and expect your income to increase and tax rates to be higher, then a Roth IRA that gives you tax-free withdrawals in retirement may be your best bet. As long as you qualify, you could opt for an IRA of each type.

To get started with your IRA, you have a few different options. First, you can open up an IRA with one of the big no-load fund companies such as Vanguard or Fidelity directly. Keep in mind that there may be a minimum investment requirement to get started. But this is a good way to invest directly in the low-cost funds you want.

The other option is to open your IRA with a discount brokerage company such as TradeKing or Zecco. With a brokerage IRA you will have more flexibility in terms of investment options. Here you can buy individual stocks, bonds, ETFs, mutual funds, and even CDs all within the same account. If you’re looking to move beyond index funds with just one company, this can provide some flexibility as long as you keep transaction costs down, which either Zecco or TradeKing will do.

Finally, don’t overlook the reduced IRA annual contribution limits. In 2009 you’re only allowed $5,000 ($6,000 if age 50+) per year in IRA contributions. If are currently putting more than this amount into your 401(k) you’d want to make sure you’re still contributing as much as you can. For example, if you have been contributing $10,000 to your 401(k) and want to switch to an IRA, you should max out your IRA with $5,000 and reduce your 401(k) contribution to $5,000. This way you’re still adding your $10,000 to your retirement accounts each year, but it’s simply divided across two accounts.

Some Final Considerations

A 401(k) without a match is still a viable retirement account, although the deal is obviously not as sweet without the free match money. If you’re considering the switch, be sure you take into account all aspects of the plan. While 401(k) plans get discussed in the news about high fees, remember that not all plans are created equal. Obviously, if you’re in a plan with high fees and you do qualify for an IRA, the decision is pretty simple. But there are a number of plans that may also have even better fees than you can get no your own. For example, my 401(k) plan has institutional variants of funds, including some Vanguard and Fidelity. That means after all said and done, my net expenses are the same or even lower on these funds than I could get in my own IRA.

So, if your company drops the company match and you’re trying to decide what to do:

• Examine your current plan, check expenses and fund offerings, and see if the match has been temporarily suspended or eliminated indefinitely.
• Check to see what type of IRA you qualify for, and if eligible, decide whether a traditional or Roth is better for your situation.
• Open the necessary IRA through a no-load fund company or discount brokerage such as Zecco or TradeKing.
• Make sure you’re still contributing the same amount or more to your retirement accounts even if this means contributing to both an IRA and your 401(k). Just because your company stopped matching doesn’t mean you should contribute less overall.
• Prepare for changes to your tax situation. Going from a 401(k) to a Roth IRA could have an impact on your taxes, so plan accordingly.

I hope that helps clear things up when faced with this question. As you can see, there are many reasons to switch to an IRA if your company drops the match, some of which I didn’t even touch on here. But there are also a number of limitations that need to be taken into account before making that decision as well. There may not be a right or wrong answer to this question, but if you’re armed with all the facts, you can make sure you’re making the most reasonable decision for your situation.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

My Employer Stopped Matching My 401k – Should I Still Contribute?

This is a guest post by Neal Frankle,  CFP ®. Neal found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.

The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger. To learn more, visit www.wealthpilgrim.com

Target date funds are very popular but maybe they shouldn’t be.

A target date fund is a mutual fund that is supposed to ratchet down risk as you get older. It turns out many haven’t really done the job they are designed to do.  This has cost investors billions of dollars in losses.

Here’s a great article explaining how these funds work .

A quick way to get your hands around this is by way of example. Let’s say you plan on retiring in 2015 and you want to reduce risk as you get closer to your “gold watch” date. In this case, you might be tempted to buy a “Retirement 2015″ fund.

The fund is supposed to automatically rebalance a portion of your money out of stocks and into bonds each year as you approach retirement.  In theory, it sounds wonderful but unfortunately, it hasn’t worked out for some people.

It turns out that “rebalancing” and “asset allocation” mean different things to different fund managers.

This came to a head last year when similar target date funds generated a huge range of (negative) returns.

Most people think that all target date funds are the same. They aren’t.

Look at the target date funds for 2010 for example. You’d expect a “Retirement 2010″ fund to be pretty conservative…right?  Well….the best performing 2010 fund was DWS Target 2010 Fund – it only lost 6.22% in 2008.  As you can see it was conservative – the fund had 85.36% of its assets in bonds.

DWS Target 2010 Fund

The worst performer was the Oppenheimer Transition 2010 Fund.  It dropped 40.16% in 2008.  Guess how much it had it bonds?  Only 30.49% as you can see below:

Oppenheimer Transition 2010

Granted, last year was horrible for just about everyone. But if target date funds are supposed to be managed similarly, how can you explain the divergence in returns?

The answer, as you can see, is that each fund managers invested very differently.

There isn’t any uniform definition of what should be included in these funds. No guidelines.  No nothing.  It’s like selling great tasting yogurt by telling all your customers that its fat-free…..only it isn’t.  Do you remember that Seinfield episode when that happened?  It was very funny.

Unfortunately, you aren’t laughing now if you invested in a target date fund that didn’t do its job.

Congress isn’t yukking it up either. Sen. Hernb Kohl, D- Wis, chairman of the Senate Special Committee on Aging is leading a congressional probe into target funds.  The SEC is also looking into the matter. They are considering increasing governmental oversight or even restrictions.  These officials fear that some mutual fund companies are just slapping a “target date fund” label on just about anything and the government wants it to stop.

Why should you care about this?

Most of the $152 billion invested in target date funds are invested through 401(k) plans. If you participate in a plan at work, you might even be investing in target date funds.

What can you do about it?

You have two choices.  First, you could try to get information from the fund by reviewing the prospectus.  It generally details what the investment restrictions are.

The second option you have is to take the bull by the horns.  Forget about using these funds until uniform standards are put in place.  If you know what kind of risk you are willing to take simply mix and match your funds to suit your own needs.

Don’t invest blindly.  The target date fund is a great concept that Wall Street has once again screwed up.

Not all of these funds are lousy.  Just make sure if you do use a fund like this, you know what “target” the fund is referring to.  It might be you.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Congress Is Investigating Target Date Funds – Should You?

I’ve talked about this trend in the past where people do just the opposite of what they should be doing. Ask even the most novice investor and I bet they can recite the words “buy low and sell high” to you. It’s an incredibly simple concept, yet most people can’t follow through with it. Human behavior plays an important role in determining actual investment returns. All of those numbers you see about gains, losses, and what the Dow is doing? They are important, but not as important as the decisions you make.

This morning I was catching up in my feed reader and I stumbled across a post over at Behavior Gap titled When Things Clear Up. If you haven’t been over to The Behavior Gap before, I suggest you check it out. Carl does an amazing job in pointing out the deficiencies in human behavior that lead the average investor to realize even worse returns than what their actual investments they hold return.

In Carl’s post about when things clear up I see a striking resemblance to the discussions I’ve been having more frequently in recent weeks. He points to an NPR story where a couple confesses to getting out of the market back in March, but are now ready to get back in because they think things have cleared up.

Everyone Becomes a Pro During a Rally

That’s right, this couple and everyone like them who waited 18 months for the market to cut their portfolio in half before bailing out has suddenly achieved great wisdom and is ready to invest again a few short weeks later because the market had a decent rally. I’m seeing this play out on a daily basis just like Carl pointed out. How can someone who couldn’t predict these massive losses suddenly predict the very bottom of the market and know it’s time to get back in?

People sell due to fear, but that fear only comes after you’ve lost money. You don’t have this fear when things are doing well. So by the time you feel bad about your losses, they have already brought your portfolio down and you’re probably going to sell at a loss. Then, people want to get back in when the fear is gone, but guess what? We lose this fear only after the market begins to rebound. And you know what? That means you’re selling low and buying high — just the opposite of what you know you’re supposed to do.

Don’t Let Your Behavior Undermine Your Returns

I’m no pro when it comes to predicting the stock market. In fact, most people aren’t. If you want to maximize your investment returns, you need to exhibit the right behaviors. If you let the headlines and your quarterly statements drive your investment decisions, you’re probably going to be one step behind and reacting to an event. If you react, it’s too late. Instead of reacting, you want to be planning.

With planning, you are putting measures in place to take advantage of the future. Yes, the future is unknown, but you can still create a plan that will maximize your returns based on your investment objectives. Then instead of always taking action after something happens, you can keep your emotions out of it and know that you’re doing what’s best based on sound principles, not a reaction to an event in the past.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Buying High and Selling Low Continues for Many Investors

March Rally Leaves Some Investors With Seller’s Remorse

Buy and hold investors have felt like this tried and true strategy has failed them, and for good reason. The past decade has been downright ugly when it comes investing in the stock market. Over the past ten years, many will point out that their money would have done better in a savings account, or even under the mattress. It’s true — stocks have done terribly over the past ten years, and extremely bad over the past 18 months — but using that as an excuse to get out can prove costly.

This past March has been a perfect example. From the lows early in the month, markets rallied over 20% in just three weeks. If the market saw a 20% gain over a whole year it would be hailed as one of the better years in decades, but this move happened in a matter of days. It was one of the shortest and strongest rallies in over 60 years. When the market moves that fast, it’s nearly impossible for the average investor to spot the trend right from the beginning, and by the time they do, the rally is over.

Visualizing Why People Were Selling

A lot of people were getting out of stocks early this year. I know that those of you with a true long-term vision see the importance of planning for the future and buying even when things are headed in the wrong direction, but we have to remember that it’s very difficult for most people to stomach continuous losses month after month like we’ve seen. To illustrate this, you’ll see a chart of the Dow below that goes back to November of last year. What’s different is that I’ve blocked out the last month’s worth of data. So, this is the chart you would have seen back in the first few days in March.

Look at that drop. From about 9,000 at the new year the market plunged about 2,500 points, or around 28% in just two short months. If you were pulling up your account information or looking at this chart back in late February, I don’t doubt that your stomach was tied into knots. At this stage, there was absolutely nothing to reassure us that a market rally was coming. The markets were dropping like a rock, and the prospect of the Dow hitting 5,000 was not at all out of the question. You can probably see that given how bleak the picture was in February, it was no surprise that more and more people were taking their money out of stocks.

From a personal perspective, I can say that I have never seen more people so desperate to get out of the market than I did right around the end of February and early March. My phone was ringing constantly and people had just had enough. Many of these were people who have stayed the course this whole time, have continued to buy even while the market is down, but the sharp decline in early 2009 was the last straw. I don’t blame them. There was really no good news coming out and the possibility of any upside in the market seemed nil.

What a Difference a Few Weeks Make

Ask anyone in the first few days of March if they thought the market could rally 25% in just a few weeks and you’d just get a bunch of laughs. And if you predicted such nonsense, you’d probably find yourself the next guest on The Daily Show with Jon Stewart getting blasted like Jim Cramer. Markets aren’t supposed to do that. Of course, markets aren’t supposed to drop 50% a year either, but we have to expect the unexpected these days.

Common sense would tell you that those who got out of the market a few months ago were right, and they were protecting themselves from the continued drop that was sure to follow. Well, not so fast. Let’s look at the same chart as above, but we’ll include what happened in March.

Look at the difference. The first chart above looks as if the Dow is in a free fall that won’t stop for anything. Give it a few short weeks and it gained nearly 1,500 points. After the first week of gains the media was happy, but many still cautioned it was just a temporary glitch. Another week of gains, and some disbelief sets in, although the news was still welcome. And after yet a third week of gains, you had some people proclaiming we’ve bottomed out.

I’m not here to make any predictions as to what this means for the future, but I did want to point one thing out. And that’s the fact that the market moves fast, and it can and will leave you behind. If you are a trader and monitor the markets carefully, I’m sure you could have spotted many buy and sell opportunities, but for the average investor, this is simply a classic example of why you shouldn’t try and time the market. If someone sold near the bottom in February, how long did it take before they bought back in? A week? Two weeks? If you look at the chart, it’s pretty clear that had you sold near the bottom and waited just a few short days before getting back in, you probably missed out on the bulk of the initial gains. In a worst case scenario, you sold low and bought high and just compounded your losses even further.

Investors Showing Signs of Remorse

If you’ve continued to stay the course, you’re probably viewing the March rally as a breath of fresh air. It’s been a brutal year and a half, so any positive gains are welcome relief. But investors who may have sold earlier this year are starting to show signs of remorse. Granted, we still haven’t climbed back to where we started the year, but the recent rally has illustrated just how hard it is for most investors to get in and out of the market at the best time.

Just as I met with a lot of people in February and early March who wanted to sell, I’ve met with a number of the same people in recent weeks who are visibly upset with their decision. They have realized their mistake and know that if they were to buy back in now, they are doing exactly the opposite of what they have always been told, which is to buy low and sell high. To make matters worse, many of these investors also stopped making their regular investment contributions into their previous allocation and instead switched to a money market or fixed account. At the very least, had they continued to invest the same and still put some money into stocks, they would have realized a nice gain on those funds.

What Does the Future Hold?

Even after all of that, what does this mean for the future? Unfortunately, I don’t know. Nobody knows. There is just as good a chance that the market will again continue to slide and drop below levels we saw just a few months ago as it is that this turns out to be a long-term turning point. If you’re trying to draw conclusions from what the March rally, you might as well flip a coin. You’ll be hearing a lot in coming weeks from pundits about what the future holds, but when you realize how many had no idea this kind of rally was imminent, you can rest assured they can’t predict what’s going to happen in the next few months either.

One thing is for sure. The market will continue to move, and it will often move fast. Just when you think you’re certain as to where it’s headed, it’s likely you’ll be proven wrong. Keep that in mind going forward. This might be just a bear rally and we’re still going to be searching for new lows in coming months. It could also be a turning point that leads to a long-term recovery. Your guess is as good as mine, so make sure you’re making investment decisions based on sound principles. If you let emotions get the best of you, you’ll probably end up missing an opportunity or regretting your decision.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

March 2009 Was a Perfect Example of Why You Shouldn’t Try to Time the Market