Market Orders

Market orders are the most common and easy to understand of the order types. A market order is simply an instruction to buy or sell the securities at the current market price. Unless you give different instructions, this is the type of order that will be placed. Market orders are almost always guaranteed to be executed as long as there are active buyers and sellers in the market.

One of the drawbacks of market orders is that the investor is at the mercy of the bid and ask spread. Buy orders are filled at the ask price, and sell orders are filled at the bid price. Depending on the individual stock and market activity, the bid and ask spread could be fairly significant. Another drawback is that in fast moving markets, you may receive a different price from what the current quote is.

Limit Orders

Limit orders do just as they say, and allow investors to set a limit on the buy or sell price. While market orders will be executed at whatever the market price is, a limit order won’t execute unless your limit is reached. Limit orders can be either buy or sell orders.

Buy limit orders are executed only when the price of the stock you want to buy is at, or lower than your limit price. For example, if you wish to purchase 10 shares of  XYZ stock at $20.15 and the ask price of the stock is currently at $20.20, your order will remain open. If the ask price never drops to $20.15 or lower throughout the trading session, your order will never be fulfilled. If the stock does move lower, and the ask jumps to $20.10, your order would be filled.

Sell limit orders work the same way, only in reverse. If you currently own 10 shares of XYZ stock and you want to sell the shares for $20.25, yet the stock’s bid price is $20.15, the order will not be filled and remain open. If at some point the bid price reaches $20.25 or higher, the order would be fulfilled.

The risk with limit orders is that the order may never be executed. If you wanted to buy a stock at a set price and it is on a run and rapidly increasing in price, your order wouldn’t be filled and by the time you could place another order, you may have missed out on substantial gains. The same goes for sell limit orders never being filled. If you wanted to unload a stock at a set price and it continues to fall, you can realize additional losses as the stock declines and your order goes unfilled.

Stop Orders

The stop order is generally used to protect profits or minimize further losses. A buy stop order is always placed at a price above the current market price, and a stop sell order is always placed below the current market price. When that stop price is reached, the order turns into a market order and will be executed at the current market price. For example, if you have a stock that you purchased at $20 that is now trading for $30, you can protect some of that profit by setting a stop sell order. You could place the stop at $25 so that if the price does fall to $25 or below, your order will be converted to a market order and executed.

The advantage of stop orders is that it makes it so an investor doesn’t need to monitor the stock market every second of the day. Investors can place various stop orders to protect gains and minimize losses without being around the computer.

The main disadvantage of stop orders is that you can get “stopped out” by a quick price movement that may not be warranted. A rumor or press release may send traders into a frenzy and briefly send the stock into your stop territory only to reverse course moments later when things settle down. Since stop orders turn into market orders when the trigger price is reached, you also have the possibility of executing the trade for a price that is different from the stop price.

Stop-Limit Orders

Like a regular stop order, investors use these orders to protect profits or minimize losses. The difference is that this order turns into a limit order when the stop price is reached, not a market order. This type of order gives you more control of when and at what price the order will be executed at. With this added control comes the possibility that the order may never be filled.

The reason this can happen is because if a stock is moving rapidly and hits your stop point, it may continue to move rapidly past your limit order, leaving the order unfilled. This could result in even further losses or losing some profit as the market moves past you. On the other hand, the stop-limit order can help you from getting stopped out early from a quick price movement that doesn’t hold.

Day Orders

All of the orders discussed so far are typically placed as day orders. This means that when you place an order, they are only good for the trading session that they are placed. So if you place an order at 10 a.m. and it doesn’t get filled before the market closes at 4 p.m., you’ll have to place another order the next day if you still want to make the trade.

Good ‘Til Canceled Orders

If you don’t want to worry about placing orders each day in the event they don’t get filled, you can place a good ’til canceled, or GTC order. These orders are good until executed or you decide to cancel it. This can mean an order could stay open for days or weeks. Even so, many brokerage companies have limits on how long GTC orders can be left open.

Other Order Types

There are a number of other order types, but the ones referenced above are the most common, and should be available to all brokerage platforms. The other order types are usually contingent on other factors, and may or may not be provided by your brokerage, so you will want to check before placing any trades.

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 401k 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 401k.

Lean More: How to roll over your 401k into an IRA

Roth IRA

Eligibility for a Roth IRA depends on your income. As a married couple you would qualify for a Roth IRA if your modified adjusted gross income (MAGI) is below $173,000. If MAGI is between $173,000 and $183,000, then you can contribute some, but not the full amount. If income exceeds $183,000, you do not qualify for any current year Roth IRA contributions. Single filers begin phasing out of a Roth IRA at $107,000 and is gone completely at $125,000.

As you can see, depending on your income, giving up your 401k 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 $56,000 and ends at $66,000 if you’re currently covered under an employer-sponsored retirement plan. Joint filers phase out between $90,000 and $110,000. 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.

As part of the Roth IRA Movement started by Jeff Rose at Good Financial Cents, over 125 bloggers are using March 27th as the day to bring awareness to the Roth IRA, how they work, and some of the benefits. While there is a lot of information to cover regarding these accounts, I’m going to focus on the tax implications of converting a 401k or traditional IRA into a Roth IRA.

While it’s generally accepted that the Roth is going to be a better option for a lot of people in retirement you can’t discount the true cost of the conversion. In most cases, the argument is that many people will be in a lower tax bracket right now and at the time of the conversion compared to in retirement. This has to do with the fact that the government has a nasty habit of increasing taxes and that you may have accumulated a significant nest egg that generates even more income in retirement than you had before you retired. So, in this scenario it would make sense to have tax-free income in retirement rather than getting less of at tax break while you’re working.

Unfortunately, it’s not that simple.

Using Roth IRA Assets to Pay Conversion Taxes

There are two different ways you can handle the taxes when you do a Roth conversion. Ideally, you would have funds already set aside outside the IRA that you can use to pay the taxes. This means your account value remains intact and you only have to pay the prevailing tax rate on the conversion amount. There’s also another way, and that’s to use the funds inside your IRA to cover the tax bill. Sadly, this is what a lot of people are choosing to do simply because they don’t have the money available to pay the taxes on the conversion. Big mistake.

First of all, if you choose to do this you’re actually taking a distribution from your IRA. Now, if you’re under 59 1/2 when you do this you’ll be subject to the 10% early withdrawal penalty. So, not only are you owing the regular taxes, but you are getting hit with an additional 10% penalty. If you use outside funds to pay the taxes this penalty wouldn’t apply. Second, using IRA proceeds to cover the taxes just reduces your account value. You could easily be faced with the fact that your account will be cut by about 40% just to do the conversion. How long would it take to recover from that?

Running a Few Different Scenarios

One of the tools I have through work is Blackrock’s Roth IRA conversion calculator. With this tool you get to plug in a bunch of numbers to create different scenarios to tell you whether or not a Roth conversion is the best choice. For this exercise I wanted to focus on the impact that paying the taxes from the IRA assets has on the conversion. Obviously, there were many scenarios where having a very low tax rate now versus a very high tax rate in retirement showed the Roth was the big winner, but I wanted to focus on a few more realistic scenarios.

For these scenarios all of the data is the same except for the tax rates before and during retirement:

• 35 years old at the time of the conversion
• Begin taking retirement distributions at 62
• Planning for 30 years worth distributions
• 8% returns pre-retirement
• 5% returns in retirement
• $100,000 account value

Assumptions:

The results assume that the taxes due when converting your current account to a Roth IRA are taken from the assets being transferred. It also accounts for the early withdrawal penalty on assets used to meet that tax liability. You do have the option of paying the tax liability out-of-pocket, which would affect the results. It further assumes that taxpayers at any income level may convert to a Roth IRA and that any tax liability arising from the conversion is paid in equal installments over two years, beginning with the 2011 tax year, at the same tax rate. The two year tax rule does not apply to conversions made during 2012. It also assumes that no distributions are taken before age 59½ and that you take even annual distributions during the retirement period you specified.

Roth Conversion at 28% Tax Rate Before and During Retirement

For the first example I wanted to see what would happen if tax rates didn’t change between the date of the conversion through retirement. I stuck with a middle of the road tax rate of 28%. As you can see, when you take money out of the IRA to cover the taxes and penalty you are left with a much smaller nest egg upon retirement when compared to leaving it in a pre-tax account. In this case, it’s nearly a $300,000 difference. Of course, when you break it out into annual withdrawals the impact is minimized, but you’d still be better off in this case to not do a Roth IRA conversion.

Roth Conversion at 25% Tax Rate Before and 28% During Retirement

What happens when your tax rate is higher in retirement? This is the classic example of when a Roth is the perfect retirement vehicle. Well, again we can see that because taxes were paid out from the IRA the damage done is hard to recover from. Even in this scenario there is a case that can be made to show that the conversion might not be the best idea.

Roth Conversion at 28% Tax Rate Before and 33% During Retirement

As tax rates increase both before and after, the gap narrows. Sticking with the pre-tax account virtually identical with the Roth just slightly losing out. But in reality and with variations that can’t be planned for I’d call this scenario as virtually equal.

Roth Conversion at 33% Tax Rate Before and 25% During Retirement

What happens when you bet wrong completely? All of the previous examples were showing tax rates the same or higher in retirement. But we simply don’t know what will happen decades from now. So what happens if tax rates end up being lower, or you make less in retirement therefore have a lower tax rate? Ouch! Making the wrong bet and using IRA assets to pay the conversion taxes cost you almost 20% overall.

Some Final Considerations

First of all, there are a lot of assumptions being made when it comes to long-term financial planning. Even though these examples kept everything constant across the board except for tax rates the real world will throw things in that can’t be predicted here or anywhere. You may retire earlier, or later. You may not be able to get the returns you expected leading up to retirement. You may not get the returns you expect in retirement. Your tax rates may change numerous times between now and retirement. Laws regarding retirement plan distributions may change entirely. There are many things we simply can’t plan for, so you need to keep that in mind when trying to weigh your options. Even what appears to be the best decision on paper today may come back to bite you in 30 years. The best you can do is make an informed decision.

This exercise wasn’t to make an argument against a Roth IRA conversion. Not at all. It was simply done to show the significant impact that using your account proceeds to pay the tax bill can have on the end result. Paying the taxes with outside funds is a completely different situation and the results are very different. Instead, this just throws a little information out there for those who were thinking about doing the conversion after hearing all the hype in the news and maybe didn’t think about where the money for taxes was going to come from.

Finally, keep in mind that even if you do have outside funds to cover the tax bill you want to make sure you’re not putting yourself into financial harm. If it’s going to take every penny of your emergency fund to pay the taxes on a conversion you’re putting yourself in a risky short-term situation only to try and maximize something in the future. In addition, even if you do have enough cash on hand to pay the taxes it may still end up bumping you into a higher tax rate, could end up subjecting you to AMT, or any number of tax complications.

My recommendation is to simply not take the decision to convert to a Roth IRA lightly. Unless your account is very small or you’re only converting a portion of your total retirement portfolio you should seriously consider getting some professional advice. Either from an accountant who handles your taxes or a fee-only financial planner you trust. They can help you navigate the waters of this important decision.

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, often sold my financial advisers or brokers who work on commission. 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! And that’s in addition to the recurring annual expenses that may run higher than 1%.

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, and instead earn money by charging you for the advice they provide.

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 essentially cost you about $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%, which can make a huge difference.

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 loaded 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. And if you’re currently invested in expensive funds it might be time to look for alternatives. You can always open a free account at a low-cost broker such as TradeKing and start investing in low-cost index funds.

Mutual or index funds are a collection of bonds, stocks or money market securities. These funds are popular choices for safer investments because they offer diversification. If one bond or stock performs poorly, another security’s stellar performance may balance the losses. Investing in a collection of securities creates a safety net for investors. In fact, a well-diversified portfolio can help you make money even while stocks are losing value.

Historically, investors can expect a typical total return of 8 percent to 9 percent over a year as a long-term average. Stocks, on the other hand, can yield 10% to 11%. Mutual and index funds are typically long term investments. Six of the best types of funds will be reviewed to help safeguard your finances.

Safest Investments

Federal Government Bond Funds

The most risk-averse investments are probably the federal government bond funds. U.S. Treasury bonds are considered safe because it is based on the government’s ability to print money and collect taxes. This eliminates most risk on behalf of a company and provides optimal protection. Even with the recent debt downgrade on the U.S. countries flooded into the Treasury market buying these securities for their safety.

Ginnie Mae mortgage-backed securities (MBS) are also considered safe investments because the securities are guaranteed by the Federal Housing Administration (FHA). Since they are securitized by the Government National Mortgage Association, they are considered safer than most investments. Including some mortgage-backed securities or federal government bonds in your mutual fund will provide more security.

Municipal Bond Funds

Municipal bond funds have a slightly higher risk than Federal Government Bond Funds. These bonds are listed by state and local governments and provide a high degree of safety to investors, because they are backed by the revenue-generating power of the issuing government. Include some municipal bonds in your mutual funds to increase your return, but maintain safety as well.

Taxable Corporate Bond Funds

If you are seeking a higher yield than federal government bonds, but less risk than stocks, taxable bond funds may be a good alternative. They do carry higher risk. However, with higher risk comes with higher yields. Investors should ask their financial advisors to recommend some high quality bonds to lower the risk associated with this type of investment. Corporate bondholders are ahead of stockholders when it comes to getting repaid due to bankruptcy.

Money Market Mutual Funds

Money market mutual funds are recommended for short term investments and provide a significant amount of security for investors. Money market mutual funds are recommended for investors that are not experienced and need a significant safety net to minimize losses. Consider money market mutual funds for diversification of your investment portfolio. But consider these basically a cash equivalent, because yields are very low, but the trade-off is the money is liquid.

Higher Risk Investments

These final securities are higher risk investments, but still considered generally considered safer than investing in just a few single stocks. Consider these investments for more aggressive returns with the benefit of diversification.

Dividends Funds and Large Cap Funds

Dividend funds are a safer way to make money while investing in the stock market. Investors experience less volatility while they focus on a steady growth by providing regular income in the form of dividends on top of capital appreciation. Consider dividends funds for a safer, but somewhat aggressive investment. Focusing on blue chip stocks is also safer than investing in smaller companies that may be slightly more volatile. Large cap stocks are typically less vulnerable to disastrous effects of an economic downturn. This will help to protect your portfolio in more difficult times in the stock market.

Hedge Funds

While not for everyone, hedge funds are designed to for people who want to make money no matter what the market is doing. Wealthy investors are often advised to invest a portion of their portfolio in hedge funds. These funds try to protect investors regardless of the market conditions. Consider hedge funds to diversify your portfolio, but only if you are very comfortable with the added risk and alternative investment types.

Where to go now?

Investing during a recession is akin to building your portfolio at a discount. When the market rebounds, your investments will increase, and the foundation of your portfolio will be built on sound investments. Recession is not the only time that people consider more conservative investments. They are also considered when a person is nearing retirement. Diversification often provides the safe haven that retirees need. With a safe haven, they can enjoy their retirement.

Invest Like a Pro

For even more information, be sure to check out Jeremy’s free Invest Like a Pro eBook. It has a ton of great information to help you research investments, track your portfolio, and invest like a pro.

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.

Lately I’ve received a few questions from readers asking about the difference between an ETF and an index or mutual fund, and which one is better. Well, as with almost all things, there are pros and cons to each. There is no right answer that applies to everyone, but I’ll provide a little background information and examples of why one might be better than the other for certain reasons and situations.

ETF Basics

An ETF, or Exchange Traded Fund, is nothing more than an investment portfolio consisting of many investments that trade like stocks. An ETF holds a collection of securities that are designed to track the performance of an index. This means that if you purchase a share of an ETF that tracks the S&P 500, you should see daily changes in your share price that come very close to, or exactly mirror the actual performance of the S&P 500.

ETFs were introduced in 1992, and back then, there were only a couple offerings. Even as late as 1999, there were only 32 ETFs in existence here in the U.S. markets. The ETF market has grown considerably as there are now nearly 1,000 available. This is good news for investors who are looking for ways to invest in many specialized niches, but it is also bad news because it can make choosing the right ETF more difficult than it has to be.

Mutual and Index Fund Basics

To give you some perspective, mutual funds have been around for a very long time compared to ETFs. The first mutual fund was established in 1924, and they have served as the primary investment vehicle for the average investor for decades. Like their ETF counterpart, a mutual or index fund is simply a collection of investments that are designed to reflect the performance of the underlying holdings. Mutual funds may have widely varying portfolios may not track a specific index, whereas an index fund is designed to track the performance of an index.

One of the biggest differences between funds and ETFs are the way they are bought and sold. ETFs trade like stocks, so that means the price per share of an ETF changes continually throughout the day while the markets are open. This allows you to buy and sell an ETF multiple times a day if you wanted. On the other hand, mutual and index funds only trade once a day. Because of this, you might place an order at 10 am, but you will get the shares for whatever the closing price is at the end of the day.

The other difference is in the fee structure. Mutual funds can have a number of ways to charge the investor–from front-end loads, back-end loads, early redemption fees, and everything from management to advertising expenses. ETFs have a very straightforward and transparent expense ratio (although, some mutual and index funds do as well).

Advantages of ETFs

While there are many similarities between these products, there are some potential advantages to ETFs:

• Low Ownership Costs - Because of their efficient structure that tracks an index rather than pay investment managers to create a portfolio, the recurring expenses for most ETFs are very low.
• Tax Advantages - While this isn’t really a concern if you’re investing in a tax-deferred account, ETFs are generally very tax friendly. In many cases, you are in control of when you pay capital gains tax because you pay it when you sell your shares. You aren’t at the mercy of wondering whether your mutual fund is going to declare a capital gains distribution or not. Many ETFs have never issued a capital gain distribution, and even the ones that do generally minimize the impact significantly.
• Liquidity - As I mentioned above, ETFs trade throughout the day just like a stock. This means you can buy and sell multiple times a day if you want, or buy and sell with virtually immediate results. You can also place market, limit, and even stop-loss orders through your broker for ETFs.
• No Minimum Investment – With an ETF, you are only limited by the amount of money you have and the price per share. Many mutual funds require thousands of dollars as a minimum before you can even invest in a fund, so ETFs have a much lower barrier to entry.
• Options - Since ETFs trade like stocks, many popular ETFs also have corresponding options. For more sophosticated investors, this means you can buy puts and calls, create spreads, or other creative techniques to hedge your investment. You can also trade ETFs anywhere you can trade stocks, so a discount broker like Zecco is an affordable option.

Drawbacks of ETFs

Even with so many advantages, there are also some drawbacks:

• Trading Costs - Since ETFs are traded like stocks, that means they generally have transaction costs like you would trading stock. Trading commissions can vary widely, from $0 to $20 or more per trade. These costs can eat into your returns.
• Brokerage Requirement - While most brokerages offer ETF trading availability, if you don’t currently have a brokerage account, that means you have to establish one. Brokerage accounts may also have account minimums or recurring fees, so you need to shop carefully.
• Slippage - This doesn’t really apply to someone buying an ETF with the idea of holding it for many years, but because ETFs trade like stocks on the open market, they have a bid and ask price. This means at any given time, what you can buy and sell a share for will be different.
• Dividend Drag - Unlike mutual funds, dividends paid out by the ETF are not reinvested which is common with mutual funds. This means the investor is paid the dividend in cash.

Advantages of Index/Mutual Funds

We’ve taken a look at the pros and cons of ETFs, so let’s now look at how index and mutual funds shine:

• No Trading Commissions - In most cases, you can invest in a no-load mutual fund without incurring a trading fee. While there may be a minimum initial investment, you can make purchases without being charged a trading commission as you would with buying/selling a stock or ETF.
• Dividend Reinvestment - Unlike ETFs, dividends paid out by the fund can be set to be automatically reinvested into the fund. This can be a significant benefit for funds that pay out regular and sizable dividends.
• Breakpoints and Share Classes - While I advocate no-load funds, the fact is that many investors do invest in funds that have loads, whether through a broker or otherwise. With different share classes from front-load, back-load, institutional shares, there is flexibility in how funds are purchased. There are also breakpoints on fees for having a certain amount invested with one particular fund company.
• No-Fuss Pricing – Since funds are price once at the end of each trading day, there are little surprises. With an ETF, the underlying share price may change minute to minute, and fluctuate a few percentage points throughout the day. While not a huge concern for the long-term investor, it can be a little unsettling to lose 1-2% on your trade mid-day trade due to market conditions out of your control.

Drawbacks of Index/Mutual Funds

ETFs and mutual funds have many things in common, but there are some drawbacks as well:

• Actively Managed Expenses - Not so much a concern for the index fund variety, but some actively managed funds may come with high expenses. These high expenses can really drag down your performance over time.
• High Minimums - Many funds require a high minimum investment just to get started. In some cases, this can be anywhere from $1,000 to $5,000 or more. This prohibits new investors without a lot of capital from getting started in the fund they may want.
• Additional Fees – Some funds have substantial front and back-end sales charges, and may even have 12b-1 fees to cover expenses such as advertising. While not all funds have these, some investors may inadvertently invest in funds with these fees without realizing it or by being tricked by a salesman.
• Style Drift – Funds that aren’t tied to a specific index are subject to the whims of the portfolio managers. This means they can alter and change the investment holdings in an attempt to bolster returns. This can be good, but more often than not, it means your investment is not doing what you wanted it to do when you purchased it.

What’s Right for You?

Hopefully the information above has shed some light on the pros and cons of both types of investment vehicles so that you can determine what would work best for you. There is no right or wrong answer, and there is no single product that fits all scenarios. In fact, there are many instances where it is desirable to have both ETFs and mutual funds in your overall portfolio. The tax advantaged ETFs will make more sense in a taxable account, and funds that regular issue capital gains distributions will be better suited for tax-deferred retirement accounts. And if you’re interested in short-term trading, ETFs are the way to go, but if you will be investing small amounts regularly, a mutual fund is going to help eliminate the trading costs associated with ETFs.

So, take a look at your situation and what you want to accomplish with your investments. There are a lot of choices out there, and it can be overwhelming, but it doesn’t have to be difficult. Take the time to understand how these investments work, and what the true costs associated with them are, and you’ll be on your way to maximizing your returns in no time.

If you have survived the economic downturn, you may be happy just to be paying your bills on time. Investing for your future might not even be on your radar and many folks assume that if they do not have large amounts they should not even bother. However, did you know it is possible to invest with very little money, as little as five dollars? Every little bit counts and now is an ideal time to begin investing small amounts, and you won’t even feel the pain.

Invest in a 401k

No matter what the current financial market is doing, most financial experts advise folks to invest in a 401k if their company offers one. Luckily, only a small amount is needed to invest in a 401k, and the amount is deducted from your paycheck automatically. In fact, it isn’t uncommon to allow minimum contributions of one percent, or even just five dollars per paycheck.

Some companies offer a matching amount that they will contribute to your plan as well. This is essentially free money. You make a contribution, and they turn around and match that contribution in part or entirely. If your place of employment offers this option it’s a no-brainer to take advantage of it.

The other benefit of using a 401k is that contributions are pre-tax. This means you don’t pay tax on the money that you contribute, and instead only pay taxes on withdrawals from the plan at a future date. To put it a different way, imagine you began contributing ten dollars per paycheck into your 401k. Your paycheck would actually only be about eight dollars less than usual due to the fact the entire contribution is not taxed, so you save about two dollars in taxes.

Don’t worry about losing the money in your 401k if you quit or are laid off. The money is still yours and you have a number of options. The best option is usually to do a 401k rollover which allows you to move your funds from your retirement plan into an IRA that you control.

DPP or Direct Purchase Plans

Direct Purchase Plans, or DPPs are ideal for folks who want to invest in the stock market but do not have large sums on hand. By using a DPP, you can avoid using a brokerage firm that can become costly when you make a lot of small transactions or don’t meet account minimums.

Direct Purchase Plans enable you to purchase stock directly from the company. There are usually no fees associated with this, or if there are, they are minimal. And unlike purchasing stock through a brokerage account where you are required to buy whole shares, the DPP typically allows you to purchase fractions of shares which is how they allow you to get started with very little money

The downsides to DPPs are that not all companies offer the plans, and it’s also a little harder to diversify since you’re dealing in individual stocks. But if you don’t mind taking the time to find a good company you’d like to invest in it can be a great option.

Investing In ETFs

ETFs are exchange-traded funds that are purchased in the same way as stocks. They can be purchased throughout the day, as their price is not set at the end of the day like somewhat similar open-end mutual funds. ETFs can track a specific industry, country or regional stocks, or they can cover broad based indices.

ETFs don’t require much day-to-day management, which is why the fees associated with them are relatively low. They also have lower ongoing operating expenses. This is one of the reasons they are ideal for long-term investment portfolios as well as short-term trading.

The minimum amount required to invest in an ETF is simply the share price plus any brokerage commission on the trade. If an ETF is trading at $25 a share and your broker charges you $4.95 to place a trade you could invest with just $30.

The drawback to ETFs is that if you are with a broker that charges a commission on each trade it can get costly to make frequent small purchases. The good news is that many brokers have a selection of no-transaction fee ETFs that you can trade without paying commission.

One good thing about ETFs is that unlike using a DPP that only invests in a single stock, you can purchase one share of an ETF and are instantly diversified. And with thousands of ETFs to choose from you can create a well-rounded portfolio.

Low Cost Brokerage Firms

If you feel you want to have the ability to invest in many different things such as stocks, bonds, ETFs, and mutual funds, a discount broker may be the ticket. There are many discount brokerage firms online, and some of them allow a small, or even no initial deposit to open an account. Once you put money in the account you’re free invest in virtually anything you want, from individual stocks and bonds to ETFs and mutual funds.

If you are looking for brokerage options I’d recommend either Zecco as they have some of the lowest commissions around.

Individual Fund Companies

Finally, if you’re low on cash but still want to get started investing, you may want to look at investing with a specific fund company. Two great low-cost companies are Fidelity and Vanguard. They offer some of the most affordable funds out there.

When investing in an individual fund you will need to pay attention to the minimum investment required. Each fund is different and the amount needed to get started can be as low as $250 or as high as $10,000. But once you make the initial investment you can usually continue to invest with as little as ten dollars.

The great thing about investing in a fund directly is there typically isn’t a transaction fee or commission for making purchases, so you’re free to add money to the account as often as you’d like without worrying about being hit with transaction fees.

The drawback is that some of the better funds do have higher minimums so it can take a little time to come up with the money to purchase the funds you’re interested in.

Learning How to Invest

Now that you’ve found a number of ways to start investing where do you turn to learn how to put that money to work? Well, for starters, you can download my free Invest Like a Pro eBook. In the book you’ll learn:

• Learn how funds charge fees and how to minimize them.
• Learn how to use Morningstar to research and compare investments.
• Learn about asset allocation, correlation, and true diversification.
• Learn how and when to rebalance your portfolio.

Download the free eBook now!

]]> http://genxfinance.com/how-to-start-investing-with-very-little-money/feed/ 0 http://genxfinance.com/investing-made-easy-with-betterment-plus-a-25-bonus/ http://genxfinance.com/investing-made-easy-with-betterment-plus-a-25-bonus/#comments Tue, 18 Oct 2011 15:34:34 +0000 Jeremy Vohwinkle http://genxfinance.com/?p=2946 Do you know what prevents most people from getting started with investing? The fear of choosing the wrong investment. This fear delays the decision to get started for weeks, months, and often even years. After all, when it comes to your hard-earned money, the last thing you want to do is see it vanish overnight because you chose the wrong place to put it.

The second reason many people never get started investing is a lack of funds. When just starting out, you may only have a few hundred dollars to work with, but that can be a problem when many of the best low-cost investment options have minimum purchase requirements. These minimums can be anywhere from $500 to $3,000, and that’s just to invest in a single fund.

So, with these two major issues preventing new investors from getting started, it means a lot of missed opportunities. Thankfully, a relatively new company called Betterment has come to the rescue. They have introduced a method of investing that is so easy there’s no reason to stress over the decisions. On top of that, they have no minimum investment requirement, so you can get started even if you only have twenty bucks to get started with. Here is a little more information about Betterment, how it works, and if it is right for you.

How Betterment Works

If you are familiar with online savings accounts, you’ll be right at home with Betterment. It’s basically a three part process: 1. Link up a bank account to Betterment. 2. Choose how you want to invest on an easy to understand risk scale. 3. Track your returns and withdraw funds at any time.

That’s it. You don’t have to go through a lengthy registration process like many brokerage accounts require, you don’t have to wade through hundreds of investment options, or worry about hidden fees or transaction costs. Before moving on, let’s talk about the investment options work.

Betterment’s Investment Options

The underlying investments are ETFs. If you aren’t familiar with ETFs, here’s a quick refresher. These are exchange traded funds, which means each fund typically tracks an index (such as the S&P 500) and then is traded on the major stock exchanges. These differ from traditional mutual and index funds which are not traded on an exchange and can only be bought or sold at the closing price set each day.

Betterment creates portfolios tailored to a specific risk tolerance you set by combining ETFs that cover everything from treasury bonds to stocks. Obviously, the more risk you’re willing to take, the more of your money that is invested in stocks versus bonds. But rather than having to go out there and create a diversified portfolio of maybe a half-dozen ETFs on your own, Betterment does this for you. And the best part is you can do this even if you only invest ten dollars to start. In the real world, there’s no possible way to invest in many different ETFs to get your target allocation without having hundreds of dollars available.

Key Features

• Fractional Trading – Betterment’s platform is dollar-based, not share- based, so it doesn’t matter how much you have to invest.
• Diversified Every Penny ‒ Through proprietary software, every penny is seamlessly reinvested.
• Rebalances Automatically ‒ Betterment rebalances automatically every quarter, or when more than 5 percent from your target allocation.
• Goal Based ‒ Betterment empowers you to invest toward specific, and multiple goals, with different allocations and advice for each.
• Dollar Cost Averaging ‒ With the automatic deposit feature you can employ dollar cost averaging.
• Efficient and Liquid ‒ Your Betterment portfolio is comprised of the most efficient ETFs and funds can be withdrawn at any time.
• Free Transactions ‒ No trading costs. Deposit funds, change your allocation, and withdraw funds without any fees.

I just want to touch on a few of those features to highlight how beneficial they are to investors. To start, the fractional trading is key because that’s what allows you to get started with just ten dollars. Unlike saving up a few hundred or even thousands of dollars just to be able to invest in a single index fund elsewhere, you can get started with next to nothing. And rebalancing is very important. I’ve written about this before, but even seasoned investors get tripped up by not sticking to a rebalancing strategy. With Betterment you don’t even have to worry about it because it’s done for you. And finally, one of the unique things is that you can allocate your money to specific goals and put real meaning behind that money. It’s that kind of motivation that will really encourage you to keep on saving and investing.

Betterment Fees

Ok, so we’ve mentioned a few times that there aren’t any fees, so what’s the catch? Well, there isn’t one really. Rather than nickel and diming you on transactions, maintaining an account minimum, and all of that, there’s simply a fee built into your balance. It’s exactly the same as the expense ratio you’d be paying on any ETF, index, or mutual fund. So with Betterment you’re simply paying an annual expense of between 0.3% and 0.9% annually, depending on your balance.

To put that into perspective, if your account balance was around $1,000 for the entire year, you’d pay just nine dollars in expenses. And remember, that’s what you’d pay regardless of how many times you traded, made deposits or withdrawals, rebalanced, etc. When just a single stock or ETF trade can run you between $5 to $10 you can see how expenses elsewhere can add up.

But let’s be perfectly honest, savvy investors can obtain lower expenses by picking their own ETF and index funds and may be able to keep expenses down to between 0.1% and 0.5%. While that is possible, keep in mind that the few extra basis points you’re paying is allowing you to do things you can’t do on your own, especially with limited funds. You’re able to get instant diversification with as little as ten dollars, automatic rebalancing, fractional share investing, and even some advice about how to make the most of your money.

Is Betterment Right For You?

The big question is whether or not Betterment is right for you. As just mentioned above, it is possible to find bare-bones funds and invest with lower expenses. So if you are already comfortable researching and picking out individual funds, and also have the money available to do so, then Betterment may not be as interesting of an option for you.

But if you’ve been putting off saving and investing for a long time because you aren’t comfortable with all the options or don’t already have hundreds or thousands saved and ready to invest, this is a no-brainer. Why keep kicking the can down the road and put it off when you can start with pocket change. Within five minutes you can have your account set up, linked to a bank account, and money deposited and invested. And since your money is completely liquid, you aren’t tying it up for any length of time and can move the money back into your bank account at any time.

Signing Bonus

If you still aren’t sure, they are giving my readers one more incentive by providing a $25 bonus for signing up. That’s 25 bucks for doing something you should have done a long time ago anyway. So give them a shot and see if it is right for you.

Does this sound like you or someone you know?  It’s an all too familiar story these days.  After all, isn’t cash KING?  Having that money in your hands feels great!  Unfortunately you will never make money by just holding that cash.

So which is it?  Is it safer to keep your money in cash right now or is it smarter to invest it and attempt to make a profit?  Let’s dig in our heels and find out.

Benefits of Holding Cash

When the stock market is crashing, your cash stays safe, thus preventing unecessary losses.  These market losses can be avoided because your money remains liquid and isn’t subject to market fluctuations.

Holding cash also has psychological benefits.  What would you rather have: a dwindling retirement account of stocks or a pile of cash that you can visually see and use?  For the short term, having that cash can give you peace of mind.

Negatives of Holding Cash

Unfortunately, there is this thing called inflation.  I don’t care how good it feels to hold your money on your hands, inflation is going to slap your cash across the face.  Don’t get fooled into thinking that just because your account value doesn’t go down that you’re not losing money. After you factor in inflation and tack on potential taxes, guess what? You could be effectively losing more than two percent a year.

Finally, have you ever heard of opportunity cost?  It’s that phrase we were taught in college.  In simple terms, it is the cost of foregoing something to buy or do something else.  When you hold cash, you theoretically forego gains in the stock market.  Although there is risk involved, there is also a potentially large payoff that you could miss. Just look at the last few years following the market crash of 2008. Stocks went on to post the two best years in history. Those who moved into cash missed out.

Making the Decision

So, comparing your two options, it seems that holding cash may or may not be your best option.  For the short term thinker, cash makes sense.  However, the implications for a long term investor are grim.  If you have a long term horizon, you can take a look at the historical charts of the stock market in general and it’s easy to see that stocks move up and down, especially in the short-term. But look at the big picture and you’ll see that what happens year to year doesn’t mean as much when you’re covering the span of a few decades. Even more important to note is that you can be a conservative investor and still protect your money while making more than one or two percent on your cash.

This brings me to another point: you should never let your emotions drive your investment decisions.  Too many people did that with the most recent stock market crash and look where that got them.  Yes, they had cash and may have prevented further losses, but now they have missed out on the market gains since then.  I actually fall in the opposite camp.  If I have investments in the market and my stocks start to plummet, I don’t go to cash, I actually buy more of that stock.  A majority of companies take hits and then come back with booms.  Buy low and sell high is a winning strategy and has worked for me extremely well. When you sell after a crash and invest again when the market is going up you’re doing the opposite and selling low and buying high.

This debate has been beaten to a pulp over the years.  When it comes down to it, one needs to look at their goals and desired retirement age.  The closer you get to retirement, you might consider a larger chunk of your portfolio in cash.  As a young person, the only cash I hold is my emergency fund.  So, you can see how this depends on your personal situation.  However, I recommend a buy and hold strategy for every type of investor out there.  Avoid extra fees, and dollar cost average your way to retirement.  It’s really that simple if you stick to it. Want proof? Take a look at how dollar-cost-averaging and diversified investing paid off during the so-called lost decade.