A few days ago I got my bonus (and taxes wiped out most of it), so I decided to invest in a few new securities (and added to an old one).
Apple (AAPL)
Russell Micro-Cap (IWC)
TRowe Price International Discovery Fund (PRIDX)
I got Apple at $85.16. It shot all the way to $97, but dropped down to $89. I bought this as a highly speculative investment. I figured that if CNN and Time was concerned about a company releasing a new phone than the stock would certainly get a pop when the announcement happened. I was right, but now have held it longer than I should have. Blame my company's policy of hold all securities for at least 30 days. I'm still trying to decided should I sell or keep it.
I also invested in the Russell Micro-Cap (companies valued under $40 million) as a medium speculative investment...also as a diversification method. The expense ratio (amount they charge you per year) is pretty low and this is a group of stocks I wasn't invested in. We'll see how it goes.
Finally, I put more money into the International Discovery fund. This fund invests in foreign small cap stocks. I've been reading tons of articles about how the time of foreign stocks might be over, but they said the same thing for REITS (real estate investment trusts) 2 years ago! Again, this is an area I'm not too exposed to. What I don't like is the expense ratio: 1.26%. I would invest in Vanguard's Explorer Fund (not run by Vanguard, by the way) with its super low expense ratio, but it is closed to new investors. Too bad. Maybe it'll open back up.
On a side note, I'm currently invested in Vanguards Total International Stock Index fund. Great fund because it is cheap and exposes you to most of the world. However, it is really a fund of funds. Basically, it invests in three other Vanguard funds: Emerging Markets, European, and Pacific Stock Index funds. However, there is an interesting rule. Funds of funds can't take the foreign tax credit (paying foreign taxes are tax deductible). To fix this, Vanguard is launching early this year a International fund based upon the FTSE Index. The new fund will differ from the Total International by directly investing in foreign stocks (can take the foreign tax credit) and will now have 5% invested in Canada. Once it comes out I think I'll move my Total International holdings over.
Here is some more info on the new fund:
http://www.marketwatch.com/news/story/new-vanguard-international-fund-breaks/story.aspx?guid=%7B5AB5474A-3678-48E0-A343-993C62730136%7D
Sunday, January 21, 2007
Sunday, January 7, 2007
Roth 401K vs. Regular 401K
Recently I've been thinking about my 401K options at work. I have the option of either investing in a Roth 401K (pay taxes now on the invested amount, but all the gains are tax-free when taken out) or the Regular 401K (tax-free now, but you'll pay the taxes at your tax bracket when the money is dispersed).
As a slight detour, my company doesn't match your contribution, so I did a quick back of the envelope calculation to see if it is worth investing in a 401K at all. Let's say you're in the 35% tax bracket and can invest $20,000 a year into your 401K (I know it is only $15,500 for 2007, but this is just a quick calculation) and are expecting an 8% rate of return. Over the course of 20 years you'll end up with $1,008,458 (a cool million) in your 401K. When you take it out you'll have $655,498 after takes (let's go with 35% even though it might be lower in retirement).
Ok, now what if you forgo the 401K. Each year you'll have $13,000 to invest after taxes (35% of $20,000). After 20 years at 8% per year you'll end up with$655,498. Assuming you're investing in stocks and the 15% capital gains tax is still around, you'll end up with $598,173.
So over 20 years you make $57,000 more by using the taxed deferred nature of the 401K. Not bad!
Going back to the discussion at hand, is the Roth 401K better? Since a company can only match into the Regular 401K, you should certainly contribute to the regular 401K to get that matching. Free money and all.
I read an interesting article about the entire subject: http://scolaro.com/McGoughMemo2006.pdf
He makes some very interesting points, especially about the possibility that the laws might change as they did for Social Security. Based upon his calculations it is better to invest in the Roth 401K (if you're in the higher tax bracket)...his final point being it is risky since who knows what the government will do.
Right now I'm still only investing in the regular 401K, but I'm seriously thinking about switching over to the Roth 401K.
P.S. The fund choices I have at my company are incredible. You have the standard index funds (all low cost) plus some interesting alternative investments: 4 hedge funds, 5 international funds (Emerging Markets, Global), 1 REIT Fund, and 1 Global Bond Fund.
As a slight detour, my company doesn't match your contribution, so I did a quick back of the envelope calculation to see if it is worth investing in a 401K at all. Let's say you're in the 35% tax bracket and can invest $20,000 a year into your 401K (I know it is only $15,500 for 2007, but this is just a quick calculation) and are expecting an 8% rate of return. Over the course of 20 years you'll end up with $1,008,458 (a cool million) in your 401K. When you take it out you'll have $655,498 after takes (let's go with 35% even though it might be lower in retirement).
Ok, now what if you forgo the 401K. Each year you'll have $13,000 to invest after taxes (35% of $20,000). After 20 years at 8% per year you'll end up with$655,498. Assuming you're investing in stocks and the 15% capital gains tax is still around, you'll end up with $598,173.
So over 20 years you make $57,000 more by using the taxed deferred nature of the 401K. Not bad!
Going back to the discussion at hand, is the Roth 401K better? Since a company can only match into the Regular 401K, you should certainly contribute to the regular 401K to get that matching. Free money and all.
I read an interesting article about the entire subject: http://scolaro.com/McGoughMemo2006.pdf
He makes some very interesting points, especially about the possibility that the laws might change as they did for Social Security. Based upon his calculations it is better to invest in the Roth 401K (if you're in the higher tax bracket)...his final point being it is risky since who knows what the government will do.
Right now I'm still only investing in the regular 401K, but I'm seriously thinking about switching over to the Roth 401K.
P.S. The fund choices I have at my company are incredible. You have the standard index funds (all low cost) plus some interesting alternative investments: 4 hedge funds, 5 international funds (Emerging Markets, Global), 1 REIT Fund, and 1 Global Bond Fund.
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