Tue 21 Nov 2006
What’s in Your 401k? Getting Rich Slow
Posted by RichSlick under Slow Wealth
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I’ve written extensively about my disdain for mutual funds and the ONLY time I would recommend investing in mutual funds is when you’re a captive investor. When are you a captive investor? When you work for a living and your company has a 401k plan then you’re pretty much a captive investor.
My game plan for 401k investing is pretty simple. For the past 2 calendar years, I maxed out my contribution at around 15k each year. This year, however, I’ve reduced my contribution to 6% which would capitalize on the maximum company match. What magic mutual funds do I invest in? NONE.
I keep most of my money liquid in cash which usually pays only about 3 to 4 pct.
Why do I do this? Years of experience have taught me that market cycles come and go and returns on mutual funds slide up and down and it is therefore important to me not to be caught in a downward spiral right when I’m getting ready to move to a new job. Investing in mutual funds longer term WILL yield some decent returns but the average worker changes job every three to five years so you’ll likely miss out on that long time horizon if you move over to a new company and have to reinvest in a new set of funds all over again.
When I have left previous employers, I have always rolled over my money into a brokerage IRA. I have complete and total control over my money and I’m not limited to mutual funds an employer chooses to provide to me. I can buy stocks, bonds, funds, ETFs, and a whole bunch of other things. I am only limited by my creativity.
Am I concerned about losing out on mutual funds returns during that period? No. I am only concerned about LOSING that money and then be forced to take the loss if I change employers.
November 21st, 2006 at 12:35 pm
Rich,as I’ve mentioned in a previous reply,my income is soon to be doubling.I’m thinking about borrowing from my credit card at 4%,borrowing from my HELOC at 7%,and then using this money to buy stocks on margin in order to write covered calls.Keeping up with the interest payments should be easily handled by my increase in income.
My goal is to develope $4000 a month in passive income,so I can quit my job to pursue other passions.
I would rather do this than grow comfortable with a higher living standard from my increased income.
Your comments or ideas would be appreciated.
November 21st, 2006 at 1:55 pm
Wow. c that’s a pretty aggressive strategy and highly risky. I’m contemplating doing something similar with credit cards money since I’m currently floating 55k at 0% earning only 5% return. If you check out http://www.etfcoveredcalls.com, you’ll notice I just sold 2 more contracts on GDX earning a cool 4.28% return for a 4 week window but I CAUTION you that the market can suddenly turn sour and leave you holding the bag until you recover.
If you want to see the PERFECT example of that check out the EXPEDIA trade I did back in May 06. I bought 1900 shares of EXPE at $19.75 and sold 19 contracts for $0.95. I made $1800 (4.8%) return in a matter of days (expiry was the following Friday) but then EXPE took a plunge down to $14 immediately after posting less than stellar results. The stock is now recovering and hovering close to $18. I never expected it to take this long for it to recover nor did I expect it to plunge so much so fast.
Thankfully, I am a long term investor so I didn’t panic and sell right away but imagine if you’re stuck in a situation like this with borrowed credit card money! Or borrowed HELOC money! You’ll be paying interest while holding potentially losing investments. Expedia was a real lesson and I’m sticking to ETF Covered Calls from here on out but they can be just as dangerous. XLE & GDX have been highly volitile these past few months.
Ultimately, you need to decide how aggressive your investment strategy needs to be for your situation. If my income were about to double, I’d use the spare cash to do the covered calls and keep the HELOC and credit card money for safer investments but that’s just me.
Once I pay off my mortgage, then risky/aggressive the sky’s the limit strategy will be employed by me.
Good luck.