Money magazine has a great article in this month’s edition called, “101 Ways to Build Wealth.” A couple of the tips, numbers 28 and 29, give some great advice on Individual Retirement Account (IRA) investing. These point out some mistakes that I find myself guilty of doing when it comes to my IRA. Not making these mistakes can make you tens of thousands of dollars at retirement time.
The first tip, number 28, is Shift Your IRA Out of Park. It speaks of how many people contribute money to their IRA, planning to invest it later, but then four or five months later the money is still sitting in cash. When investing for long periods of time it is better to have the money invested than on the sidelines. You never know when the big moves up will come and if you miss them your total return will be a lot less.
I definitely find myself guilty of leaving money in cash. I often get busy with things and it gets to be a while before I get around to picking out what I want to buy in my IRA. Of course, I normally pick individual stocks and lo0k for stocks that I consider to be great long-term investments. Those are not easy to find at any given time, so it may be worth waiting a bit. Keeping a “wish list” of stocks that meet the criteria may be the way to go, however, since then I can just find one on the list when I have money to invest rather than waiting to look until after I have cash to invest and then needing to find time to scan through Value Line.
Another consideration would be to just park the money in a mutual fund like an S&P500 ETF or a Total Stock Market Fund and then sell shares of the fund to buy individual stocks as they are found. The only issue there is that you could be paying out a lot in transaction fees if you only hold the funds for a few months. There is also no guarantee that the fund would increase in value over any four-month period. If you did it every year, however, you would gain more than you’d lose. (Note that each time you buy, your odds of making money would be about 50-50, but because the market has an upwards bias, if you did this several times you’d come out ahead since this would be similar to buying and holding for several years. Most of the gains would come during a few very rapid increases, since that is how most of the gains in the market are made.)
The second tip, number 29, is Grab the Earlybird Advantage. Many people wait until the end of the year before they contribute to their IRA. Using a calculation from Vanguard, contributing $5500 per year and assuming a 4% after inflation return (hopefully you’ll do better than that!), Money magazine estimates that you’ll have about $15,000 more if you contribute at the beginning fo the year instead of the end of the year because of that extra year of market return you’ll get on that $5500 each year.
There was a time when I would always contribute at the start of the year. The trouble was that I slacked off on contributions to my IRA when I started contributing to the 401k. I’ve now gotten in the habit of contributing late to the IRA, often after figuring out taxes and deciding how much will be deductible for both my IRA and my wife’s IRA. Still with a little planning, I should be able to contribute a little earlier.
It is difficult to switch from late contributions to early contributions, however, since then you need to come up with two year’s worth of contributions at once. (This is a little like trying to get off of the credit card habit when you pay your balance every month because there are expenses you are used to floating on the card. You’ll need to come up with that cash or cut expenses for the month if you want to stop using the card.) Perhaps the best way is to contribute a little throughout the year, perhaps using the extra paychecks (the ones where you get three in a month since there are 26 pay periods and only 12 months) to make bigger contributions since our monthly income will be bigger during those months.
So how many out there contribute at the start of the year? Any good tips for making sure you remember to actually invest the money rather than leaving it in cash for several months at the start of the year?
Contact me at VTSIoriginal@yahoo.com or leave a comment.
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.