Wednesday, July 8, 2009


I finally am signed up for a retirement plan for the first time in my life. I put 6% of my income into it and SCE puts in another 6%. I will likely up that to 9% at some point but by far the best investment I can make is to pay off my credit card debt. After that I will worry about whether my retirement savings should be higher.

I think what I did with my contributions might make some financial planner lecture me, but I am willing to take the bet that I know enough I won't get burned. Pretty much I am trying to be as diversified as possible while paying as low of fees as possible.

The bulk of the money, 70%, went to an index fund. Philosophically these are my favorite investment. On average after fees they are something like the 65th percentile of mutual funds. They however will never be the best mutual fund because they only track the market, while other mutual funds are roughly normally distributed just below the market average meaning a random few significantly beat the market in any given year while most match the market only before fees are taken out. My index fund only wastes 0.05% of its money in fees, where as some of the other funds were paying over 1%. Which means i lose a lot less money to wall street. Even though 1% doesn't sound like much after compounding forty years it is huge!

Diversification makes a lot of sense to me. Let the good investments balance the bad. For that reason my next 20% of contributions went to international mutual funds. It was split between one primarily investing in European stocks and one primarily in Asian stocks. To pick the funds I wanted I again simply found the international options I had with the lowest fees, 0.6% and 0.75%

The last 10% went to bonds. I know nothing about bonds. I simply looked at the graphs to find the three that seemed to fluctuate the least and split the 10% between them. Really I don't like the idea of investing in bonds at my age. But if the stock market chaos continues I would like to know I at least have some retirement savings that beat inflation. I imagine in a decade or so I will retreat from putting as much new money into stocks and buy bonds. Stocks are great if you have forty years to wait but over a twenty year period I don't feel so safe. Over a ten year period stocks terrify me.

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