Need Some Investing Help/Advice...How to Maximize Gain

[Jeffage]

Hey Everyone,

Here's my situation. I'm 25 and have a job where I make decent money for my age (mid 5 figures). But I also have been doing really well at poker and have made more annually at that than my job. This year, I've already surpassed my salary. So I have some money to invest. So far, I'm maxing out my 401k (500 a pay check). Is that smart? Or should I be putting all this money into my Merryl Lynch Acct (I have some mutual funds from an inheritance...decent amt, but not a ton). Any other advice appreciated...I want to not work my whole life.

Jeff

[midas]

Jeff:

You should always max your 401K since the gov't is paying for a chunk and your employer may match (free money). The 401K max I thought was $12K+ now so you are technically not maxed out but your employer may limit your deduction as a % of your income. For investments - I would make it easy and buy SPY (S&P 500) and MDY (S&P mid cap index) in equal amounts each month or find a mutual fund family like Vanguard that has low cost funds that replicate these index stocks.

[Talex]

[ QUOTE ]

You should always max your 401K since the gov't is paying for a chunk and your employer may match (free money). The 401K max I thought was $12K+ now so you are technically not maxed out but your employer may limit your deduction as a % of your income. For investments - I would make it easy and buy SPY (S&P 500) and MDY (S&P mid cap index) in equal amounts each month or find a mutual fund family like Vanguard that has low cost funds that replicate these index stocks.

[/ QUOTE ]

This depends on what your tax liability will be at retirement. It may be better for you to set 401k to whatever is matched by employer, then max a Roth IRA and see where you're at from there. At this point your tax liability may well be lower than what it's going to be at retirement. Once you've max'd the Roth if you're still looking for investment oppourtunities then turning again to the 401k is certainly a possibility. Do you own property yet? A home may easily be the best place to put your money.

-Tim

[Jeffage]

So are you saying that if your employer doesn't match, you wouldn't do the 401k? Mine doesn't match, but there is a pension program. About the house...I'm thinking about it, but it might be in a warmer climate (like Vegas). I need a year.

Jeff

[Jeffage]

For my Merryl Lynch Acct, I have all mutual funds and they seem to be doing pretty well. Should I simply write a check to them and tell them to distribute it in what thy see fit?

Jeff

[Talex]

[ QUOTE ]
So are you saying that if your employer doesn't match, you wouldn't do the 401k? Mine doesn't match, but there is a pension program. About the house...I'm thinking about it, but it might be in a warmer climate (like Vegas). I need a year.

[/ QUOTE ]

If the employer did no matching I'd at least take a look around at other vehicles. Given that you're making what sounds like a good wage + poker, and you're not even in your prime earning years the benefits of being able to grow an investment tax free and not be liable for taxes on the back end is pretty attractive, hence my recommending the Roth. I think a house, and a Roth may be your best bet at the moment.

Buying a house has a lot of advantage in terms of tax sheltering that aren't talked about. Interest on the mortgage will be deductible, and so you'll find it attractive to itemize if you aren't already. For a poker player, given the way the US taxes gambling winnings, being able to itemize can be a big advantage. Real estate is pricey right now, but as long as you're not buying into the most expensive boom markets you should probably be fine.

The other thing to consider is how much liquid capital do you have available in the event of emergency? When doing retirement investing you want time on your side, and you don't want to dip into that money if you can avoid it. Give yourself a buffer in the event of losing a job, or getting hurt. It's always good to have some liquidity in case something unforeseen comes up. It's even more important once you own property since there are so many vaguaries than can oocur (i.e. CRAP! The basement flooded and the roof leaks, we need 10k for repairs!)

So, I'd look hard at a Roth, set aside some money for emergencies, and get yourself into a house. If you have stuff to invest after that there are a lot of options and the 401k is certainly one of them. Generally though a 401k's single largest benefit is employer matching. Without that it acts much like a standard IRA. There are benefits there, but only if your tax liability at retirement will be less than your tax liability now.

Frankly, it sounds like you're thinking about all the right things, and that puts you ahead of the game in a lot of ways.

-Tim

P.S.- I'm not an investment advisor, just for the sake of disclosure.

[ScottTheFish]

Since you're so young you should really look at 401k up to the match, and then max out a Roth IRA (4K this year, 5K next I think)

The beauty of the Roth is, even though it's after-tax money you're putting in, it will be in there growing a long time, and you NEVER have to pay any taxes on the growth, which will be triple your contributions or more by the time you retire.

With a traditional IRA or 401k, you contribute with pre-tax dollars, but pay taxes on everything when you take it out. The advanteage of the 401k is that the contribution limits are much higher.

Also make sure you're paying taxes on your poker winnings, it's not worth the risk.

BTW you are extremely smart to be thinking about all this at 25. Stay smart and you will be very rich in 25 years.

[Dan Mezick]

Find yourself a good financial planner and focus on poker.

The planner will set you up with a good plan.

Stick to what you know.

[Talex]

[ QUOTE ]
Find yourself a good financial planner and focus on poker.
The planner will set you up with a good plan.
Stick to what you know.

[/ QUOTE ]

This is sound, but the problem is that there are a lot of bad financial planners. It's useful for him to be informed about his options if only to help evaluate the planner's pitch.

-Tim

[Jeffage]

How do you select a financial planner. Is my Merryl Lynch guy automatically my financial planner or do I hire someone else? I did a web search and have no clue how to evaluate someone. Obv., being a gambler I must keep lots of cash liquid...but I feel like I can invest tons right now. So much info...I don't even know how Roth's work really or understand the tax benes (my bank has been tryin to sell me on this stuff). Any benefit to just dumping money in my Merryl Lynch acct. and having my guy spread it around to the diff funds as he sees fit? Tax implications?

Also...anyone know if gambling will make it hard to get a mortgage even if you still have another job? I feel like it will be looked at as a credit risk, but I've paid taxes on the gains for a few years now? How much will they ask me about this? I def want to buy property...in Vegas, condos by Bellagio start for a quarter mil...VACATION HOME AND INVESTMENT. I currently pay a grand a month in rent.



Jeff

[Jeffage]

Thx for the advice...my post below to Dan is also to you...please respond if you can.

Thanks,
Jeff

[Talex]

[ QUOTE ]
How do you select a financial planner. Is my Merryl Lynch guy automatically my financial planner or do I hire someone else? I did a web search and have no clue how to evaluate someone. Obv., being a gambler I must keep lots of cash liquid...but I feel like I can invest tons right now. So much info...I don't even know how Roth's work really or understand the tax benes (my bank has been tryin to sell me on this stuff). Any benefit to just dumping money in my Merryl Lynch acct. and having my guy spread it around to the diff funds as he sees fit? Tax implications?

[/ QUOTE ]

Well, a lot of folks call themselves financial planners and they range all over the map. I'm guessing your Merryl guy is a broker? In that case he's not really a financial planner. Financial planners tend to be generalists; they understand a lot of vehicles and can give you some indications on where to be putting your money. There are planners that work on commission, and planners that work on hourly rates. I'm wary of planners working on commission, it can often be a conflict of interest. Not always, but in general they'll want to sell you vehicles they'll make money on, which may or may not be the best choices for you. It's like anything though, if you have some understanding of what they might get you into you'll have an easier time deciding if they're working in your best interests. It's worth your while to become conversant in the different options.

As for handing it all off to the Merryl guy and having him spread it around, it's frankly hard to say. When it comes to retirement planning you really want to take advantage of the programs that are in place to shelter your money from taxes. If he's not skilled in that you're not going to get the best results possible. That said, he may be able to refer you to someone who's better suited.

[ QUOTE ]
Also...anyone know if gambling will make it hard to get a mortgage even if you still have another job? I feel like it will be looked at as a credit risk, but I've paid taxes on the gains for a few years now? How much will they ask me about this?

[/ QUOTE ]

I have 0 experience with mortgage inquiries regarding gambling winnings so I can't really speak to this.

-Tim

[gvibes]

As Six has noted, there are an assload of really bad financial planners out there. They really are no better than common thieves, churning your portfolio for personal gain at the expense of your retirement.

I would really avoid commission-based brokers/planners. There is a huge conflict of interest there. Fee-based (ie, hourly) is better. If you have a lot of money, you can find someone who only charges a percentage of your assets.

Educate yourself. Read Malkiel's a random walk down wall street, or bogle's common sense on mutual funds. There are some other goods ones recommending an index fund way. You may want to check out some of the value investing books as well (like Ben Graham's). I'm an index fund guy myself.

A random walk should teach you enough about some central investing tenets such as the impact of fees and variance.

Max you 401(k) AND your Roth IRA. After that, it sounds like you will have the funds to invest beyond that. It gets more complicated, because you need to be concerned about the tax implications of your investment.

I'd be curious to see what your Merrill Lynch guy has you in right now, and I'd also be curious to look at your transaction history for the last couple of years (hint, if there are more than a few transactions a year, your merrill lynch guy is probably screwing IMHO).

As far as gettting a mortgage goes, if you have a documented income history, a "real job," and a lot of cash, I don't see it beeing a problem.

[imported_bingobazza]

[ QUOTE ]
As Six has noted, there are an assload of really bad financial planners out there. They really are no better than common thieves, churning your portfolio for personal gain at the expense of your retirement.

I would really avoid commission-based brokers/planners. There is a huge conflict of interest there. Fee-based (ie, hourly) is better. If you have a lot of money, you can find someone who only charges a percentage of your assets.

Educate yourself. Read Malkiel's a random walk down wall street, or bogle's common sense on mutual funds. There are some other goods ones recommending an index fund way. You may want to check out some of the value investing books as well (like Ben Graham's). I'm an index fund guy myself.

A random walk should teach you enough about some central investing tenets such as the impact of fees and variance.

Max you 401(k) AND your Roth IRA. After that, it sounds like you will have the funds to invest beyond that. It gets more complicated, because you need to be concerned about the tax implications of your investment.

I'd be curious to see what your Merrill Lynch guy has you in right now, and I'd also be curious to look at your transaction history for the last couple of years (hint, if there are more than a few transactions a year, your merrill lynch guy is probably screwing IMHO).

As far as gettting a mortgage goes, if you have a documented income history, a "real job," and a lot of cash, I don't see it beeing a problem.

[/ QUOTE ]

Excellent advice all round. You need to be very careful with planners and brokers. There are some dreadful ones out there. As far as chosing a planner, in the UK, there are 2 types, independant advisers who evaluate every investment house and their funds, and advisers who work for an investment house. My suspicion is that the Merril Lynch guy put you into merril lynch funds, tho Im not sure if its the same in the US as it is in the UK...try to get an independant fee based adviser. But take his recommendations and buy the funds through funds supermarket if his bid/offer spread is higher than theirs.

You dont have enough money yet for a good 'funds under management' broker, but this is a good way in a few years.

Also read Common stocks and uncommon profits by Phil Fisher. If all that is too much like hard work, (like it is for a lazy sod like me, I want to do other things with my time other than looking at annual statements and analysts reports), buy Berkshire Hathaway non voting shares. Ive said this a few times on this forum...and it doesnt seem to go down too well.

But...

a) you can be pretty darn sure about beating the S&P or the Dow average per annum over any 10 year period, probably by more than 5%/year.
b) you dont have to do any work AT ALL.
c) Even tho it looks like you're putting all your eggs in 1 basket, you are not really, because...
d) you get exposure across market sectors, countries and asset classes.
e) This doesnt have the constraints that a regular 'managed fund' has.
f) You never need to sell this stock.
g) No one has ever given me a persuasive argument against putting all your wealth into this stock.
h) The aquisistion cost of these shares are a fraction of a mutual fund, and you dont need to pay a fee to an adviser.
I) This company pays very little tax, boosting your returns.

I would even go as far as to say that the predicted earnings from this company should be used as the opportunity cost when evaluating all other investments during ones lifetime, ie, if your hard work, research and time spend cannot give you an aqequate return of, say 2% over Berkshires return on equity, why are you investing at all outside Berkshire?

Anyone who likes index funds should look real close at this.

[michiganfan9]

Continue with your 401k. If you know wut you are doing switc to a discount brokerage firm such as scottrade and start investing there. Unless you want to continue with your mutual funds.

[michiganfan9]

That is why you need to switch to a discount brokerage. Financial analyst underperform the market constantly and there is no need to be paying them to underperform. Do it yourself but do your hw first. set out financial goals and i would recommend running a stock screener and looking for undervalued stocks with book p/e, p/b and so forth

[Sniper]

Read the Automatic Millionaire by David Bach and setup a financial plan for yourself.

[michiganfan9]

Or follow Warren Buffett and use his investing strategy as yours. You can't go wrong with him.