mutual funds versus savings accounts

[sonso]

...just thinking what is really good with the high interest internet savings accounts? Granted they are secure up to $100,000, but depending on what you have put away, is it the best move? That 5% or 6% APY is cool but just doing some math, one could do much better in a mutual fund. I know that mutual funds aren't 'safe' but until the market crashes and I lose thousands in one day I think they are safe enough. If you set parameters you should be okay, and mutual funds are 100% liquid. You may lose 1-10% if you redeem your money within one year of starting, but if you do the math that's not bad compared to a savings account. In reality it should only be 1% that you'd lose.

I am asking because I've been putting a lot into mutual funds but was going to move towards adiding more muscle to my savings account. But no matter how I look at it, from putting $2500 to $100,000 in an online savings account, you can do much better with mutual funds and the money is still liquid. You can make that 1% that would be taken if you withdrew your money early in 1 week with the right fund, even with the wrong fund you could make that.

You can start a good mutual fund with $2500- 3000. If I put that into HSBC or Imigrant in one year I'll gain $150 dollars. $150 dollars in one year, that's better than nothing but, with a mutual fund I'm likely to make at least $250-625. If we consider larger amounts, the discordance is only greater. Mutual fund money is not guaranteed. True. but if you set a parameter all you have to do is stick to it and pull your moeny if it drops below your tolerance.

I just transferred some money into my online savings account but the more I think about it.. heck, I'm going to cancel that transaction right now

Input please?

---

Members don't see this ad.

 

[Sol Rosenberg]

Mutual Funds are great. I am assuming that you are investing for the long-term. Put the money in a no-load index fund, and you will earn 13% per year on average (the long-term average earnings of the S&P 500.) Savings accounts can't touch that. Standard Disclaimers apply: Past Performance is no indicator of current/future performance. Long-term average is in no way indicative of year-to-year performance between any 2 given years, etc.

Before you stick your $$$ into an actively-managed mutual fund, I believe that there is a statistic that over 90% of actively-managed mutual funds fail to outperform the S&P 500.

I emphatically think that mutual funds (specifically index funds) belong in any portfolio, but that's just MHO, of course.

 

[etf]

depends on what kind of fund you are talking about - are you considering a bond fund instead of a savings acct? stock fund? managed futures (stupid)?

 

[etf]

Before you stick your $$$ into an actively-managed mutual fund, I believe that there is a statistic that over 90% of actively-managed mutual funds fail to outperform the S&P 500.

i think that's because there are so many different funds out there. i've got the majority of my holdings in actively managed funds, and all of them (about 10-15) have beat the markets, sometimes handedly (sp?). i own a lot of index etfs, but decided to sell the total stock market one (vti) and put that money into jnj and cvx, which are top holdings anyway. indexes are great for things you don't know about (like reits, mid-cap, etc), but i'm personally confident in my abilities to pick out good large cap stocks, so i don't bother with indexes there.

 

[Stroganoff]

It depends on your purpose and your horizon. For instance, I would never put my emergency fund in the market or the down payment for a future house. I would put retirement in the market in tax-advantaged accounts and maybe some other "fun money" to invest in taxable accounts, but that's it.

 

[sonso]

I have a few no load fidelity mutual funds and one with TRowe. A mix of funds, majority are 5 morning star funds, with great past performance (no indicator of future performance ). Even regarding this, unless the market crashes and I lose thousands in one day, I am not too worried about losing money, I have my tolerance for loss set so if the funds were to go red ( to my magic number) I'd pull the money, but they are all increasing in value.

I already have a savings account with HSBC (4.59% APY right now). I was just trying to figure out if I wanted to add some more money to my savings account or put it towards my/new mutual funds.

My investing has not gone beyond mutual funds, a Roth, a 401k and a savings account. I haven't gotten into individual stocks (which I'll probably avoid this lifetime). I need to read up on bonds. My initial impression is that they're not much better than CD's. That probably sounds very ignorant but I am in fact a ROOKIE.

My first home buy is potentially right around the corner. Per a recent post, trying to decide wheter to buy in a particularly TERRIBLE market I'll be living in for only 3-4 years versus renting.

I do have emergency money in a bank account, but again, my mutual fund money is 100% liquid and I've made well above the little early redemption money they'd keep (in like 3 days).

So, I need to look into bonds but aside from that it's sounds like I shuld go ahead and put my extra money into more mutual funds as opposed to addding to my savings account.

Thank you

more input appreciated

 

[Sol Rosenberg]

i think that's because there are so many different funds out there. i've got the majority of my holdings in actively managed funds, and all of them (about 10-15) have beat the markets, sometimes handedly (sp?). i own a lot of index etfs, but decided to sell the total stock market one (vti) and put that money into jnj and cvx, which are top holdings anyway. indexes are great for things you don't know about (like reits, mid-cap, etc), but i'm personally confident in my abilities to pick out good large cap stocks, so i don't bother with indexes there.

You definitely have a point. I read the OP as a pretty risk averse person if he/she was contemplating a savings account vs. mutual funds. That decision is a no-brainer to me -- pick the mutual funds, and if you are concerned about risk, go with an index fund. I might not have made myself clear.

One's stock portfolio is essentially an actively managed mutual fund, so I just buy/sell the stocks that I am interested in. I don't need to pay someone else to do it for me. I haven't checked to see how I have done overall compared to the S&P in a while, but I believe the last time I checked the score, the S&P was a bit ahead, I'm afraid. <shrug> But you're right, while the statistics are against them, there are some fund managers that manage to consistently beat the S&P, and you can't argue with that.

OP: Most financial advisors will only advise you to keep 6-12 months worth of expenses in liquid accounts (savings, CDs, etc) as sort of emergency cash. The rest should be invested in a diversified portfolio (whatever combination of stocks, bonds, funds, real estate, etc that you personally prefer.)

 

[etf]

My investing has not gone beyond mutual funds, a Roth, a 401k and a savings account. I haven't gotten into individual stocks (which I'll probably avoid this lifetime). I need to read up on bonds. My initial impression is that they're not much better than CD's. That probably sounds very ignorant but I am in fact a ROOKIE.

So, I need to look into bonds but aside from that it's sounds like I shuld go ahead and put my extra money into more mutual funds as opposed to addding to my savings account.

Thank you

more input appreciated

i can't understand why you would want to avoid individual stocks (and thus go with the fund), but want to buy individual bonds - it should be the other way around. individual bonds are more for people who have a lot of money to invest, and, according to peter lynch, people our age have no business buying bonds period - 100% equity. if you really need fixed income diversification, go with a bond fund.

 

[sonso]

i can't understand why you would want to avoid individual stocks (and thus go with the fund), but want to buy individual bonds - it should be the other way around. individual bonds are more for people who have a lot of money to invest, and, according to peter lynch, people our age have no business buying bonds period - 100% equity. if you really need fixed income diversification, go with a bond fund.

I know absoulutely nothing about bonds. On the surface they seem unattractive to me. I say I need to read because I don't want to completely dismiss them w/o knowing anything about them.

I don't feel I know enough about stocks to actively trade. At least not now. My mutual funds seem to be doing quite well:


http://personal.fidelity.com/products/funds/mfl_frame.shtml?315910208
http://personal.fidelity.com/products/funds/mfl_frame.shtml?316390806
http://personal.fidelity.com/products/funds/mfl_frame.shtml?316389873
http://personal.fidelity.com/products/funds/mfl_frame.shtml?315910844

These are a few of the ones I've invested in.

These are doing better for me than my savings account and I'm guessing the S&P for the most part as well. But as I openly admit, I'm a rookie. My moves have come from the advice of others.

I do have a high tolerance for risk (relatively at least), but that's hard to really say when I've been "winning" for the past 3.5 years (when I startred). I can certainly do better and that's why I'm here I haven't lost any money yet and I'm a single male with no kids...

 

[etf]

I know absoulutely nothing about bonds. On the surface they seem unattractive to me. I say I need to read because I don't want to completely dismiss them w/o knowing anything about them.

I don't feel I know enough about stocks to actively trade. At least not now. My mutual funds seem to be doing quite well:


http://personal.fidelity.com/products/funds/mfl_frame.shtml?315910208
http://personal.fidelity.com/products/funds/mfl_frame.shtml?316390806
http://personal.fidelity.com/products/funds/mfl_frame.shtml?316389873
http://personal.fidelity.com/products/funds/mfl_frame.shtml?315910844

These are a few of the ones I've invested in.

These are doing better for me than my savings account and I'm guessing the S&P for the most part as well. But as I openly admit, I'm a rookie. My moves have come from the advice of others.

I do have a high tolerance for risk (relatively at least), but that's hard to really say when I've been "winning" for the past 3.5 years (when I startred). I can certainly do better and that's why I'm here I haven't lost any money yet and I'm a single male with no kids...

hehe, i own two of the funds you listed - international discovery and leveraged company stock. both are solid funds and have done well for us so far, and there doesn't seem to be any indication that they will be letting up any time soon. i could think of some individual stocks for you to buy and hold, such as lockheed martin (lmt), since it is probably in the top 10 holdings of aerospace/defense. bank stocks are usually solid too.

 

[aggernodi]

Though I'm sure you are all aware of this already, the tax consequences of mutual funds could be considerable (all the buying and selling of stocks in mutual funds by the fund manager are subject to capital gains tax).

Personally, I invest in mutual funds for only my retirement accounts where taxes are not a consideration at all (Roth, traditional IRA, 401K).

My non-retirement accounts are all in stocks and money markets and at some point I am hoping to add bonds to the mix.

 

[Sol Rosenberg]

Though I'm sure you are all aware of this already, the tax consequences of mutual funds could be considerable (all the buying and selling of stocks in mutual funds by the fund manager are subject to capital gains tax).

Personally, I invest in mutual funds for only my retirement accounts where taxes are not a consideration at all (Roth, traditional IRA, 401K).

My non-retirement accounts are all in stocks and money markets and at some point I am hoping to add bonds to the mix.

I never understood why people thought of "capital gains tax" as a dirty word/phrase (esp. nowadays.) I'm currently in the 28% tax bracket, and with capital gains tax, I pay only 15% (although it will go back up to 20% over the next few years) on my capital gain vs. 28% on the "top dollars" of my income. Explain to me why that is bad? Also, buying securities, etc does not generate a taxable event -- only selling.

If you think that taxes are not a consideration "at all" on your retirement accounts, you are sadly mistaken. Taxes NOW are not. Taxes later most certainly are.

 

[etf]

I never understood why people thought of "capital gains tax" as a dirty word/phrase (esp. nowadays.) I'm currently in the 28% tax bracket, and with capital gains tax, I pay only 15% (although it will go back up to 20% over the next few years) on my capital gain vs. 28% on the "top dollars" of my income. Explain to me why that is bad? Also, buying securities, etc does not generate a taxable event -- only selling.

If you think that taxes are not a consideration "at all" on your retirement accounts, you are sadly mistaken. Taxes NOW are not. Taxes later most certainly are.

well, i have yet to file a tax return in my life, seeing as how i've never had a paying job and have not "earned" enough to require filing. so those fund managers can be as tax-inefficient as they want, because it doesn't affect me (yet).

 

[aggernodi]

I never understood why people thought of "capital gains tax" as a dirty word/phrase (esp. nowadays.) I'm currently in the 28% tax bracket, and with capital gains tax, I pay only 15% (although it will go back up to 20% over the next few years) on my capital gain vs. 28% on the "top dollars" of my income. Explain to me why that is bad? Also, buying securities, etc does not generate a taxable event -- only selling.

If you think that taxes are not a consideration "at all" on your retirement accounts, you are sadly mistaken. Taxes NOW are not. Taxes later most certainly are.

I guess its all about how you look at things. I personally think 15% capital gains tax is quite high, even on top of my 40% tax bracket. Let me restate... I think ANY tax is bad and should be avoided/deferred as long as/much as possible (within legal limits of course).

Also, Roth IRA is not a tax deferred account. The taxes have already been paid.

In the traditional IRA, you are right... it is tax-deferred... but making money once you have a lot of it is much easier and though taxes are paid later on withdrawal, it is less (compared to overall growth) than when it is paid every tax year through capital gains.

But that's just my opinion...

I'm also one to do line-item tax deductions instead of the standard (because it ends up always being more tax deduction), never carry a balance on my credit card, drive across state borders in order to avoid paying the higher sales tax in my own state, keep my house at 66 degrees, always keep the lights turned off even if I'm not in the room for only 1 minute, etc. To me, every cent counts...even the capital gains tax of 15%.

My philosophy has always been avoid taxes/interest as much as possible (or second best, defer it as long as possible) so I can keep as much as possible which can make even more money for me.

 

[etf]

deferring taxes is also a good idea because then you get inflation to work for you.

 

[Sol Rosenberg]

I guess its all about how you look at things. I personally think 15% capital gains tax is quite high, even on top of my 40% tax bracket. Let me restate... I think ANY tax is bad and should be avoided/deferred as long as/much as possible (within legal limits of course).

My point was that I would trade off 15% tax for 40% tax any day.

Also, Roth IRA is not a tax deferred account. The taxes have already been paid.

Never said that they were. They are also not an option for you, since because you are in the "40%" tax bracket (I assume you actually mean 35% tax bracket as that is the current top tax bracket) you hit the ceiling back when you were in the 28% tax bracket. If you are truly in the 35% tax bracket, most of this, and the following discussion is simply academic to you, because contribution limits to tax-deferred accounts are 15k for 401k plans (that might've been adjusted up slightly this year, I haven't really followed) and 5k for Trad. IRAs. To be in the 35% tax bracket, you already need to be earning 336.5k or above. You are going to be paying capital gains tax on a significant portion of your savings/investment earnings (presuming that you save a significant percentage of your income) whether you like it or not.

In the traditional IRA, you are right... it is tax-deferred... but making money once you have a lot of it is much easier and though taxes are paid later on withdrawal, it is less (compared to overall growth) than when it is paid every tax year through capital gains.

But that's just my opinion...

You are implicitly assuming that income later (through distributions from your retirement accounts) < income now and tax rates later < tax rates now. When I went and did the math, assuming a reasonable rate of return, this was questionable to me. Especially taking into consideration required minimum distributions from IRAs. But I understand that this is a matter of opinion and ours differ.

I'm also one to do line-item tax deductions instead of the standard (because it ends up always being more tax deduction), never carry a balance on my credit card, drive across state borders in order to avoid paying the higher sales tax in my own state, keep my house at 66 degrees, always keep the lights turned off even if I'm not in the room for only 1 minute, etc. Yes... I've been called OCD a few times.

Totally irrelevant to the discussion. I do most of those things too. My point with this all is that your original statement was that if you put money into a tax-deferred account, you didn't have to worry about taxes "at all." Not true. The tax code governing retirement accounts is some of the most confusing that I have ever read.

 

[aggernodi]

My point was that I would trade off 15% tax for 40% tax any day.

Never said that they were. They are also not an option for you, since because you are in the "40%" tax bracket (I assume you actually mean 35% tax bracket as that is the current top tax bracket) you hit the ceiling back when you were in the 28% tax bracket. If you are truly in the 35% tax bracket, most of this, and the following discussion is simply academic to you, because contribution limits to tax-deferred accounts are 15k for 401k plans (that might've been adjusted up slightly this year, I haven't really followed) and 5k for Trad. IRAs. To be in the 35% tax bracket, you already need to be earning 336.5k or above. You are going to be paying capital gains tax on a significant portion of your savings/investment earnings (presuming that you save a significant percentage of your income) whether you like it or not.

You are implicitly assuming that income later (through distributions from your retirement accounts) < income now and tax rates later < tax rates now. When I went and did the math, assuming a reasonable rate of return, this was questionable to me. Especially taking into consideration required minimum distributions from IRAs. But I understand that this is a matter of opinion and ours differ.

Totally irrelevant to the discussion. I do most of those things too. My point with this all is that your original statement was that if you put money into a tax-deferred account, you didn't have to worry about taxes "at all." Not true. The tax code governing retirement accounts is some of the most confusing that I have ever read.

Of course I agree with you that 15% tax is better than 33% tax. That's a no-brainer. My point is why pay 15% at all (meaning, why pay both the 33% and another 15%)? Furthermore, in mutual funds, what makes you think that all the trades being made occur >12 months, even in index funds (granted probably it's quite minimal if any)?

Capital Gains Taxes are as follows:
Trades made in 12 months or less: 35%
Trades made >12 months: 15%

Roth IRA is for individuals who make below $114,000 (if memory serves me right). Obviously I contributed while a resident as I made way less than that. Now that I'm in private practice, I'm totally ineligible and am now only contributing to traditional IRA and 401K.

BUT, writing all this made me realize something... We both may be in different financial situations which makes us choose different courses of action. I'm in a situation I'm paying more than a third of my income in taxes. SO, I'm doing everything I can think of to avoid/defer taxes.

People who are in a lower tax bracket may feel less pressure regarding tax consequences and think more along the lines that you do.

In a sense, I suppose we are both right depending on the particular financial situation that a given person may be in and the level of risk-tolerance a given person has.

AND... I admit... I may have overstated things by saying "not worrying about taxes at all"....

I'll rephrase that statement as follows... retirement accounts allows an individual to either have tax-free growth (where the taxes are paid up front before contribution) or tax-deferred growth (where the taxes are paid upon withdrawal; ie, you don't pay taxes on what you contribute initially). Investing in mutual funds in non-retirement accounts results in taxes EVERY YEAR (generally speaking, though some mutual funds are specially created to minimize tax consequences).

 

[aggernodi]

OK...

I just discovered that I have received several private emails from newbie investors on what I would recommend on how to start investing and instead of replying to all, thought I would just post my answer here as I assume these emails are prompted from my posts in this discussion thread.

This is just my OPINION and geared towards individuals not planning to retire anytime soon, are novice investors, and are making money... The steps are:

1) Open an investment account. I personally use Fidelity. It's EASY... Just like opening a checking/savings account at a bank. Just fill out a form and mail it in with a check. Some places, you can do this over the internet.
2) For those eligible (<$114,000 per year income for single filers...I might be a little off on the income amount), open a Roth IRA and contribute the maximum amount every year. Don't skip!
3) For those who make too much money, open a traditional IRA or via work a 401K or other retirement account if offered and again, contribute to the max every year.
4) Transfer the money into mutual funds (as per this discussion forum).
5) After maxing out retirement contributions, put as much of your savings into your regular individual (non-retirement) account. Even if you don't invest at all, an investment money market account will still make more money with interest than in a savings/checking account in a bank.

From this point, you can go a million different directions (buying stocks, bonds, mutual funds, etc etc). As you can probably tell, I'm a huge believer in the benefits of retirement accounts in terms of tax consequences.

 

[Sol Rosenberg]

Of course I agree with you that 15% tax is better than 33% tax. That's a no-brainer. My point is why pay 15% at all (meaning, why pay both the 33% and another 15%)? Furthermore, in mutual funds, what makes you think that all the trades being made occur >12 months, even in index funds (granted probably it's quite minimal if any)?

Capital Gains Taxes are as follows:
Trades made in 12 months or less: 35%
Trades made >12 months: 15%

The gain is not doubly-taxed as you are implying. You have a good point re: short-term (which are taxed as income) vs. long-term capital gains, to which I'll make a confession: I don't invest in mutual funds outside of my retirement accounts (indeed, my 401k is restricted to only investing in mutual funds) and I will agree with what you ORIGINALLY wrote that investing in mutual funds may have undesirable tax consequences (to me, being "forced" by a fund manager to take a short-term gain vs. a long-term gain is an undesirable tax consequence.)

BUT, writing all this made me realize something... We both may be in different financial situations which makes us choose different courses of action. I'm in a situation I'm paying more than a third of my income in taxes. SO, I'm doing everything I can think of to avoid/defer taxes.

People who are in a lower tax bracket may feel less pressure regarding tax consequences and think more along the lines that you do.

Absolutely the point that I have been trying to make. But also, if you are pretty confident that you will contribute the max., contribute for a long time, earn a decent rate of return, and retire late, IMHO, retirement accounts aren't the panacea that they are held out to be. Especially considering that your money is, for all intents and pruposes, locked into that account until you retire.

You might notice that I said that my wife and I have 401k accounts, so am I being hypocritical? (We also contribute the max. to our Roth IRA accounts.) To me, the biggest advantage of 401k/403b plans is the matching contribution provided by your employer (if your employer matches.) That's the biggest benefit, IMHO, not the tax-deferedness. I would do lots of analysis and retirement planning before contributing to a Traditional IRA or an unmatched 401k plan.

 

[etf]

while i'm sure the above will be deleted soon, i'd actually like to see it stay and we can point out the kind of things that people can get suckered into, kind of like a psa.