Daily Archives: February 22, 2011

Interesting Notes about Investing

A couple years ago I picked up a discarded “First Book on Investing” published in the ripe year of 1994. Some things have undoubtedly changed since then (interest rates! Wow!) but many basics then are still essential basics to understand now.

When you get dividends you have to pay taxes on them, even if they are reinvested. If you had couple hundred thousand saved up and mutual funds this could be quite a burden and is one of the reasons that tax deferred accounts like 401ks and special funds like Roth IRAs are so magical. When looking at retirement investing, these types of investments cannot be overlooked or undervalued. For medium term investing there are mutual funds built to avoid taxes as well.

The management fee of a fund comes off the top. So if the management fee is 1% and the fund makes 5% in the real world, it will be reported as 4%. If it loses 5% in the real world, it will be reported as losing 6%. It’s easy to make money as a fund manager, obviously.

Any fund you invest in should have no “load” or “exit” fees, these are bunk. There are plenty of really low cost funds out there that perform well. We reviewed our investments and discover one that had a 3% load fee. Every time we put money in, they took 3% off the top! Its pretty hard to earn that back, especially in todays world of low interest rates.

It is also worthwhile to see if you can take loans against your investments (not 401k, but the medium term ones) and how much they might cost. It could be a good alternative against a home equity loan (which is really just another way to leverage an investment…)

Finally, the early 90’s had crazy interest rates. 9% interest on a CD? I can only imagine how much it must have cost to borrow money!

–Nat