Sunday, March 12, 2006

Artists and Retirement Investing

...or any kind of investing.
 
Many artists (not all) are a little hazy about what to put their money into. Their bag is creating, not poring over the stock tables in The Wall Street Journal. I'm not a licensed financial adviser, but doing 401(k) enrollment meetings the last eleven years has forced me to bone up on investing basics, because like it or not, I get asked a poop-load of questions about it, and I look like a dweeb if I just smirk and shrug my shoulders.  So here are the most-asked questions and my basic answers, applicable to anyone anywhere who wonders about investing in a 401(k) Plan.
 
Should I invest in a 401(k) Plan?  Sure.  It's a good way to shelter income.  Every dollar you stick into a traditional 401(k) Plan will be deferred from income taxes until you retire.  And many 401(k) Plans have a dollar match from the employer that you won't get if you don't participate (full disclosure: TAG's 401(k) Plan is "no match" because we enjoy two other employer-funded pension plans automatically.)
 
What should I invest in?  A combination of stocks and bonds.  The rule of thumb is, if you're younger, you should be heavier into stocks, if you're close to retirement age, you should be heavier with bonds with a short or intermediate term.  The stats show that a simple combination of 25% short-term bonds, 25% intermediate to long-term bonds, 25% U.S. equities divided between small, medium and large companies, and 25% foreign stocks will give you wide diversification that will be more stable than putting everything in one asset group (Large company U.S. stocks, say.) This kind of investment style is called Asset Allocation, and it's been shown to work well. At the end of the day (or fiscal year) it's Diversification that is the key.
 
What are the biggest mistakes most investors make?  In five words, it's "buying high and selling low."  Sounds stupid, but most people who invest for retirement jump into the "hot" investment segment of the moment (in the late '90s, this was tech stocks.  Now it's energy.)  Trouble is, by the time a segment is cooking, it's past the time to jump in.  The "selling low" part comes about when the stock market is sinking like the Titanic.  Most people hang on and hang on...and then, when they can stand it no more, sell in a panic.  Most times, massive panic selling marks the bottom of a market cycle.  (I've been there.  And been stupid. You don't have to be.)
 
To sum up, put something away every week, even if you have to scrimp.  I've had too many older artists come into my office over the years who don't have a pot to urinate in, usually because they made lots of dumb choices over the course of thirty or forty years.  Don't let it happen to you.

4 comments:

Anonymous said...

Gents, stocks and bonds not for me.
I find the safe way is realestate.
You always can pay on the principle of the loan when you got the extra money, and if your lucky you can even pay the loan off in 15, 10 or 7 years. And there's no place like Los Angeles for prices to neep going up up and up.
I remember when a gallon of gas was 23 pennies.

Kevin Koch said...

Real estate is definitely a great investment in the long run. But, having owned a house in the early '90's, I can tell you they don't always go "up, up, up." And anyone who thinks the real estate appreciation of the last five years is going to keep going is looking for trouble. Finally, unlike stocks and bonds, it's difficult to invest in real estate incrementally.

Anonymous said...

Real estate should be part of your investment mix (Real Estate Investment Trusts -- REITs -- anyone? But the idea is to put something into savings.

Neal Irwin in the Washington Post wrote:

“The average family has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance. That is the portrait of the median American household as painted by the Federal Reserve Board's Survey of Consumer Finances. Blown away yet?

No? There’s more: “Only 49.7 percent of American families even had a retirement account in 2004.”

Anonymous said...

I could never make sense of real estate. Couple of reasons...its a slow moving asset and takes time to buy and/or sell. People seem to think that real estate would never go down. Wish that was the case.

It requires little more effort but financial markets provide a larger variety of tools for all kind of situations.

just my 2 cents!!!

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