blake johnson

Over break a friend was asking me questions about investing, specifically about 401k’s and Roth IRAs. By no means am I an expert on these subjects, but I have given my own financial planning a fair bit of thought, so I thought I’d write down my own advice for others that are interested. In large part I am just repeating advice which you can find on most financial planning websites.

1. Get a high-yield savings account. Right now you can get savings accounts with no fees and no minimum balance from a number of companies, including Emigrant Direct, Ing Direct, and E*Trade (I use E*Trade because I also have my Roth IRA and brokerage account with E*Trade). You may also be able to find a local bank offering a competitive product, but what you want is something with at least a 4.5% APY and an automatic deposit program. You should try to have 9-18 months of living expenses in your savings. This is your cushion should you lose your job, or for less drastic (but no less inconvenient) expenses like a car accident or a health problem which requires expensive treatment.
2. Make regular contributions to your savings. In fact, I highly recommend drawing up a budget and listing your savings as an expense. Try to save at least 15% of your paycheck. Your “extra” money for entertainment, gadgets, etc. should come from what’s left over after you have paid yourself.
3. After you have built a suitable cushion, it is time to think about other investments. Investing in the stock market is a poor idea unless your investment horizon (when you plan to start withdrawing the money) is at least five years. Besides saving money for more near-term goals like buying a first house, retirement accounts like 401k’s and Roth IRAs are incredibly good deals. Many companies will offer a program to match contributions to a 401k. This is free money that no one should refuse. If you have already filled up your 401k, or your company does not offer a matching program, of if, like me, your don’t work for a company that offers 401k’s, then you should open a Roth IRA. You can open a Roth IRA account at any investment house (like E*Trade, TD Ameritrade, Fidelity, Vanguard, etc.). A Roth IRA has the amazing tax benefit of the interest being tax-free upon withdrawal. Honestly, get one before the US government changes their minds about this.
4. Once you have opened a 401k or Roth IRA account, you have to choose how to invest your money. I’m not entirely sure how much flexibility you have with 401k’s, but with a Roth IRA absolutely any stock, bond, or mutual fund is available to you. You can safely ignore most of these, because I highly recommend that you invest in index funds. Why index funds? Because if you are more interested in doing well over the long run and you aren’t a trader that spends almost every waking hour researching companies, you simply can’t do better than index funds. Sure, there are mutual funds which will occasionally outperform the market, but even a very good mutual fund will lose out in the end because of the very large fees associated with active trading and the large salaries of the fund managers. Index funds have ridiculously low costs (to the tune of less than 0.20%) which will make a big difference in the long-run. Most financial websites have tools which will suggest a portfolio of index funds to match your expected return and tolerance for risk.

5. An especially easy way to get started is with a company called Sharebuilder. They have an automatic contribution program which will automatically purchase a portfolio of funds every month based on your selections. Every portfolio should include a mix of index funds that cover various asset classes such as large cap (e.g S&P 500), small cap (Russell 2000), and international corporations. The minimum initial investment in most funds is $3000, which means that given the $4000/year contribution limit, it will take several years to build a proper portfolio if you use a traditional brokerage service.

   If you want something even easier than that, Vanguard has a number of target retirement date funds which will automatically invest in a diversified portfolio of low-cost index funds and bonds and automatically adjust your stocks/bonds ratio as you approach retirement.

Well, I think that is enough to get started. I hope this is useful to someone.

New Haven is scary.  Look at this message from the Yale chief of police which I received yesterday morning:

I am writing to let you know of an attempted robbery and shooting last night involving four graduate and professional students in the yard of a house located at Mansfield and Tilton Streets.  The students were approached by a man wearing a mask with a handgun who demanded money.  In the ensuing struggle, the gun was fired and one of the students was injured.  He is recuperating in the hospital.  Yale and New Haven police have arrested the man, and he is now in the custody of the New Haven police.

I live at the intersection of Mansfield and Tilton.  The shooting was at a house directly across the street from me.  I was not home when it happened, but I am still pretty freaked out.

Source: worth1000.com

The first two weeks of June brought me to many places, including Boston for Margaret’s graduation, Copenhagen for a Rotary convention, and San Diego for a wedding.

Harvard commencement was much like my own graduation two years ago. It was raining lightly most of the day, making Harvard’s insistence on outdoor commencement oh-so-much fun! At least Dunster house did not cram everyone into as tight a spot as Currier did. I remember that my family could barely see; people were packed in that close. I also got a chance to sample the excellent scotch selection available at the Harvard Club. Rahul directed me to a 30 year old single-malt scotch which was super smooth going down. Yum!

Next was Copenhagen. You really have to love the feel of that city. The architecture is very modern, but somehow they missed all the concrete monstrocities of the 60s and 70s. I learned my lesson about avoiding the bicyclists the first time I was in Copenhagen, so I managed to escape any further near run-ins. I only brought my camera along for one day in whcih we toured 3 different castles on “main” island of Denmark where Copenhagen is located: Kronberg, something-berg, and something-else-berg Frederiksborg, and Fredensborg. One of these castles was located in the town of Elsinore, the setting for Shakespeare’s Hamlet.

The final stop was in La Jolla, California for Hope and Dave’s wedding. At right is a picture of my sister and her boyfriend Brandon. More pictures of all these events are available on my flickr account.

In an effort to encourage reader participation, I bring to you my first ever blog riddle. This riddle was told to me by Mike Metcalfe over dinner during the March meeting.

There was an evil king that wanted to kill 4 of his subjects, but worried that there would be an uprising if he simply had them executed, he decided to provide them with a way to escape their fate. What he did was to bury each of them in the ground up to their neck and he put a white or black hat on each of them. One of the subjects was placed behind a wall, so that he was not visible to the others. Example configuration:

Each prisoner could now only see what was in front of him. The king told the subjects that two of them were wearing white hats and two were wearing black hats, and if one of them could shout out the color of his own hat, all four of them would be set free. If any of them said something other than the color of his own hat, they would all be killed.

How do the prisoners escape?

The solution will be posted in the comments about a week from now, if someone out there doesn’t post it first. UPDATE: Solution now available in the comments.