5 Ways to Overcome Your Fear of a 401(k)

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To some, few things are scarier than investing in a 401(k) or IRA.

Generation Y has already lived through two bear markets and had their job prospects shaped by the Great Recession, and Generation X watched helplessly as their stock investments plummeted by 40 percent during that recession.

And among people 55 and older, nearly 29 percent don’t have retirement savingsor a traditional pension plan, and many rely on Social Security, according to 2015 analysis from the Government Accountability Office.

But calculations show that those who start saving $2,000 a year at age 35 with an average annual return of 8 percent may only amass around $245,000 by retirement — an amount that likely won’t go too far 30 years from now, considering how prices rise.

“Pension systems are few and far between in the public sector. We are not sure what the Social Security system will look like in the future. The ability to successfully retire will solely be based on the financial decisions you made during your working years,” says Brian White, a financial adviser at Mandell, White & Associates in Melville, New York.

Putting aside money for retirement is so important that Illinois is creating a savings program that requires companies with at least 25 employees to automatically transfer a set amount from employees’ pay to a Roth IRA unless a worker opts out.

Regardless of your skittishness, you need to find a way to take care of your 80-year-old self someday. Here are a few considerations that can chase your investment fears away.

Regard the pain of loss as inevitable, but temporary, before a rebound. Some people remember pain more than profit. Investors may have gotten nervous when the average employee retirement account shrank from $91,864 in 2010 to $87,668 in 2011. But they may have missed it when balances plumped up to $119,804 in 2013 — an increase of more than 30 percent from 2010, according to numbers from the Employee Benefit Research Institute. In those years, the median Roth IRA grew more than 51 percent, and traditional IRAs grew 28 percent.

“We are going to have bear markets, and you are going to lose money at some points; It’s just a question of whether you have the stoicism and education to know the pain is temporary. You have to be ready to withstand it if you’re going to reap the benefits in the long term,” says Jesse Mackey, chief investment officer of 4Thought Financial Group, based in Syosset, New York.

If you hate risk, you can reduce it. Generally, the younger you are, the more your portfolio can take risks and the more stocks you can be invested in, as opposed to bonds and cash. The theory is that you won’t need your retirement fund while you’re in your 20s, 30s and 40s, and the stocks carry the highest rate of return despite being more volatile.

As you get older, you should change the ratio to maybe only 50 percent stocks, Mackey says. And, in case of a crash, you need to have the time to allow your investments to rebound, “You should expect to have to hold a portfolio for 10 years-plus.”

But let’s say you want to put aside money for a college fund without the risk. Consider investing in bonds that will mature when you need them to, Mackey says. “You can take a portion of a portfolio to do this. You can use individual bonds that are laddered to when you want them to mature.”

Diversify not just by asset type, but also by method of investment.Different approaches work for different markets. In down markets, more active approaches tend to excel. Liability-driven investing, typically used by very large institutions like banks, insurance companies or public pension funds, transfers risk by finding assets to offset it. Selective or concentrated investing, used in private equity funds, focuses on the stocks they hold. Index funds should be a large piece of any investor’s portfolio, but they tend to do best in bull markets, with asset prices rising and relatively low investor anxiety in the marketplace, Mackey says.

“Consider including an opportunistic or tactical element within your broader strategically allocated portfolio that will potentially be able to defend against or capitalize on volatility and market slides. This will require professional assistance or the purchase of a specialist fund,” he says.

Take the free money. If you’ve got a 401(k) with an employer matching a percentage, consider it free money. “At a minimum, you should take advantage of the full match. For example, if your company provides a dollar-for-dollar match up to the first 4 percent, you should contribute at least 4 percent,” White says.

Let’s say you’re making $40,000 and your employer offers you a match of 4 percent of your salary. That would likely amount to $1,600 in free money by the end of the year.

It’s a no-brainer, yet leaving money on the table is more common than it seems, with Americans likely leaving $24 billion in unclaimed company-match dollars each year, according to a 2015 research report by the workplace financial advisory services firm Financial Engines. Overall, one out of four employees doesn’t avail themselves of matching funds, with the typical employee leaving $1,336 of potential “free money” on the table each year, according to the report.

Think of compounding interest like a windfall. Compounding interest, which means you will earn interest on your interest, accrues much faster than stuffing money in your mattress. “Start with a penny and double it every day; in 28 days, you will have $1 million. So even saving a small amount every paycheck will make a big difference over time,” White says.

The younger you are, the more time your money has to compound before you retire. One example of this is if your relatives placed $100 in a trust fund for you in 1927, at the average rate of return of the stock market. Seventy years later, that money would grow to $263,000, according to economic writer Stephen Moore.

Online investment calculator tools can tell you how much you will need to put away each month to likely reach your retirement target. If you start saving $2,000 per year at age 25 at an 8 percent annualized return, you’d have $560,000 — more than double what you’d have if you start saving 10 years later.

Of course, you should always check out the fees associated with the funds, because a fee of 1 percent can quickly chip away at a 3 percent return. You also want to see how well your fund performed by checking out its performance and ratings. And consider fund managers who have been around two or more years.

Get started as soon as you can. After all, what could be scarier than waking up one morning with less than 10 years until retirement, and with no retirement savings?

How to Invest in Wearable Technology

Digital Life Review Smartwatches

Even that cartoon-strip cop Dick Tracy, with that fancy two-way wrist radio in 1946, could never have envisioned that folks would be trotting around 70 years later with digital fitness devices and miniature computers strapped around their arms.

“You don’t have to look far to catch a glimpse of someone wearing the latest wearable technology, such as an Apple watch (ticker: AAPL) or Fitbit (FIT),” says Terence Pitre, an accounting professor at Saint Mary’s College of California. “It’s logical to wonder just how good of an investment in this technology would be.”

Then again, that’s not exactly an issue your tech bauble can surf the Internet to answer – not even Apple’s over-the-top watch, complete with a 38 mm, 18-karat yellow gold case and bright red belt buckle that retails for $17,000. (But there’s free shipping!)

No matter how many of those fly off the shelves, or waddle pretentiously, it takes a different measure to determine how watches and fitness devices in the 21st century translate to value for the companies that make them. And a good place to start is with Fitbit, which got into the game well before anyone, in 2007. Its pantheon of products, which track data including steps walked, sleep quality and heart rate, helped the company go public in June.

Apple and Fitbit are at the top of the heap. Fitbit controls almost a quarter of the wearable tech market, according to Pitre. And that slice of the pie has been mirrored by solid Wall Street performance. Since going public, Fitbit has seen its share prices jump more than 20 percent.

One appeal of Fitbit is that its products work with Android or Apple devices, whereas the Apple Watch … well, you know the drill. “Additionally, firms like Fitbit have since added text capability and music to their products, thus rendering both models comparable in functionality,” Pitre says.

Yet Apple’s new gizmo, which starts at $349, hasn’t been a flop, either. For the year, Apple’s revenue grew an astounding 28 percent to nearly $234 billion, after its fiscal fourth quarter profit rose 31 percent. And in its earnings statement, CEOTim Cook singled out the Apple Watch as part of the recent success.

That said, the stock bounce factor is harder to measure for behemoth companies where a watch or fitness device represents one in a large line of products. “Even if it’s a hot product, they often make up a minuscule percentage of the total sales,” says Will Hsu, managing partner of Mucker Capital, a venture capital firm in Los Angeles.

In fact, sales of the Apple Watch will create three to four times as much revenue as Fitbit models. But as Pitre points out, “The financial impact to Apple will barely register the proverbial blip on the radar screen. … Investing in Apple or Samsung (SSNLF) because of their presence in the wearables market would be like buying a hamburger for the lettuce.”

Looking ahead. As for taking a tasty bite of the future, “We’re just beginning to scratch the surface of what’s possible, says M.S. Krishnan, professor of technology and operations at the University of Michigan’s Ross School of Business. “The key is going to be how relevant these applications are going to be.” Krishnan predicts innovations in the health care market could arrive first – and indeed, that could be a very profitable frontier in the years ahead.

“The next big step for wearables will be a shift toward medical grade sensors for health care,” says Carla Kriwet, CEO of Philips Patient Care and Monitoring Solutions “Today’s devices are able to successfully track data, but this alone is not enough to improve patient outcomes and won’t lead to broader, healthier changes overall – as these devices are not yet helping meet the very real medical needs of patients who would benefit most.”

But there have been advances. Healthwatch Technology, for example, has come out with a shirt that employs electrodes to monitor vital signs for patients with cardiac issues and interfaces with a smartphone app. It promises to not only help hospital patients and outpatients, but also drive sales.

“The greatest benefit will be the fact vital information can be collected over time, allowing health professionals a better view into potential problems of the patient using actual data points and trends,” says Eric Spackey, CEO of Bluewater Defense, a company that mass produces combat apparel and equipment for the Department of Defense.

Already seeing a top? Some experts already spot tech fatigue settling in among everyday consumers.

“We are starting to see performance degradation in favor of feature-rich devices,” says TJ Dailey, national products manager at TCC, a retailer of Verizon premium wireless products. “Where is the tipping point, and when is too much connectivity too much?”

“One of the challenges with wearables is whether or not someone will actually wear it,” adds Joel Evans, vice president of mobile enablement at Mobiquity, a professional services firm in the mobile and digital sectors.

So let’s say you already wear a Seiko or Timex “dumbwatch” you love. Chronos is expected to release $99 smartwatch disc in the spring. “It attaches to the back of the watch you already like to wear, lasts 36 hours and brings many of the features that a traditional smart watch will bring, even responding to taps and gestures,” Evans says.

But whether that propels Chronos to an initial public offering is another story. And not all wearables have caught on. Some major companies that tried wearable technology in athletic clothing have tanked, including Adidas (ADDYY) and Under Armour (UA), says Steven LeBoeuf, president and co-founder of Valencell, a provider of biometric sensor technology in fitness gear.

That said, things could get exciting over at your favorite consumer electronics store. “Be on the lookout for ‘hearables,’ smart wearables worn at the ear,” LeBoeuf says.

Or if you prefer: Keep your ear to the ground.

Know the Risks of Year-End Mutual Fund Purchases

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When it comes to investing, most experts offer the same advice: If you are a typical mutual fund buyer saving for college or retirement, don’t try to time the market. It’s a loser’s game.

Except that you might tweak your timing a little — just a little — at the end of the year, or you may get hit with a tax bill on year-end capital gains distributionsthat you don’t deserve. Because stocks have done well in recent years, many funds are sitting on large profits that could create big tax bills.

“Many mutual funds are expected to make sizable capital gains distributions this year,” says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Illinois. “Some funds are paying out gains for the simple reason that the securities hit the manager’s price targets.”

Other funds, he says, trigger taxes by selling profitable holdings to pay cash to shareholders who are pulling out, disappointed by this year’s lackluster results, or who want to move to funds less likely to trigger big year-end tax bills in the future.

“This has triggered capital gains in a year where the stock market has not done that well,” he says.

What are year-end distributions? Year-end distributions are payments to investors of any profits earned on holdings like individual stocks or bonds that the fund managers sold during the year. If the fund is held in a taxable account, the distributions are taxed as long- or short-term capital gains. Of course, there’s no tax if the fund is in a tax-favored account such as an IRA or 401(k).

The tax is owed even if you use the distribution to automatically buy more shares of the fund. That means you may have to dig up cash from somewhere else to pay the tax.

Although there are no industrywide figures yet for this year’s distributions, Morningstar, the market-data firm, predicts that many funds will make “sizable” payouts, in a few cases amounting to 25 percent of a fund’s net asset value, or share price.

If you’ve owned the fund for some time, you might be philosophical about these distributions. After all, they are profits, and that’s what investors want. But if you invest in the fund just before the distribution is made, you’d pay a tax even though you hadn’t owned the fund long enough to share in those gains.

Imagine, for example, that the fund started the year at $8 a share, and held stocks that soared, driving its price to $10 a share by the time you invested on Dec. 1. You wouldn’t have enjoyed that $2 gain. Now suppose the managers sold those winning stocks and paid out $2 a share on Dec. 15. You’d get $2 for every share you owned, but your share price would drop back to $8, reflecting the cash removed from the fund’s holdings. You wouldn’t have lost money, but you’d have to pay tax on the $2.

That could be 30 cents a share assuming a 15 percent tax rate on long-term capital gains. It could be higher if some or all of the $2 came from short-term capital gains, for investments the fund had held for a year or less, because short-term gains are taxed at income tax rates as high as 39.6 percent.

Joseph P. Kalmanovitz, director of advisory services at Stonegate Capital Advisors in Scottsdale, Arizona, notes an especially unwelcome possibility: having to pay tax on a distribution even though the fund has lost value during the year. “The reason this can occur is because even if a fund’s net asset value has declined during the year, the fund manager may have sold appreciated securities that have been in the portfolio a long time, and those gains still must be distributed to shareholders at the end of the year,” he says.

Avoiding tax on distributions is simple. Postpone your purchase until after the distribution is paid out. You wouldn’t get the $2 payout, but you’d buy the shares for $8, so you’d lose nothing.

Most fund companies offer estimates on their websites of the payouts they are likely to make on each fund this year. So check before deciding what to do. Look for the record date; if you own the shares on or before that date, you will receive the distribution.

Going forward, savvy investors consider year-end distributions when they decide which funds to buy. Payouts are triggered only when gains are “realized,” which is when a profitable investment is sold. The risk of big payouts can be gauged by looking at the “unrealized” gains reported by the fund. Those are profits on holdings that have gone up and have not been sold, but could be.

Some funds have a history of big payouts. Actively managed funds can have large payouts because managers buy and sell frequently in their search for the next hot stock. This is reflected in high “turnover” rates reported in fund documents.

Passively managed funds — index funds — tend to have small payouts because they don’t sell holdings very often. Instead, they simply buy and hold the stocks in a benchmark index, such as the Standard & Poor’s 500 index. “Since index funds are cloning an index, they have less trading, which triggers a lot less tax,” Piershale says.

Exchange-traded funds generally do not have distributions. ETFs are like mutual funds that are traded like ordinary stocks. Most are index products, and any gains they realize from sales are simply reflected in the share price.

To deal with the tax issue, some fund companies offer “tax managed” mutual funds that use various strategies to minimize distributions. For example, the fund managers may sell money-losing stocks to offset the gains on the winners they sell. Then, if they think the losers may rebound, they might buy them back

Put your IRA or 401(k) to work. For individual investors, another strategy is to use a tax-favored account like an IRA or 401(k) for any fund likely to make large year-end distributions. That way, the tax bill is postponed until you redeem your shares, which may not be for many years.

Experts, of course, will tell you not to let the tail wag the dog: Don’t avoid a promising investment just because you’ll be taxed on the gains.

“Equity mutual fund investors should put much more weight on the long-term direction of the market than on potential tax liabilities arising from near-term distributions to shareholders,” says David Louton, finance professor at Bryant University in Smithfield, Rhode Island. He notes that because stocks often do well in January, investors should not wait too long after the record date to make their purchases.

Experts will also tell you to keep good records. That’s because your distributions, if you reinvest them, are not to be taxed again when you eventually pull money out of the fund. In effect, the distribution is added to the “cost basis,” or average price paid per share. A higher cost basis reduces the profit when you eventually sell the shares, so your tax bill will be smaller.

Most fund companies update each investor’s cost basis automatically when distributions are reinvested, so it should be easy to figure the taxable gain after you redeem shares. But for safety’s sake, keep the year-end statements that report these distributions. Those will come in January.Jeff Brown spent nearly 40 years as a newspaper reporter, columnist and editor, including 20 years writing about investing, personal finance, the economy and financial markets. He spent 20 years at The Philadelphia Inquirer and has been freelancing since 2007.

How to Invest Your Money the Way Warren Buffet Would Want

Fortune's Most Powerful Women Summit - Day 2
Warren Buffett, the Oracle of Omaha, is pretty much a one-man investing machine. If you’re going to follow anyone’s example of how to invest, it should be his. But with shares of Berkshire Hathaway trading at over $200,000 each, you can’t exactly hitch your star to his wagon. So how do you invest like Buffett in a way that makes sense for your budget, circumstances and family? Lend us your ear.

Don’t Pick Stocks

Of course, picking stocks is how Buffett made his fortune, but it’s not going to work for you. “If you’re not an expert at picking stocks, you have no business picking stocks,” says Maz Jadallah, founder and CEO of AlphaClone, a company that uses technology to help people invest wisely. He advises people who aren’t experts at picking stocks to throw their money into the S&P 500 (^GSPC) with a 10 percent cash cushion and leave it. “It’s so simple it takes your breath away, and that’s why it appeals to so many people.” It might not be as sexy as day trading, but it’s probably what Buffett himself would tell you to do. In fact, it’s what’s going to happen to his money after he dies.

“If you want to be a passive mutual fund investor, index funds are the place to be,” says Steve Wallman, CEO of Folio Investing. “They offer low fees and are reasonably diversified. You’re not going to knock it out of the park, but the S&P isn’t going to drop to zero like Enron stock.”

Still, Wallman admits that there are people who both want a higher return and want to be more engaged. Ultimately, what you can do depends on several factors, including your current income, projected income and responsibilities. Wallman notes the world of difference between a family where two people are working and earning a decent wage with no kids against the same income level with three kids and aging parents to support. In the former case, there’s more risk tolerance. In the latter, there’s less. “Should you be doing a little bit more or even a little less with your money?” he asks. “It depends on your circumstances.” Still, no matter what you decide, Wallman thinks you should have an index fund as part of your investment strategy.

Manager Selection Is Even Harder

“The biggest pain point is manager selection,” says Jadallah. Because even when you concede that you’re not the best person to manage your money, that doesn’t mean you know who the right person to manage your money is. AlphaClone’s entire business model is helping people to pick competent money managers based on their previous track records using current technology.

He points out that there are basically three problems when investing. Market risk is the risk of the overall market. This is an area where you have zero control. Company risk is the risk specific to the company your manager is investing in and can be mitigated by picking the right manager. Finally, there’s the manager risk, which is where the rubber meets the road. So look for a manager who isn’t putting all your eggs in one basket and knows how to mitigate market and company risk.

Don’t Go All Long or All Short

Jadallah says that one mistake people make is that they go “all long.” This means they put all their money into an exchange-traded fund that tracks an index like the S&P 500. And while Buffett is bullish on the ETFs, urging investors to put 90 percent of their money there, he also keeps a 10 percent cash cushion in the form of short-term bonds. For his part, Jadallah suggests that you increase that to 20 percent. “If the market has a 40 percent drawdown event, it takes years to recover,” he says. “You want to align with what the market is doing over a long-term trend.” Do that, he adds, while also having something to protect you in the event of a major drawdown event.

Find Funds that Are Diversified

One of the main reasons the S&P 500 is such a safe bet is that it’s diversified. “Having 10 airline stocks isn’t being diversified,” says Wallman. In fact, it’s an incredibly concentrated way of investing, but that doesn’t stop a lot of investors from investing primarily in tech, energy or other industry-specific stocks. Here you’re not getting much of the benefit of an index fund at all. You’re sharpening your overall market risks, because when you invest heavily in one specific industry, the entire economy doesn’t have to have a downturn — just the one that you’re in.