Name: Kyle

Question: I am 27 and have been putting money into a roth and 401k for the past several years.  I have my money invested in mostly balanced funds, about 70% stocks and 30% bonds.  My question is this: after hearing the Jonathon Stewart vs. Jim Cramer debate I started to wonder how intelligent it really is to invest in mutual funds for the long term.  It seemed to me like Stewart might actually have a good point when he brought up the fact that investors try to convince the public to invest long term in mutual finds so they can trade in and out and take advantage of these people.  What are your thoughts on this?  Was he just making a compelling argument or is this in fact what is really going on in the investment world?

Answer: 

Hi Kyle, Thanks for the question. Like Stewart said to Cramer "I understand you want to make finance entertaining, but it's not a F****** game".

The good news is that you're only 27 and although you may have experienced up to a 40-50% drop in the value of your portfolio, you're investing for the long term so you have plenty of time for the market to rebound.  Hopefully you are only watching Cramer for entertainment purposes and not for actual investment advice.  I often watch his show to stay informed about what the masses really may be thinking, but intelligent investing involves due diligence and a lot of research to find the in depth information unavailable to basic cable subscribers.  So Cramer is right in saying "Do your Homework". 

In my opinion, you should stay away from mutual funds in your 401k.  I'm not saying avoid diversity, just mutual funds.  A better option is an index fund like the Vanguard 500 Index Investor (VFINX), which mimics the holdings of the S & P 500 and has an expense ratio of only 0.15%.  One of the top rated mutual funds out there is the American Funds Amcap (AMCPX) which has an expense ratio of 0.65% (more than 4x that of the VFINX!).  There's a difference in expenses of 0.5%.  You're paying someone a fee to manage your money that probably will never beat the S & P 500 performance over a period of more than 7 years (maybe will get lucky for a few years).  Over the next 20-30 years that ends up being huge!  You can read more about it in a book lik Stop Wasting Your Wealth in Mutual Funds which will break down how much money you are actually wasting.  So yes, Jim Stewart does bring up a valid f****** point.

Your percentage in stocks and bonds is at a good level for now but if you feel like being a little more risky it's not a bad idea to keep investing when the market dips.  We are seeing historically low levels and you may not invest at the very bottom but you should still be investing because when the bull market comes... it will come fast. 

As for your Roth IRA, where you're able to invest in individual stocks, I would advise doing some research and picking companies you like that are paying a nice 3-8% dividend.  I'm bullish on oils stocks for the long run because I believe there's no way oil prices can stay this low.  If you're truly interested in some alternative views on the current market situation I would recommend reading Rich Dad's Prophecy: Why The Biggest Stock Market Crash in History is Still Coming...and How You Can Prepare Yourself and Profit From It! by Robert T. Kiyosaki and Sharon L. Lechter.  This book goes into detail (however it seems to be written for a 12 year old) about the baby boomers retiring and being forced to liquidate their 401k funds around 2016 which could result in another crash.  Until then I'm confident that your safe.