How To Scew Up Your 401k Plan

The following is an excerpt from 5 Ways to Screw Up Your 401k

There are all sorts of creative tax loopholes out there for savvy investors to exploit, and over the years I’ve looked at (and even tried) plenty of them. But the truth is, you don’t have an army of fancy Ivy League tax lawyers to massively lower your federal income tax bill. The single best tax shelter out there happens to be one that is available to the vast majority of working Americans: the humble 401k plan.

The 401k plan is the only investment vehicle I’ve ever seen that offers instant, tax-free “returns” of 100%, via employer matching. And depending on what federal tax bracket you find yourself in, you can get instant “returns” of 10% to 39.6% due to the tax deferral.

That’s real money, to say the least.

And all of this assumes your 401k contributions and matches sit in cash. We haven’t even touched on actual investment returns yet, fop good reason. A well-constructed mutual portfolio might return 8%-10% per year if you’re lucky, which isn’t bad, of course. But it pales in comparison to the matching and tax benefits.

The humble 401k plan is a veritable money-printing machine. Yet it can be remarkably easy to make a mess of things and kill the goose laying the golden eggs. Today, we’re going to look at ways to really screw up a good thing.


Failing to Increase Your Contributions As Your Pay Rises

This is America. If you’re reading this, chances are good that you make enough money to eat and keep a roof over your head. Yes, our expenses rise over time due to inflation and family changes, such as the addition of children. But it’s safe to say that if you were able to survive on the income you earned last year, you should be able to survive on the same amount this year and do so comfortably.

So, as you get salary bumps, try to continue living on your old salary and use the raise to increase your 401k contribution. You don’t have to eat ramen noodles or sell blood to make ends meet. Just avoid lifestyle creep, and you can get a lot closer to maxing out your 401k plan.

I know, I know. That new car is just begging you to buy it. But you can stretch another year out of your old car, and 20 years from now, when you look down at your 401k balance, you’ll be happy you did.

To read the full article, see 5 Ways to Screw Up Your 401k

Advice to a Recent Graduate

The following is an excerpt from 5 Things You Must Do As Soon As You’re Employed.

20 years ago, long before I starting managing money professionally, I remember a little nugget of wisdom my mother’s financial advisor Daniel gave me: “Your career is a far more important investment than any stock or bond I’ll ever buy for you.”

It was the late 1990s — at the tail end of the greatest stock market bubble in history — and I was a kid fresh out of college. The thought of grinding away in a cubicle for the next 40 years of my life was laughable to me. I was going to be a dot-com millionaire and retire by 30!

I often hear older men say that they’d love to go back in a time machine and kick their own asses for some of the stupid decisions they made in their youth. Well, I don’t have those urges because the 2000-2002 bear market did it for me.

In retrospect, it was fantastic timing. I had the get-rich-quick mentality bludgeoned out of me by a nasty bear market. It taught me discipline and humility. And from that point on, I took my career a lot more seriously.

Daniel was right. Getting serious about my career was the best investment I ever made. And by putting my nose to grindstone and getting to work, I advanced and managed to escape the greyish hell of the cubicle in just a few short years. I still work for a living, but today I have the freedom to make my own hours and work from anywhere in the world.

So again, work hard and advance your career. Yes, you’ll be a peon for a few years — just view it as a necessary stepping stone.

To read the full article, follow this link.

Spring Cleaning Tips for Your Portfolio


Photo credit: Hans Splinter

The following is an excerpt from a piece I wrote for InvestorPlace: 10 Spring Cleaning Tips for Your Portfolio

I don’t personally do a lot in the way of spring cleaning. It seems that my wife actually takes pleasure in digging through my closet and throwing away clothes that have outlived their usefulness, so I try my best to stay out of her way. But I do usually spend a few hours in the garage and attic going through junk we’ve accumulated over the past year.

What’s good for your household is also generally good for your portfolio. You should regularly tidy up your portfolio and your broader financial plan. You’d be surprised how much “junk” you can accumulate in a brokerage account.

You won’t want to get rid of it any more than you want to get rid of that old moth-eaten Texas Christian University Horned Frogs hoodie you wear during college football season. But frankly, getting rid of it is for your own good. Not only does holding on to portfolio junk tie up capital that can be better allocated elsewhere, it can also be a major distraction.

And frankly, like the moth-eaten hoodie, it’s downright bad for your self respect.

With that in mind, we’re going to look at 10 portfolio spring cleaning tips.


Rebalancing is an important spring cleaning chore, both among asset classes and among your individual stocks. I agree with the old trader’s maxim to “cut your losses short and let your winners run”.

But if a single stock has come to completely dominate your portfolio, you should probably consider scaling it back a little and reallocating. Otherwise, you run the risk that that single stock will take a wrecking ball to your portfolio should it unexpectedly hit a rough patch.

There is really no hard and fast rule on when a single stock position is too big for a portfolio. My basic rule of thumb is to keep my initial investments to just 3% to 5% of the portfolio. When a stock really has a nice run and starts to make up 10% of the portfolio or more, that’s when I start to scale back.

Every investor is a little different here, and there is no absolute threshold at which you should sell. Just try to be honest with yourself about the risk you’re taking, and do what seems best for you.

To read the rest of the article — and the 9 remaining spring cleaning tips — follow this link to the article.

5 Mistakes That Could Derail Your Retirement

Head in Hands

Photo credit: Alex Proimos

The following is an excerpt from 5 Simple Mistakes That Could Ruin Your Retirement.

You can make a lot of mistakes in your youth … and assuming none of them get you killed or put in prison, you can generally recover from them. Time is on your side. But the closer you get to retirement, the less room for error you have.

Investing mistakes like that might make the difference between a comfortable retirement and working until the grave.As your nest egg gets larger, investing mistakes cost you a lot more. Think about it. If you lose 30% on a $10,000 portfolio, you’re out $3,000. That might be a single after-tax paycheck when you’re young. But imagine losing 30% on a $1 million portfolio. That’s $300,000. For most Americans, that represents years of income in the prime earnings years of your career.

Today, we’re going to look at five potential retirement mistakes that can dramatically affect your lifestyle. Some will be more relevant to younger investors and others to older investors. But all can potentially torpedo your retirement.

#1. Waiting Too Late to Start

If you save aggressively in your 20s, you have 40 or more years for those gains to compound. You can save at a more moderate level and let the capital markets do the heavy lifting for you. But the later you start, the harder it gets.

The best illustration of this I have ever seen is Richard Russell’s essay, Rich Man, Poor Man. Russell, who until his passing last year had covered the financial markets since 1958, gives an example of two savers. One opens an IRA at age 19 and sets aside $2,000 per year until the age of 25 and then stops. He invests for just seven years and then sits back and lets it compound.

A second saver starts saving at age 26, one year later than when our first investor stopped. He saves $2,000 per year until age 65, a period of 40 years.

So, we have one saver that started early and quit … and one that started just seven years later, but proceeded to save for 33 additional years. At age 65, who had a larger IRA?

Shockingly, the early investor. Assuming annual returns of 10%, Russell found that the early starter had a net worth of $930,641 by age 65 vs. $893,704 for the late starter.

Naturally, tinkering with the returns assumption will make a difference here. The stock market returns roughly 10% per year over the long-term, but returns vary wildly from year-to-year. But Russell’s point was simple enough: Start early when time is on your side.

If you’re already in your 30s, 40s or even older, you can’t undo your savings decisions from the past. But you can start now.

To continue reading, please see 5 Simple Mistakes That Could Ruin Your Retirement


Lessons Learned From Prince’s Untimely Death

I gave my thoughts to Kiplinger’s Stacy Rapacon on lessons we can learn from the unfortunate passing of Prince. The music legend apparently passed away without a proper estate plan. Or if he had an estate plan, no one knows where it is… which is just as bad. See below:

Keep a copy of your will somewhere handy and be sure to tell your family—or at least your lawyer—where it is. All the estate planning in the world is for naught if your loved ones don’t know where the documents are. In Prince’s case, he was unmarried and had no surviving children, so at least in this case there are no grieving widows and orphans to worry about. But chances are that Prince intended his multi-million-dollar fortune to go, if not to a friend or friends, then to a charity. His wishes may never be carried out if his will cannot be found.

I’ve told my wife repeatedly where to look for the documents in the event I meet an untimely end. But I also know good and well that, if that day came, she might not be mentally able to deal with it at first. So, I keep one of the estate lawyer’s business cards pinned to the bulletin board in our kitchen. Yes, it’s a little morbid, but at least the number is there to call if she needs it. The estate lawyer has copies of all of our documents in the event that the originals are lost or destroyed.

You can read the full article here.