Quote:
Originally Posted by manasecret
So, uh, Prof. S, could you dumb that down for me a bit? What exactly is an equity -- do you mean a stock? And in that last paragraph, what exactly do you mean by redistributing investments in a hot market? And how do I know if something is tax deferred? I thought all profits in a Roth IRA weren't taxed.
|
1) Equities are stocks. Equities are the more risky in the short term, and have no guarantee of profit, even though they avereage about 8% a year in the long term. An equity fund is also an aggressive fund.
2) Not all investments like Roth IRA's and 401k's are based in stocks. All stable funds and money markets are based in bonds and other safer venues, they guarantee return on the investment, but the return is far lower. This is why they are great for those who will be retiring shortly as all they do is fight off inflation and you have no risk of loss.
3) By redistributing investments, I mean moving from more aggressive/high yield funds to guaranteed/low yield fund as you get closer to retirement. If you stay in an aggressive/equity based investment plan close to retirement, you are in danger of losing a lot of money and with retirement approaching, the likelihood is you'll not make that money back before you retire. When you decide to move you're money from aggressive to stable, you want to make sure the stick/equity markets are high, so that you are making the most of your investment before moving it into a guaranteed/low interest retirement account.
4) Remember the difference bewteen a paper and realized loss when you invest. I've lost about $10,000 in my 401k since the market started going nuts, but that loss is a PAPER LOSS. Meaning: My investment has been devalued on paper, but since I have not cashed out, I can still make that money back when the market corrects and advances in the future. If I were to freak out and bail now, that would be a REALIZED LOSS, and I have no chance of earning that money back.
5) Tax deferred means that you are NOT taxed on the money you put in, but you are taxed as you take it out. This is tax deferred. Its deferred until later, and you are only taxed on what you use, not the balance. My knowledge is more based in 401k's, so I'm not sure if Roth IRA's tax now or later.
Moral of the story is: This is a great time for young people to invest in agressive/equity funds, as you will be getting stocks at a devalued price and when they correct you will make out huge.