I read saw this over at Free Money Finance: If we really want to be rich, the best financial advice David Bach has for us is to buy a house.

I have to disagree. Bach compares the average net worth of a renter (under $5,000) versus the average net worth of a homeowner ($171,00) and goes on to argue that nothing will multiply your wealth like owning a home.

The problem I have with this statistic is that Bach is not really comparing apples and oranges. For it to be a valid comparison, you would have to compare the average net worth of renters and homeowners in the same income range.

It makes me wonder why David Bach encourages homeownership so much. If you have ever read any of his books, most of his financial advice is pretty solid. He teaches readers principles such as: paying yourself first by saving 10% of your income, spending less than you earn, and watching our for those little purchases that can really add up.

When you compare owning stocks to owning a home, it is crystal clear which investment is the winner. According to this article from Smart Money, after considering inflation, stocks have returned 7% in the long-haul while homes have returned an average of 0%. Home values have skyrocketed in recent years, but the historical data shows that you have more to gain when you invest in stocks.

Is it a wrong move to purchase a house? No, not at all. Just don’t expect it to be a fast-track to great wealth. Building wealth is still achieved through sound financial planning. By starting early, diversify your investments, and being consistent in saving, you too can be on your way to great wealth. You don’t have to get so fixated on owning a home at the expense of all other things.

In today’s post I’m going to give you a basic primer to get you started on investing in your company’s 401k plan.

So you recently started a new job and your company is offering you a 401k plan. Great! You want to start investing a portion of your income, but you have no idea how to go about it. I’ll give you step-by-step instructions to get you started and simplify the whole process. I started helping out my fiancée in setting up her 401k and I’ll use her plan as an example.

1. If you haven’t already done so, enroll in your company’s 401k plan and get access to your account online. Once you have an account setup you can login and begin researching what investment choices are available. The 401k my fiancée is enrolled in is managed by Vanguard. For you it might be Fidelity or another investment firm.

2. After you login, begin to compile a list in Excel of all the investment options. This can vary significantly from company to company. The firm my fiancée works for offers 21 investment choices in their 401k plan:

Write down each investment option and the ticker symbol. Also make note of what category of sector they fall in.

3. Once you get a list of names or ticker symbols, you can go to google finance to get more info. (For example, if you look up DODGX, you will find the expense ratio as 0.52% and that its a large cap value fund.)

4. This next step is going to be a little more involved, but I promise everything else is simple. The next step I’m talking about is asset allocation; how you will choose to invest your money in all these various options. Opinions will differ in how this should be approached, but I will give you my best take on it.

Let me pause here and say that instead of selecting your own mix of asset allocation you can choose to invest all your money in a target retirement fund. A target retirement fund is an all-in-one fund that matches your retirement date. Initially the fund will start weighted more heavily in stock funds, but as you get closer and closer to your retirement date the fund will invest more money in bond funds. The asset mix starts off aggressive but with high risk and slowly levels off to lower and lower risk. I won’t get into a debate of whether its better to create your own portfolio mix or if you should choose a target fund instead. For me I choose to create my own asset allocation.

First you need to decided how much of you money will be in stocks versus bonds. A common advise that is given is that you should subtract your age from the number 120. This will give you a percentage. (For example, if you are 30 years old: 120-30=90. You should invest 90% in stocks and 10% in bonds.)

The next step is figuring out how to invest that 90% in stocks. For my fiancée I chose the following asset mix:

20% in Large Cap Blend
20% in Large Cap Value
30% in Small Cap Growth
15% in Foreign Large Growth
15% in Foreign Large Value

Why invest in this manner? Although you can’t determine the outcome of how well your investments will perform, you can determine your risk to a certain extent. The crucial point here is that we are not trying to predict the future and anticipate what markets or what sectors will perform well, but trying to reduce our risk by adding diversity to our portfolio instead. History shows us that having diversification in your investment options helps to buffer you from the ups and downs of the market from year to year. (If your interested here are two great articles on this issue: The Ultimate Buy and Hold Strategy and Fine Tuning Your Asset Allocation)

How do you choose between all you options. In each category, choose the option that has the lowest expense ratio. Why? Because there may be years that some funds perform wonderfully and other years that they perform miserably. But one thing that stays constant is the fees and expenses you will pay for investing in those funds. So why not minimize the fee amount if you can.  Some might disagree with me here and ask how I know that the fund with the lowest expense ratio will outperform all the others.  I don’t know.  And neither does anyone else.  You can do research on each fund and compare the ratings, fund managers, etc., but that is out of the scope of this primer.

5. Once you have decided on your investment options, set your contribution settings accordingly in your online account. This is how it looks for my fiancée. You can see that my weighted expense ratio is around 0.76%. Although I wish it was lower, it’ll do for now.

6. The last step is rebalancing your portfolio. As the year progresses, some funds will perform better than others. Either once every year or twice every year, check to see if you need to move around some money to keep you on track with your allocation decisions. (For example if your Small Growth fund begins to grow to 35%, its time to move 5% of the money to other funds that are lacking.)

Hopefully this primer gets you started into understanding the basics of investing in your 401k plan. Remember that no investment choice is without risk, and there are no guarantees of great returns on your investment. But as you begin to understand the basics of your 401k plan, you will hopefully reduce expenses and possibly risk and be on your way to accumulating a sizable investment.

I have seen it suggested before that in order to maximize financial aid eligibility through FAFSA, grandparents should save in a 529 plan instead of parents. Why? As I mentioned yesterday, the assets of parents are factored in to the total expected family contribution of a student. A student would receive more financial aid if a large 529 college savings plan was held by the grandparents instead of the parents. So it has been suggested that parents who want to open a 529 plan should have the grandparents be the account owners instead of the them.

I understood this logic, but I still had questions about what happens during distribution. I saw a potential problem. Either the money given by the grandparents would be considered as yearly income to the student (we want to minimize this) or if the grandparents pay for college expenses directly the financial aid becomes reduced dollar for dollar (this is even worse).

The laws are vague about whether the distribution of money to the student would actually be considered income that needs to be reported on the FAFSA. Here are two articles that discuss this in more detail:
Rules unclear for grandparents’ 529 plan
Section 529 college savings plan loophole

It is ultimately possible that the laws change and become more clearly defined. I believe in the end that it might be easier for parents to open their own 529 plans instead of trying to shelter them through the grandparents. Starting early and saving for college expenses is what is ultimately important.

I was searching the internet for information about 529 College Savings Plans, and realized that ScholarShare, the 529 plan in California, has changed its fund manager to Fidelity. This is great news because now there are a number of investment choices including index funds with all-in fees at 0.5%. Click here for more information.

Since my 401k is managed by Fidelity, I’m already a satisfied customer. Managing your portfolio is fairly standard, so I’d expect the same interface in their 529 accounts. The minimum investment starts at $15 a month so even if sending your kids to college is way down the road, a little bit each month could add up.  I might consider opening one even though I don’t even have kids.  If I ever go back to school I could always use it on myself too.

I just noticed that Fidelity started to offer free finance podcasts. Check them out here. I listened to the personal finance one and it was a little cheesy, but hey at least its free. Hopefully they’ll start to fill it up with some more content.

Earlier this year my fiancée and I decided that we would each save $10,000 for our wedding next May. So, since the summer I’ve been aggressively saving my money into my HSBC account. Any extra income has been channeled to my wedding budget. Well today I opened a Roth IRA. Oops. I’ve been contemplating opening one for a long time and I finally succumbed to it. I already have a 401k and get 4% company match but I wanted to spread my investment around a little. T. Rowe Price has a good program where you can direct-deposit as little as $50 a month and they waive the minimum initial investment of $2,500. So even though my 401k is with Fidelity I went with T. Rowe Price. I’m actually very impressed with their user interface. It is much more intuitive and easier to use than what I have at Fidelity. I looked around at the different funds they had and I went with the Real Estate Fund (TRREX). This is the only sector I’m missing in my 401k so I thought it would be a good balance. Its rate of return has been over 25% this year so I hope I’m not chasing performance and setting myself up for loss. Well with a small monthly investment I trust that dollar-cost-averaging will help me out in the long run.

Here’s a free Java-based asset allocator tool that gives you some guidelines of how to divide up your investment portfolio. You can play around with it to suit your personal factors.

I input the follwing and got:
Age: 25
Current Assets: $15,000
Savings Per year: $5,000
Risk Tolerance: Med-High

Large Cap: 30%
Mid Cap: 23%
Small Cap: 17%
Foreign: 15%
Bonds: 4%
Cash: 9%

Okay so here’s the deal. A while back I was invited by a friend to a free lunch (Hawaiian food). The only catch was that we had to listen to this financial planner from Ameriprise give his spiel. Wasn’t really impressed with what the guy was talking about. Mostly basic stuff like 401k or Roth IRA’s. At the end of his talk he told each of us that he would give us a free initial consultation. I wanted to save the trouble and asked him how much it would cost for him to draw up an investment plan. He told me that it depends from person to person. (Actually its $695, but he just didn’t want to tell me).

I thought, what the heck, I’ll schedule an appointment and see what its like. Maybe I’d learn something about my financial outlook. I went in a week later and drove down to his office. I sat down with him and I gave him a brief overview of my financial standing. Decent income, some student loans, no other debt, some savings, 401k with company match. Hmmm, am I missing something here? Btw, I am already pretty meticulous about tracking my budget/spending, so I know where all my money is going. He suggested that I should probably open a Roth IRA and pad my emergency fund a little more. Okay, sounds like reasonable advice to me. Anything else? Well for $695, he would draw up a investment plan for my retirement/investments. And that’s just the initial planning, not to mention meeting with him periodically for an hourly rate. Hmm…I think I’ll pass, especially since my portfolio only consists of a few thousand in my 401k anyways.

Bottom line…I wasted my time and quickly found out that unless I am extremely lazy about allocating my assets, or unless I have more money than I know what to do with, I really don’t need a professionally prepared financial plan. And in my opinion, most other average folk like me don’t really need it either. I think there are invaluable resources that are all freely available on the internet. Just save more than you spend every month and find a few decent mutual funds and savings accounts to stash it in. Its not rocket science folks.