OT- First time investments

[Freddy Merckx]

I know there are some bright people here, and I would love to hear your opinions when it comes to a first time investment. Rough background- I'm in my mid-twenties, I owe roughly 9k in student loans, 32k yearly salary, and a savings of 5k. I want to be pro-active with my small savings and put $2k-$3k into a long term and "safe" investment.

I have spoken with a life-insurance sales person and they had a pretty appealing plan, but of course I must purchase the life insurance in order to invest. Also this is the FIRST investment opportunity I have really considered and learned about. Seems like a lot of responsibility to take on, and I don't like the attachment of purchasing life insurance. Their appealing characteristics are:
-Only taxed once (income tax)
-Gains cannot be used against me in FASFA or college fund situations.
-5-9% average annual return, invested in Global market (S&P500, EU, Chinese market)
-low monthly payments where majority (because of my age) goes to investment side rather than insurance premium.
-caps of 15% gain, and .075% floor annually
-if I die my family gets $ but again not my first priority


Please excuse if I have said anything silly above, as I am learning. I sat through a 4 hour talk last week about that Life insurance policy and it was quite overwhelming. I've read a few books on technical analysis, Robert Kiyosaki's series, and played with Up-down.com on my own pretend investments, and I am not a broker. I want some direction, and its hard to put faith in the investment opportunities I am presented with when the person is on commission, and I am not very educated on the subject.

So after than long promt I wanted to see what your opinions would be on my first investment given my current situation. I want to start a tier with safe and long term being my first steps such as an IRA/life insurance, and then work my way up to higher risk and short term investments after locking down that long term.

What would you look into in my shoes? and should I even begin investing with college debt and a small savings?

Cheers and thanks for your time guys,

Freddy.

[joosttx]

1) I would pay off the student debt.
2) Make sure you have good insurance
3) Buy High dividend yielding stock ~5%, MLP's RTI's are generally good to look into for buys.

I actually sold most my gains from this year this week and will if I even do cautiously reinvest until 2015. With that said I did buy HCN today.

[Louis]

I'm no expert, but the vast majority of stuff I've seen says that insurance in not the way to go for investing your $. (I've read that the fees are way high compared to other types of investments.)

I think the simplest way to start is dollar-cost-averaging into a broad-market indexed mutual fund at someplace like Vanguard or Schwab.

Start as early as possible and keep at it.

Edit: and yes, pay off your debts as soon as possible and don't pick up any more, if you can avoid it (ie no cc debt)

[robin3mj]

If you're employed and have access to a 401k, first, max that baby out.
Then-
Index funds.
90/10 equity and bonds at your age.
Vanguard- low fees.

[Louis]

If you're employed and have access to a 401k, first, max that baby out.


+1 - the matching is free money, and you should take advantage of this as much as possible

[saab2000]

Study a compounding interest calculator online, then:

Get debt free ASAP. That bike stuff can wait. So can a lot of stuff.

Study a compounding interest calculator online, then:

Max our your matching
Max out your (Roth-if available) 401(k)
Max out your Roth IRA

Be on the earning side of compounding dividends and interest, not the paying side. No credit card debt. Not 1$.

If you have some extra cash, put it towards a Roth IRA.

The maximum for 2014 in a Roth IRA is $5500 for those under 50 and for a 401(k) is $17,500. If you can, max those out. Then find a compound interest calculator and determine what you will earn on that if you never add another penny, assuming, say, 30 years of growth at 5.5%. It's pretty remarkable. And if you add money regularly, it's even more remarkable.

Find a low fee brokerage firm. Research this. There's more out there than you can believe and 99% of people don't read it. A couple of fellow forum folks have graciously answered some questions and I've learned a ton. There's no magic bullet but there's a lot to be learned. Do some internet searches and you will find more than you care to read on this.

[Ken Robb]

There are BIG commissions paid on these plans. If you have dependents and need life insurance look into simple term policies. "Past performance is no guaranty of future returns" is routinely quoted somewhere in the prospectus for any investment plan like this. In today's market I don't think there is any "safe" investment returning anything close to 9%.

If you're paying more in interest on your loans than you can get in truly safe investments you might be better off getting out of debt before looking for investments. For a young person index mutual funds with low fees (Vanguard offers them) are as close to a long-term sure thing as anything.

When I started writing I was going to be the first responder but I got called away so my post followed others with similarly good ideas so forgive my redundancy.

[Louis]

Max out your (Roth-if available) 401(k)
Max out your Roth IRA

+1 Unlike nearly everything else, the gains are never taxed.

[Ahneida Ride]

Just remember that the shopping coupons of our nations private
central bank, decrease in purchasing power at about 6% per year.

Pay off as much as you can with a cheaper frn.

[likebikes]

32k in sf, that's like minimum wage there.

[rounder]

When I was going to school years ago. my investment instructor was a Harvard Phd...he said that no one out performs the Dow over the long term. For my 401K, I had 50% in S&P and 50% in growth. The S&P stuff has outperformed the growth stuff for me. I would say diversify and invest early.

[professerr]

Read the book A Random Walk Down Wall Street, and go from there.

Every 10 years or so I go down the life insurance rat hole and always conclude it is a great deal for the sales person pushing it.

[jtakeda]

Hmmmm.

I'm in the same boat as OP here, except I paid off my student loans.

OP pay em off ASAP. It feels great.

I was actually thinking off investing soon so very timely thread.

PS. Posting so I can find this thread later-I need to invest before I turn 30

[kramnnim]

...how you live on $32k in SF?

I've been listening to Clark Howard podcasts, and he says pretty much what has already been said here- the life insurance plans are horrible, Roths are awesome, max out your matching 401k, etc...

[Louis]

I want to be pro-active with my small savings and put $2k-$3k into a long term and "safe" investment.

Something I figured I'd point out: In the sentence above "long term" and "safe" are contradictory. If you're investing for the long term, then unless you are psychologically super risk-averse, you can afford to take greater risks, since you won't be withdrawing the money any time soon. (the definition of long term)

However, if you're 65 years old and retired and are going to need part of the money soon for your living expenses, then that's short term, and you want a "safe," ie not volatile, investment. In that case it wouldn't be wise to put all your money into some penny-stock you heard the guy with the expensive loafers talking-up at the barber-shop.

So, figure out what you time-horizon is, and the farther away it is the more chances you can take. If the market is efficient (and it is, sort of) it should reward you for taking those risks and provide a higher return.

[Freddy Merckx]

First off thank you guys for your time and input. You have some very valid points. First being why try to gain a 5-9%(maybe) when I'm paying around 6% on my student loans. So I will most likely tackle that debt first.

I am not in any sort of CC debt, and live frugally. Thats why I am able to save a small amount while living in an expensive city. I have an interview next week for a job offer that would double my income, but is contracted and may not offer a 401(k).

ROTH seems to make the most sense to me thus far as a first time investment plan. My current employment does not offer a 401k, and I work as an independent graphic designer for earnings on top of my 32k salary. This is what mostly funds my savings.

As for ROTH IRA's is there an institution that would stand above others that I can look into, or is this dependent on my financial situation?

I believe in speaking with professionals in their fields when it comes to advice, and this is an odd situation because those professionals I speak with are usually looking to make gains themselves off my decisions. If any of you work in finance and would be interested in chatting PM me and I'd be happy to compensate any way I can for your time.

Again thank you all for your input. Game plan at the moment seems most reasonable to:

-Pay off student loan debt
-Research into ROTH IRA's and what institution would best benefit my financial situation

[Louis]

Posting so I can find this thread later-I need to invest before I turn 30

If you have any spare cash available start a Roth RIGHT NOW. Don't wait until you're 30.

I don't know what the minimums are, but look into it at, say, Vanguard (they have low expenses) and if you can, do it, even if it's the minimum.

[Louis]

As for ROTH IRA's is there an institution that would stand above others that I can look into, or is this dependent on my financial situation?

https://investor.vanguard.com/ira/types

(I don't work for them)

You won't have to worry about the income limits, that's way high compared to what you're making right now.

Just be sure you don't put in too much. (probably not a problem for you yet)

[joosttx]

First off thank you guys for your time and input. You have some very valid points. First being why try to gain a 5-9%(maybe) when I'm paying around 6% on my student loans. So I will most likely tackle that debt first.

I am not in any sort of CC debt, and live frugally. Thats why I am able to save a small amount while living in an expensive city. I have an interview next week for a job offer that would double my income, but is contracted and may not offer a 401(k).

ROTH seems to make the most sense to me thus far as a first time investment plan. My current employment does not offer a 401k, and I work as an independent graphic designer for earnings on top of my 32k salary. This is what mostly funds my savings.

As for ROTH IRA's is there an institution that would stand above others that I can look into, or is this dependent on my financial situation?

I believe in speaking with professionals in their fields when it comes to advice, and this is an odd situation because those professionals I speak with are usually looking to make gains themselves off my decisions. If any of you work in finance and would be interested in chatting PM me and I'd be happy to compensate any way I can for your time.

Again thank you all for your input. Game plan at the moment seems most reasonable to:

-Pay off student loan debt
-Research into ROTH IRA's and what institution would best benefit my financial situation


I cannot stress enough before you start putting away money have health insurance. A medical situation without insurance can erase any savings you can every save. It's a very good hedge.

[jtakeda]

If you have any spare cash available start a Roth RIGHT NOW. Don't wait until you're 30.

I don't know what the minimums are, but look into it at, say, Vanguard (they have low expenses) and if you can, do it, even if it's the minimum.

I've got about 5-6k stashed away.

I make about the same as OP, no 401k.

I need to stop buying expensive bikes and tube amps I guess. :p

[likebikes]

download this and read it: http://www.etf.com/docs/IfYouCan.pdf

it's a short ebook and gives reccomendations on other books to read on the subject. you'll have to read carefully and probably reread sections as it is all new info for the novice investor. (no hate, i'm a novice too)

(the quick summary is "spend less than you earn, invest 15% in index funds for 30-40 years, and you won't have a ···· retirement)

[moose8]

Thinking about these things at this stage is an awesome first step. I would only add that you should pay extremely close attention to the fee charged / the fine print in whatever investment vehicle you choose. Fees over time can really eat into returns. And like someone else said, beating the indices is pretty much impossible so some low fee tracking sort of thing might be a good idea. And also like others have said try to figure out what kind of return you can reasonably expect versus paying off debt and see what makes the most sense. I've still got some student loans but I paid off $90k of it and when I did I felt such a profound sense of relief. I never regretted driving an old car and living pretty frugally up until that point.

[Ken Robb]

I am so pleased to see the attitudes about $$$ expressed by our younger members. "The Millionaire Next Door" is a cool book that may reinforce and expand your sensible attitudes.

[Freddy Merckx]

I have good health insurance through work now, and will have decent insurance through that contracted job (if I get it) in the near future. Will read the links provided! thanks

[MattTuck]

Don't have a ton of substance to add to what has already been said.

But here are some of my thoughts.

1.) Low cost ETFs or Mutual funds. 13 Basis Point portfolio. (http://seekingalpha.com/article/56346-the-13-basis-point-portfolio)

2.) Agree with suggestion to read "Random Walk Down Wall Street". I read it undergrad and it is super useful.

3.) Paying off student debt is good, but not THAT good. It is debt that can be put into deferral (payments stop, but interest accrues) in the event of an emergency. I'd rather put your money into savings so you have a cushion in case of emergency.

4.) Similar to above, I'd avoid anything that puts your money somewhere that cannot be touched without penalty. 401k, roth, ira, etc. All of these are great vehicles for saving for retirement, but what you need now is saving a nest egg to have some security, maybe put a security deposit on an apartment/down payment on a car/down payment on a condo. These things become very complicated if you've put your money into accounts that are not really liquid.

[dekindy]

Life insurance is not an investment, that is why they call it insurance. Only reason to purchase life insurance is if you have someone that relies on you financially and would be greatly impacted if you died, AND, you care enough to provide for them. First rule is to get the proper amount for short-term which is term insurance. Determine if you have a long term need and if you can afford to cover it; then consider WL, UL, or VUL insurance.

Then save 6 months take home pay in a liquid investment, one that the principal is stable; I suggest an old-fashioned savings account. Do not worry about the return as that is not the objective. Having an emergency fund is the foundation of any good investment strategy.

Then if this is available to you, invest in a 401k to at least the level to maximize any employer contributions. Invest in a traditional IRA. There are very few that truly understand that Roth IRA's are for the rich. A traditional and Roth IRA are mathematically the same if equal contributions and distributions are made to each at equal tax rates. So who benefits from a Roth IRA. There are 2 categories. Investors that expect to have a higher tax rate in retirement than while they were working; OR have so many non-retirement account investments that they want to avoid minimum distributions and use their tax-preferred accounts as the most efficient investment to get to the next generation. Don't both of those categories sound like rich people!

At your current low income tax rate level it could be argued that a tax-deferred investment might not be as efficient as a non tax-deferred investment.

So avoid permanent life insurance now. You may want to purchase life insurance to protect your insurability in case of a health problem; especially if your family has a history of health problems. Accumulate an emergency fund. If your employer matches a 401 then a traditional 401 is a no-brainer. If your employer does not match, then it is really your personal preference as to either invest in a tax preferred account or non-tax deferred account. I would recommend a well-diversified balanced fund that includes money markets, bonds, and domestic and international equities and has a long history of successful management.

[MattTuck]

To dekindy's point, Roth and IRA are only as good as the tax laws on the books. Congress could easily get into a jam in 20 years and change the laws -- perhaps negating whatever benefits you envision. I think him and I agree on the importance of a liquid account that will not be hit with penalties if you need to tap it.

[Louis]

1.) Low cost ETFs or Mutual funds.

Can someone briefly explain (or provide a link to) the pros and cons of ETFs vs Mutual Funds.

TIA

[Louis]

Congress could easily get into a jam in 20 years and change the laws

I've wondered how likely this might be. I doubt the changes would be applied retroactively. They might say, "OK, the party's over for any future contributions" but it seems unlikely that they would tax previous gains.

Edit: Regarding Roth's being for rich folks, if you look at the income limits, I'd say that's easily middle-class, and not more than that.

[MattTuck]

Just different type of products. ETFs are priced intraday, so you can buy at any moment. Mutual funds are priced at the end of the day.

Generally, mutual funds are more actively managed -- they pay investors to try to pick stocks and beat the market. Vanguard would be an exception to this, though they have mutual funds and ETFs.

There are some tax implications also. ETFs are considered more tax efficient (only an issue if you are holding them in a taxable account)

From fidelity site:
ETFs are more tax efficient compared to traditional mutual funds. Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account.

From the perspective of the Internal Revenue Service, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the ultimate tax bill – after the ETF is sold and capital gains tax is incurred – is less than what the investor would have paid with a similarly structured mutual fund.

In essence, there are – in the parlance of tax professionals – fewer “taxable events” in a conventional ETF structure than in a mutual fund.

more (https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency)

[Louis]

Thanks Matt.

(I bet Matt knows who this guy is)

http://4.bp.blogspot.com/-SwfNmLaRxcM/TdGsIXjNwNI/AAAAAAAABXE/OHEl2uEUK3g/s1600/10K.jpg

[Freddy Merckx]

Life insurance is not an investment, that is why they call it insurance. Only reason to purchase life insurance is if you have someone that relies on you financially and would be greatly impacted if you died, AND, you care enough to provide for them. First rule is to get the proper amount for short-term which is term insurance. Determine if you have a long term need and if you can afford to cover it; then consider WL, UL, or VUL insurance.

Then save 6 months take home pay in a liquid investment, one that the principal is stable; I suggest an old-fashioned savings account. Do not worry about the return as that is not the objective. Having an emergency fund is the foundation of any good investment strategy.

Then if this is available to you, invest in a 401k to at least the level to maximize any employer contributions. Invest in a traditional IRA. There are very few that truly understand that Roth IRA's are for the rich. A traditional and Roth IRA are mathematically the same if equal contributions and distributions are made to each at equal tax rates. So who benefits from a Roth IRA. There are 2 categories. Investors that expect to have a higher tax rate in retirement than while they were working; OR have so many non-retirement account investments that they want to avoid minimum distributions and use their tax-preferred accounts as the most efficient investment to get to the next generation. Don't both of those categories sound like rich people!

At your current low income tax rate level it could be argued that a tax-deferred investment might not be as efficient as a non tax-deferred investment.

So avoid permanent life insurance now. You may want to purchase life insurance to protect your insurability in case of a health problem; especially if your family has a history of health problems. Accumulate an emergency fund. If your employer matches a 401 then a traditional 401 is a no-brainer. If your employer does not match, then it is really your personal preference as to either invest in a tax preferred account or non-tax deferred account. I would recommend a well-diversified balanced fund that includes money markets, bonds, and domestic and international equities and has a long history of successful management.

So if I understand correctly the tax benefits I will gain NOW in a traditional IRA may outweigh the tax benefits when removing my gains from a ROTH IRA?

[MattTuck]

I've wondered how likely this might be. I doubt the changes would be applied retroactively. They might say, "OK, the party's over for any future contributions" but it seems unlikely that they would tax previous gains.

Edit: Regarding Roth's being for rich folks, if you look at the income limits, I'd say that's easily middle-class, and not more than that.

In order of probability (high to low), I'd put these in the following order.

Need money for emergency (Must tap retirement account and pay penalty)
Need money for life event (moving, buy a car, buy a house, etc. - tap retirement, pap penalty)

way way way down.
congress changes laws. (it could happen, they outlawed private ownership of gold in the 30's to keep the treasury solvent. the feds know how much money is in every 401(k) and ira (because of reporting) and I'm sure, if there was a crisis, congress would look at that pool of money as in play.

[Louis]

Clearly the OP should have enough liquid savings to be able to handle emergencies, house down-payments, etc. However, he did say that he was asking about "long term" investments.

A related matter:

NYT story on the marshmallow test (http://nyti.ms/WUREff)

Do you have to have the goodies now, or are you willing to wait a little while and have more in the future?

[MattTuck]

Disregard my earlier post about the 13 basis point portfolio. The author updated it this year, it is now down to 8.6 basis points. Ridiculously cheap.

http://www.etf.com/sections/blog/21559-cheapest-etf-portfolio-now-cheaper.html

[fogrider]

The tax implications come from mutual funds posting profits, which end up as capital gains and you will likely need to pay taxes on. I'm not a fan of ROTH accounts; the pitch is that after you put in the money and the it grows, you will not be taxed when you withdraw the funds. but think about it, when you retire, your income will likely be less than your paycheck. this means your tax bracket will likely be less. the catch is you need to pay taxes on the money when you put the money into the account...so that means you pay upfront. if you put aside 5K, you need to pay about another 1.5K in taxes. not easy with your current income living in sf. if your investments do really well, then it won't be a big deal to pay the taxes when you retire.

if your student loans are 6%, I'm not sure I would pay them off fist. many mutual funds will outperform that. just don't take on credit card debt. if you can get matching money for 401k and put money away that is pre-taxed, you're way ahead of 6%. After you get a few bucks in mutual funds, I would also say put some money into stocks, build it to about 25% of your portfolio. Remember, your retirement is not accessible until you get to retirement age, if you need money for life emergency's, you will need savings. An important part about stocks investment is diversify!

Just different type of products. ETFs are priced intraday, so you can buy at any moment. Mutual funds are priced at the end of the day.

Generally, mutual funds are more actively managed -- they pay investors to try to pick stocks and beat the market. Vanguard would be an exception to this, though they have mutual funds and ETFs.

There are some tax implications also. ETFs are considered more tax efficient (only an issue if you are holding them in a taxable account)

From fidelity site:


more (https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency)

[Louis]

After you get a few bucks in mutual funds, I would also say put some money into stocks

Given that managed funds have such a hard time beating indexed funds, and most little-guy investors are unlikely to be a whole lot better than the pros, I've always wondered how often individual investors beat the total return a low-cost index fund.

[cfox]

Just remember that the shopping coupons of our nations private
central bank, decrease in purchasing power at about 6% per year.

Pay off as much as you can with a cheaper frn.

So you are telling him to pay off his debt as slowly as possible, correct? If money actually loses purchasing power over time , via inflation, it decreases the real value of debt. If you borrow money for ten years at 5%, and inflation is really running at 6% like you believe, then the real interest rate you are paying is -1%. If inflation is really 6%, we should all run out and borrow as much money as we can at any rate lower than 6%, because we'll be getting paid to borrow money.

[saab2000]

if your student loans are 6%, I'm not sure I would pay them off fist. many mutual funds will outperform that. just don't take on credit card debt. if you can get matching money for 401k and put money away that is pre-taxed, you're way ahead of 6%. After you get a few bucks in mutual funds, I would also say put some money into stocks, build it to about 25% of your portfolio. Remember, your retirement is not accessible until you get to retirement age, if you need money for life emergency's, you will need savings. An important part about stocks investment is diversify!

It's worth noting for the OP that most mutual funds are just collections of stocks and by definition, are diversified. Picking stocks is not easy and managing a portfolio of individual stocks could be seen as a bit risky.

I'm no pro, but it seems like getting a stock fund (like a low-cost S&P500 mutual fund) might be a good first step.

[kramnnim]

I've also been wondering about Roths vs traditional...I've been going with traditional, just for the immediate tax savings. Interesting to see the pros/cons.

Are your student loans private, or federal? If federal, is it possible they could be deferred?

One thing about the Roths that might not have been mentioned- you can withdraw your original contributions (that have already been taxed) at any time without penalty.

[CNY rider]

It's worth noting for the OP that most mutual funds are just collections of stocks and by definition, are diversified. Picking stocks is not easy and managing a portfolio of individual stocks could be seen as a bit risky.

I'm no pro, but it seems like getting a stock fund (like a low-cost S&P500 mutual fund) might be a good first step.

If you look at "most" mututal funds they are NOT diversified. They own stocks or bonds or various sectors of the market that are likely to perform in a highly correlated way.

And to the OP: Good advice already given about life insurance. If you have dependents you need to cover, get term life insurance. Other than that avoid even thinking life insurance is an investment.

[biker72]

Roth, Exchange Traded Funds (ETF), and low cost (Vanguard) index funds.

Roth because the capital gain is tax free after 5 years. You must be over 591/2 to withdraw with no penalty. Pre taxed contributions can be withdrawn anytime.

Index ETF's generally have a very low expense ratio.
Vanguard funds in general have a low expense ratio.

[fuzzalow]

From my perspective, in the beginning of your investments lifespan the more prudent approach is to keep it simple. Without over thinking and obsessing over the complex menu of investment vehicles available to you, simply invest small amounts at regular, consistent intervals. Preferably in a low cost index fund purchased direct from the distributor, like Vanguard.

At you current tax bracket & asset base, there is little you should do to minimize taxes. Never take on any form of credit card debt; don't buy what a salesman has to sell and it is OK to run parallel cash flows off of your income stream to simultaneously pay down your student loan and add to your mutual fund(s). "Funds" in the plural as you can invest both for your retirement and as general investment for your asset base that might well be liquidated in the future for use as down payment on a house or apartment (NOT a car!). Do not focus on the amounts of the increments, which at your income will be small especially subdivided into 3 deposits. Focus on the discipline of your approach. The rest you will figure out.

Because the most significant step and understanding of yourself that you have achieved is you have decided to take control of your investment future. Now you get to figure out what is right for you, make a simple plan and stick with it. The plan might become more complex and time sensitive as you progress nearer to retirement. But for now, you are 5x5 in the asset growth & accumulation phase of your trajectory. At your age, time is on your side and even $100 invested now will be significant to your end results.

In paraphrasing Warren Buffet, the investment game is not about smarts, it is about temperament. Best of luck in this lifelong endeavor.

[SlackMan]

I've wondered how likely this might be. I doubt the changes would be applied retroactively. They might say, "OK, the party's over for any future contributions" but it seems unlikely that they would tax previous gains.

Edit: Regarding Roth's being for rich folks, if you look at the income limits, I'd say that's easily middle-class, and not more than that.

I can imagine a scenario in which the government completely offsets any Social Security payments a person would have received against their Roth withdrawals. Technically, that's not a direct tax on Roth income, but it is effectively the exact same thing. Or, I could imagine declaring Roth withdrawals to be tax free, but then tacking on any taxable income above the Roth withdrawals to put the taxable income into a higher tax bracket.

Unfortunately, there is no way to forecast future tax policy with any certainty. Thus, choosing what is optimal now could turn out to be suboptimal later on. And unfortunately, any serious calculations of future government revenues against its promises implies that Congress will have to resort to all manor and kind of tax gimmicks to raise sufficient revenues.

[1centaur]

Plenty of good advice in this thread, so I'll focus mostly on two concepts from the OP before hitting some specifics.

The two concepts are "5-9%" and "safe."

A concept I find that nonprofessionals have a hard time ingraining in their process is that risk and return go hand in hand, but risk does not guarantee return, it just makes it possible.

Investment markets are very good at seeking out returns, so they won't allow "safe" 8% returns in one place and "risky" 6% returns somewhere else. When one arrays prospective returns from top to bottom, they will array in order of prospective consensus risk. So when you hear "5-9%" from somebody in today's world of 2.6% 10-year Treasury yields, you should think about where other categories one might associate with risk are offering returns. For example, junk bond funds are nominally yielding 5-6%. Are junk bond funds risky? I might not think so because I am in those markets every day, but the world thinks so because of the label. So when an insurance salesman say "5-9%" I am betting he is doing what way too many people do - look backwards. Historical category averages are interesting, but they are not a good basis for return expectations over the next decade in any category, and especially not as run by insurance company managers who are unlikely to be best of breed. (BTW, learned early that you should not mix insurance with investing - separate the two products in your mind and buy them separately). 5-9% probably reflects some generic bond/stock mix, I guess with global elements, but that's VERY far from a locked in expectation over the next 10 years. China could easily crash, the EU is in near depression for structural reasons, and if rates rise in the US most bonds will have negative returns as those rates rise.

Which leads to "safe." If risk goes with return, "safe" means low return. Period. Young people have the enormous advantage of time on their side, which is why advisors say to have a lot of stocks, which are inherently riskier than bonds (even junk bonds, BTW). "Safe" is the enemy of long-term wealth building, though stupid risk is as well. But safe is great for short-term wealth preservation, and as noted by others can fit the temperament of certain investors who might panic and sell stocks in a downturn rather than riding through the storm. So when the OP wants to be safe, I urge the OP to think about what that really means and what it would imply over 40 years. If the student loans cost 6%, that's higher than "safe" offers these days so I would pay them off.

ETFs - they should never never be viewed as a category, but as an approach within each sector individually. Low cost S&P 500 ETFs are an excellent choice for people who would otherwise buy generic stock funds or even index funds and are happy investing that way. They have the "safety" of not massively underperforming the stock market and don't cost much to implement. ETFs that invest in HY bonds, or loans, or commodities, or levered directional stock bets are VERY different and can be terrible investments. So don't think "cheap mutual fund" in general about ETFs. ETF managers don't care about what they buy, they just need to assemble characteristics - they might as well be a computer program. I'd rather find smart managers for most of what I buy.

As also noted elsewhere, the habit of saving and investing is what I would encourage most. If you wait to invest until you can afford it you may never get there. If you would be devastated to see your investments drop 20% a year after you start, don't put it in the stock market (even an index or ETF version). But try to get to a place emotionally where down 20% is a "whatever" moment (because you are young and have time), because that attitude is how you'll build wealth in the long run. Look for situations where perceived risk is overblown, especially where others are more worried about the short term than you are. If sellers are panicking, they are are not investing rationally (same as buyers in the Internet bubble), and you can make money by not being those people.

[dgauthier]

Good for you for getting started in your twenties. I did too, and am now in my fifties and (knock on wood) ahead of my retirement projections. I hope I can provide you some useful insights.

I am not a fan of life insurance as an investment. The fees are high and the returns are modest, and the plans are bewilderingly complex, which in my opinion is a purposeful attempt to "razzle-dazzle" you. For investing, simple is good and life insurance investments fail on that front. Use life insurance to provide your dependents with a replacement for your lost income (i.e.: term life insurance) and keep it at that.

Of all the investments I have tried, I regret all of them except two: the simple, low fee, S&P 500 index fund (Vanguard is a great vendor for those), and the similarly simple "targeted retirement fund" which automatically weights risk based on your projected year of retirement. If you are 25, you'll retire in 40 years, so you would look for a fund with 2054 in the name, such as "2054 Targeted Fund". Pick one with low fees.

Keep your investments simple and boring. Start now, keep it up, and you won't regret it.

[fogrider]

Given that managed funds have such a hard time beating indexed funds, and most little-guy investors are unlikely to be a whole lot better than the pros, I've always wondered how often individual investors beat the total return a low-cost index fund.

there are many types of mutual funds, and in general are broken down into small cap, mid cap, large cap. then some are tech funds, international, etc. and yes, that is why you buy into funds they are well managed. But I said to start with funds, then move into stocks and build to about 25%. I do it because its fun!

I live in San Francisco and I pay attention to locate business news and have been pretty good at investing on some local business...I bought a 100 shares of six stocks 15 years ago. two went up and down and has doubled in value, two lost me money and one was Apple. I've also bought some shares of Tesla, Salesforce and most recently Gopro. I've also lost some along the way. Again, it's not a big part of my holdings.

[Freddy Merckx]

One thing that I keep seeing in your posts that I agree with is keeping it as simple as possible. My family raised me on the principle when you owe money (for bills etc.) the money you see in the bank is not yours. I'm in the habit of paying my car insurance 6-months at a time to get rid of those monthly payments. When it comes to CC I use them for EVERY dollar I spend, and I pay them off when they reach roughly 75% of my credit limit, and I have never carried a balance. I hope that can narrow down my personal spending traits.

That being said what seems most attractive at the moment is to use that money in a few areas. How realistic does this sound-

-Spend 1-2k on student loans, all of which are federal (getting that balance down)
-Putting another 1-2k into an ETF or mutual fund that makes sense to me
-Starting an IRA or ROTH, again what makes sense after research and investing another ~1k into that.

That would exhaust my 5k savings at the moment, but I would wait until I have accumulated another 2-3k as a safety net. This is my idea of diversifying my capital, taking a chunk out of my debt, and starting a possibly more profitable investment as well as a long term retirement investment.

Over the few hours course of this thread I have decided to ditch my "bike funds" and dump them into my savings. This will add another chunk of money that will be put into the "Savings" sector, and again I will plan to leave at least 2-3k in that savings at all times while making these decisions over the next year or so.

Sound decent?

[likebikes]

It feels great to pay off all your student loans and get that letter in the mail saying that your loans are paid in full. I still have those letters from all my student loans, ha.

[saab2000]

One thing I read that was really useful was "Pay Yourself First". This was explained by the idea a portion of your paycheck is automatically sent to a retirement account.

At my employer I divert a percentage and I never see that money. I make sure that I put in the minimum required to get maximum matching. Some folks leave money on the table by not putting in enough to get the best match.

After I get my paycheck I have a percentage deducted and it automatically goes to another account for my Roth IRA. Again, I never really see that money.

Of course, there are things like food and bills and mortgage/rent that have to be paid, but after those needs are met, divert a certain percentage to your accounts automatically. If you have to write a check every month you might not always do it. If it's fully automated and you never see the money you're way more likely to be successful.

Earlier I commented that mutual funds diversify your investments and someone answered that they don't always do so because often funds are just from one sector or one type of business. This is true. But there are others that are less focused and have a broader investment spectrum.

The reason I'm a fan of funds (and ETFs) is that there's no transaction cost. Often a broker will charge a transaction cost to buy shares in individual companies but they don't if you add to a mutual fund or ETF. Of course, they charge a fee to have this fund but if you shop around you can find some with expense ratios as low as 0.05%.

Just some more thoughts.

[cnighbor1]

Life insurance is a poor investment. Only term life insurance makes sense when married with children then buy a policy that will cover at least five years living costs for wife and children. reduce amount has your net wealth increases and children out of college
Investments. I prefer investing in systems not individual investment choices.
individual Stocks are hared to buy. for every great stock there is a great loser.
How do you know ahead of time. I seen Microsoft so up to 120's down to 15's and now at 45's
I use Merriman LLC in Seattle. but you need at least $75,000 to start with
No Load mutual funds is the way to go has your investing in many stocks not just one you seem to like at the moment. Let the fund manager pick the stocks you pick the mutual funds You need just a maxium four funds
USA general
USA technical
USA Heath (Biotech best)(IBB)
International general
Do a search for investing in systems and get back to me for my opinion
James Stack in Montana has a great track record
and read this http://www.merriman.com/how-we-invest/

[cnighbor1]

I’m finally making some money…now what?

Posted on 02. May, 2013 by Cheryl Curran in Investing 101


I recently had the pleasure of sitting down with a client’s daughter. She’s in her twenties, just finished up her nursing degree six months ago and is working the night shift at a local hospital. She is living with a couple of roommates and is finally in a position to save some money after being a very broke college student. She now faces the question posed by many young people who are starting their first “real” jobs.

Now what?

Michelle (as we will call her) wanted to know what to do with the money she’s now able to save. She had no idea where to start getting her finances in order. To get her started on the right track, I suggested she focus on a few key areas.

Live within your means

She’s already years ahead of many twenty-somethings in that she is living on less money than she earns. She wasn’t sure how much money she would be able to save on a monthly basis so I suggested she set up a rough budget. I didn’t encourage her to be terribly rigid with the budget but to use it to get a sense of where she is spending her money so she’s aware of her spending habits. This will help her decide what she wants to spend money on and what is less important to her.

Create an emergency fund

While she enjoys her job and has no plans to quit anytime soon, you never know what life will throw your way. So I recommended she save three to six months of income and have it very liquid (money market, for example), which will enable her to have a safety net in place.

Understand your insurance policies

Michelle wasn’t sure exactly what her benefits were at work. She knew she had medical but wasn’t sure of the deductible. She also didn’t know if she had dental or vision coverage. As a young woman in her twenties, the likelihood of an expensive surgery or illness is very low, but injuries can still happen.

She also had no idea whether her employer provided disability insurance. I recommended she read through her employee materials again as things are typically a blur when starting a new job. I also encouraged her to ask the HR department about any questions she may still have after reading the policy information.

I checked to make sure she has car and renter’s insurance and that the policies are up to date. When you’re just getting started financially, you don’t want to find out after an accident that your $10,000 car is only covered up to $5,000, or regret not having renter’s insurance after your upstairs neighbors leaves a faucet on, flooding your apartment and ruining your new laptop, couch and clothing.

Pay off your debt

This is typically the ball and chain around many people’s ankles when they first start their careers. I recommended that Michelle pay off the money she owes by attacking the debt with the highest interest rates first. She has about $10,000 in student loans and another $1,500 in credit card debt. The credit card debt has a much higher interest rate than the student loans, so she’ll pay the minimum on the student loans until she pays off the credit cards. Then she’ll pay down the student loans. A good way for her to keep debt in check moving forward is to use primarily cash for all purchases or to use a credit card and pay it off monthly.

I also recommended she compare her local credit union fees and programs to that of her bank. She’ll likely save money on ATM transactions, credit card interest and loans in the future by using a credit union.

Identify short-term and long-term goals

Michelle’s short-term goals include a trip with college friends to Hawaii later in the year. Her longer-term goals include retirement and buying a house. It was important to identify these goals so she can budget for the trip and start down the road to home ownership and retirement. While retirement is probably 40 to 50 years off for Michelle, she will not have to save nearly as much towards her future as friends who start saving in their thirties. She’s fortunate to have a 401k plan and the hospital provides her with some matching as well. The matching is basically free money to her so she would be wise to take advantage of it. By contributing to her 401k plan, she’ll pay less in taxes and benefit from the employer match, which is a win-win. She may not be able to add as much as she’d like to her retirement plan right now, but she can always increase that after building up her emergency fund and paying off debt.

Get organized

Michelle is well on her way to a successful future just by addressing her finances at such a young age. She’ll have a good handle on her spending habits, her debt level and goals.

My final piece of advice, which Michelle has already followed, is to talk to your parents’ financial advisor. The advisor may not be in a position to take you on as a client, but they should be happy to meet with you and get you headed in the right direction.

[cnighbor1]

http://www.merriman.com/category/psychology-of-investing/

[Cat3roadracer]

Find a beautiful teacher, marry her, and get on her health benefits. You will save a fortune.

[binxnyrwarrsoul]

...

[binxnyrwarrsoul]

...

[saab2000]

This. That zero balance on credit cards is intoxicating.

Seeing your account balance grow every quarter through dividend reinvestment is too! It's very rewarding and the earlier you start, the earlier you finish......

I only wish I had started earlier. The OP is on the right track to address this now, rather than later.

[kramnnim]

Not sure if mentioned, but doing a 401K on your own, as in not through your employer, the money is income already taxed, iirc.

Wouldn't you be able to report the IRA contributions and get a refund? (I'm self employed, so it's different for me)

[shovelhd]

I think you should be praised for simply asking these questions. I didn't read everything in this thread so forgive me if I repeat what others have said. First a recap of your status.

You are making ends meet and making the minimum payments on your student loans. You have no debt outside of that. You have about $5K in savings. You have health insurance with your current employer. You are exploring other employment opportunities that could increase your cash flow, i.e. you aren't joining the Peace Corps.

Paying your student debt is important. The interest compounds. However having cash in the bank is more important. $5K is a good place to start. I would like to see 3-6 months worth of expenses in the bank. If you could get that up to $8K over time that would be good. In the meantime take a look at how much you could afford to pay down your loans. An extra $25-$50/month paid down in principal makes a difference. I would also see if your employer has a matching 401K. If they do, contribute to get the maximum match. It's the only free money left in this world.

As for life insurance, I would not look at it as an investment. It is a benefit that will be paid out to someone who will at a minimum pay for your funeral and other expenses related to your death. If you have no beneficiaries, then it's really just about that. You are young, so term insurance is cheap. You may even be covered by your employer for a base policy. Check that out first. If not, they may offer it. Compare the costs to the market.

There's nothing wrong with credit cards as long as you spend what you can afford. People get in trouble when they live above their means. You don't seem to be that kind of guy. Your student loan payment is helping to build your credit rating, adding a low limit credit card would help some more. Take a look into that.

Good luck.

[Freddy Merckx]

Can't thank you guys enough for the kind words and the input. I feel like I have a much better idea of a game plan, and will be reading those books recommended (ordered on amazon last night).

[saab2000]

Can't thank you guys enough for the kind words and the input. I feel like I have a much better idea of a game plan, and will be reading those books recommended (ordered on amazon last night).

I'm sure there are many books that are good. There are also tons of free articles online and as long as you see who benefits by their publication and can sift through obvious commercialism in them, there's much to be learned.

Much of my own education has been by sifting through and reading free articles online. I have read much simply by clicking the "Finance" link on Yahoo and going to the Personal Finance section. Often I click one further to the Retirement section.

Just look to see who is publishing those articles but there is a lot of good stuff that's free.

[likebikes]

will be reading those books recommended (ordered on amazon last night).

Use the library instead!

Save some dough!

[dekindy]

So if I understand correctly the tax benefits I will gain NOW in a traditional IRA may outweigh the tax benefits when removing my gains from a ROTH IRA?

I am saying that if you contributed the exact same amounts to a traditional IRA and a Roth IRA, your marginal tax rate stays the same, and you withdrew the exact same amounts from both accounts, they are mathematically the same. Both zero out at the exact same time.

So when is one advantageous over another. If your marginal tax rate in retirement when you are making withdrawals is less than the marginal tax rate when you are making contributions while you are working, then the traditional IRA/401k has an advantage. If marginal tax rates in retirement are higher than when you were working, then the Roth IRA has an advantage. Very few retirees have a higher marginal tax rate in retirement than when they were working. If you think federal fiscal deficits and the national debt are going to change that in the future then you might want to consider a Roth. I am a former CPA and CFP, 55 years old, and contributing zero dollars to a Roth IRA. That is my view after running the numbers.

All traditional and Roth comparisons are mostly marketing gimmicks to generate interest in Roth. The comparison show $2,000 being contributed to both accounts. This scenario fails to take into consideration that you have to pay income tax on the Roth IRA contribution making the contribution amount less than $2,000 into the Roth.

If you do not believe me I will understand as CPA's do not believe this and even after presenting Excel spreadsheets and running every possible scenario it was still counter to the belief that they had established without running the numbers, and they would continue to try, unsuccessfully, finding the error in my presentation.

[SlackMan]

I am saying that if you contributed the exact same amounts to a traditional IRA and a Roth IRA, your marginal tax rate stays the same, and you withdrew the exact same amounts from both accounts, they are mathematically the same. Both zero out at the exact same time.

So when is one advantageous over another. If your marginal tax rate in retirement when you are making withdrawals is less than the marginal tax rate when you are making contributions while you are working, then the traditional IRA/401k has an advantage. If marginal tax rates in retirement are higher than when you were working, then the Roth IRA has an advantage. Very few retirees have a higher marginal tax rate in retirement than when they were working. If you think federal fiscal deficits and the national debt are going to change that in the future then you might want to consider a Roth. I am a former CPA and CFP, 55 years old, and contributing zero dollars to a Roth IRA. That is my view after running the numbers.

All traditional and Roth comparisons are mostly marketing gimmicks to generate interest in Roth. The comparison show $2,000 being contributed to both accounts. This scenario fails to take into consideration that you have to pay income tax on the Roth IRA contribution making the contribution amount less than $2,000 into the Roth.

If you do not believe me I will understand as CPA's do not believe this and even after presenting Excel spreadsheets and running every possible scenario it was still counter to the belief that they had established without running the numbers, and they would continue to try, unsuccessfully, finding the error in my presentation.

One can actually prove this algebraically, so there's no question about whether it's true. I'm not surprised that many CPAs do not believe; many of them seem to understand very little about finance despite their CPA certification.

[dekindy]

So if I understand correctly the tax benefits I will gain NOW in a traditional IRA may outweigh the tax benefits when removing my gains from a ROTH IRA?

Yes. I am saying the tax deductible benefits of a traditional IRA, based upon the likelihood of having a higher marginal tax while you are working versus your marginal tax rate in retirement, WILL outweigh the tax benefits of the tax-free income from a Roth IRA when you are making withdrawals in retirement.

If your marginal tax rate while working is the same as the marginal tax rate in retirement, then it is a wash, the traditional and roth IRA's are exactly equal.

If your marginal tax rate while you are working is less than the marginal tax in retirement, then a Roth IRA would be more advantageous.

I guess you could argue that contributing to both a traditional IRA and a Roth could be another form of diversification, that is tax strategy diversification. There were actually CPA's 30 years ago that would not make any contributions to a traditional IRA because they were predicting that federal deficits and debt would be so cumbersome that they were 100% certain that future marginal tax rates would be higher and their current tax benefits from a deduction would less than the tax benefit of future income tax free income. It appears that prediction was 100% wrong. However maybe they were just ahead of their time by a few decades!

[fuzzalow]

^ Thanks dekindy for that post.

This is the unqualified value of this forum to tap into expertise like this. I always give preference to somebody who says they ran the numbers on it - and who actually know what goes into the numbers and what they mean. More signal; less noise. Well alright!

[jtakeda]

Yes. I am saying the tax deductible benefits of a traditional IRA, based upon the likelihood of having a higher marginal tax while you are working versus your marginal tax rate in retirement, WILL outweigh the tax benefits of the tax-free income from a Roth IRA when you are making withdrawals in retirement.

If your marginal tax rate while working is the same as the marginal tax rate in retirement, then it is a wash, the traditional and roth IRA's are exactly equal.

If your marginal tax rate while you are working is less than the marginal tax in retirement, then a Roth IRA would be more advantageous.

I guess you could argue that contributing to both a traditional IRA and a Roth could be another form of diversification, that is tax strategy diversification. There were actually CPA's 30 years ago that would not make any contributions to a traditional IRA because they were predicting that federal deficits and debt would be so cumbersome that they were 100% certain that future marginal tax rates would be higher and their current tax benefits from a deduction would less than the tax benefit of future income tax free income. It appears that prediction was 100% wrong. However maybe they were just ahead of their time by a few decades!

As a young guy, this is why I love this place.

[dekindy]

One can actually prove this algebraically, so there's no question about whether it's true. I'm not surprised that many CPAs do not believe; many of them seem to understand very little about finance despite their CPA certification.

THANK YOU! You are right, it is not a religion that requires belief. I questioned the examples that I was seeing, that is contributing the exact same amounts to both accounts and not taking into consideration that the Roth contribution was taxable, and developed an Excel spreadsheet to test the premise and ran countless scenarios that proved the folly of the examples that I was seeing. It was simple math.

[tumbler]

I have spoken with a life-insurance sales person and they had a pretty appealing plan, but of course I must purchase the life insurance in order to invest.

I can tell you with 99% certainty that this is not a good first investment. Insurance is insurance and is not an efficient vehicle for investing. Almost every one of these investments has a catch, which was likely brushed over in the presentation you received. The usual suspects are high fees (often 3%+ per year... compared to around 0.10% a year if you invest in a low cost index fund) and surrender charges (high penalties if you do not meet all plan requirements for the duration of the plan... like if you decide this is a crappy investment 5 years from now). Most of the benefits you mentioned also exist in the standard 401k and IRA vehicles (taxed once, pass to your family,etc.). Trust me on this one... this is not the way to start your investment portfolio.

PM me if you have specific questions. I work in the financial industry and would be happy to point you in a better direction.

[Ken Robb]

After 36 years as a real estate broker I saw lots of credit situations. It is very important for everyone who may want a mortgage loan sometime to establish credit history as far in advance as possible. The cheapest (free) method is to get a couple of credit cards, never let your balance exceed 30% of your limit and pay the balance every month. This way you will incur no interest charges and there are plenty of cards with no annual fee. The credit agencies also give bonus points for people with a perfect record of paying on long-term loans or leases for things like automobiles but I don't recommend doing that just to boost your credit rating. It incurs interest charges and the long-term debt so incurred will reduce the amount of your available credit you may need to buy a home.

[Ken Robb]

Concerning IRA vs. Roth: At the present time we can convert a standard IRA to a Roth by paying taxes on the amount transferred. This requires one to have the cash to pay the taxes but at least we aren't locked in to a plan that may be less advantageous than we thought it would be due to changed circumstances.

[Freddy Merckx]

Dekindy and Tumbler you guys are awesome. This definitely answered my question. I have started the process of opening an account with Vanguard to start funding an EFT and IRA. So far I went through their recommendation survey based on my risk and amount invested and they spit out what seems like a reasonably diversified EFT.

49% in Vanguard total stock market
21% in International stock
24% in bond market
6% in international bonds

Their entry amount to creating an account with them is $3k. So I'm going to call and see if my 3k has to all go into an EFT or if I can diversify those funds between and EFT and an IRA.
Also I will see what sort of fee's apply and if there are any other charges I am not seeing. But before pulling the trigger on any of these options I'll wait till I have another 1-2K in saving as a safety net, and contact some of you folks for a last round of advice.

Thanks again for your help! and let me know if that EFT diversification looks odd or out of balance. Cheers

[Ken Robb]

Can't you elect to hold almost any type investment of in an IRA account?

[joosttx]

Dekindy and Tumbler you guys are awesome. This definitely answered my question. I have started the process of opening an account with Vanguard to start funding an EFT and IRA. So far I went through their recommendation survey based on my risk and amount invested and they spit out what seems like a reasonably diversified EFT.

49% in Vanguard total stock market
21% in International stock
24% in bond market
6% in international bonds

Their entry amount to creating an account with them is $3k. So I'm going to call and see if my 3k has to all go into an EFT or if I can diversify those funds between and EFT and an IRA.
Also I will see what sort of fee's apply and if there are any other charges I am not seeing. But before pulling the trigger on any of these options I'll wait till I have another 1-2K in saving as a safety net, and contact some of you folks for a last round of advice.

Thanks again for your help! and let me know if that EFT diversification looks odd or out of balance. Cheers

I think you are being way too conservative with 24% in bonds at the age you are. With that said I think there will be a correction that's why I'm sitting on the sidelines (buying on dips) really til 2015. But what do I know...

[joosttx]

The problem I have with the mutual fund recs is that is doesn't teach anyone how to evaluate and buy winning stocks. You can beat the Dow investing with low risk as a individual investor who's has say 3 million max. It's gets tougher when there is more money.

This is your time to learn.

[tumbler]

Dekindy and Tumbler you guys are awesome. This definitely answered my question. I have started the process of opening an account with Vanguard to start funding an EFT and IRA. So far I went through their recommendation survey based on my risk and amount invested and they spit out what seems like a reasonably diversified EFT.

49% in Vanguard total stock market
21% in International stock
24% in bond market
6% in international bonds

Their entry amount to creating an account with them is $3k. So I'm going to call and see if my 3k has to all go into an EFT or if I can diversify those funds between and EFT and an IRA.
Also I will see what sort of fee's apply and if there are any other charges I am not seeing. But before pulling the trigger on any of these options I'll wait till I have another 1-2K in saving as a safety net, and contact some of you folks for a last round of advice.

Thanks again for your help! and let me know if that EFT diversification looks odd or out of balance. Cheers

The portfolio above looks diversified, however at your age, I would scale down the percentage in bonds or even ditch them entirely. The general idea is to weight more heavily towards equities (ie. stocks) in your 20s, early 30s and gradually shift your portfolio towards more conservative investments as you age. This maximizes your potential earnings, allows you time to ride out ups and downs in the stock market, and minimizes downside risk as you near retirement. A good recommendation is to subtract your age from 110 and that is the percentage you should hold in stocks (ie. if you are 25, you should hold 85% of your portfolio in stocks). This is a decent "rule of thumb", but there is no definitive rule for asset allocation.

The reason I say that you might consider ditching bonds entirely for now is that based on your age and investment amount of $2-3k, segregating 15% or ~$375 into bonds vs. stocks is not likely to make a significant difference in reducing risk to your portfolio. My personal opinion is that your 20s are not the time to be risk averse. This doesn't mean that you should go and invest everything in the latest tech stocks, but you can allocate a little more into a diversified index fund that holds a broad range of equities. Historically, these have produced very strong long run returns and outperform the majority of professional stock pickers... not to mention the fees are incredibly low. If it were me, I would do a 75/25% or 80/20% split between domestic and international equities for now. Then in a few years, as your earnings and your portfolio grow, you might consider shifting a little into bonds or other conservative investments. I hope this helps.

[Louis]

The problem I have with the mutual fund recs is that is doesn't teach anyone how to evaluate and buy winning stocks. You can beat the Dow investing with low risk as a individual investor who's has say 3 million max. It's gets tougher when there is more money.

This is your time to learn.

Buying mutual funds now doesn't preclude him from ever buying stocks in the future.

Let him build a relatively simple to implement base now, and in a while when he has more money to "play" with (some predetermined and not large percentage of his portfolio) he can try his hand at becoming the next Warren Buffet.

[slidey]

Echo most of what tumbler suggested about ditching bonds from your present portfolio, while not really screwing yourself over by investing into the latest tech stocks.

OP: You do mean ETF, right? Correcting you now, since using the wrong acronym might allow a wily financial advisor to pull many fast one's on you. And boy are there loads of those around or what! Good luck.

[slidey]

I think you are being way too conservative with 24% in bonds at the age you are. With that said I think there will be a correction that's why I'm sitting on the sidelines (buying on dips) really til 2015. But what do I know...

I'm with you on the likely dip. Market fundamentals don't warrant this surge, in my terribly amateurish view.

[joosttx]

Buying mutual funds now doesn't preclude him from ever buying stocks in the future.

Let him build a relatively simple to implement base now, and in a while when he has more money to "play" with (some predetermined and not large percentage of his portfolio) he can try his hand at becoming the next Warren Buffet.

My point it's never too early to learn. In fact it's the best time to learn because one actually has free time no kids no responsibility really. Better learn now make a few mistakes then at 50.

[saab2000]

Buying mutual funds now doesn't preclude him from ever buying stocks in the future.

Let him build a relatively simple to implement base now, and in a while when he has more money to "play" with (some predetermined and not large percentage of his portfolio) he can try his hand at becoming the next Warren Buffet.

I agree. Baby steps..... I don't hang around with people who have 3 million max. :eek: I don't know anyone who talks in those numbers.

If I had 3 mill I'd quit flying and that's no joke. The average beginning investor in their 20s who has college debts and who is asking these kinds of fundamental questions does not have 3 mill.

[cnighbor1]

In realty has you invest you want the stock market to be lower each time you buy. why because you have a long time frame and you will buy more shares has they drop lower Later in your 60's market will have reversed and you will be rich
If buying individual stock (I prefer no load mutual funds) go with something that has a big potential to it. I.e. apple versus firestone tires How can say firestone stock jump a lot. sell 5,000,000 more tires never will happened over a few years span
But apple, biotech, etc can really jump fast

[1centaur]

Fundamentals are not valuation. If you are buying individual stocks, you can make 40% on "Firestone" or 40% on Apple. Tech and biotech are more likely to lose 100% than Firestone over the intermediate term, though that does not mean Firestone is a better choice.

The bond allocation question is another example of looking back rather than ahead. Bonds (as defined by Vanguard) these days have terrible returns AND will go down in price as rates rise, which they will if the economy is doing well in a way that helps stocks. So all they are today is a hedge against a good economy. If you are optimistic enough to have a lot of stocks, I'd take cash over bonds as a hedge, because at least it won't go down if you are right about your stocks.

[Louis]

Bonds (as defined by Vanguard) these days have terrible returns AND will go down in price as rates rise, which they will if the economy is doing well in a way that helps stocks. So all they are today is a hedge against a good economy. If you are optimistic enough to have a lot of stocks, I'd take cash over bonds as a hedge, because at least it won't go down if you are right about your stocks.

I'm glad I'm apparently not the only one staying away from bonds these days.

[Ralph]

No one really in the investment business can give specific (to you) free advice over the Internet. It could cost them their career.

No one's crystal ball re the near future is very good. Especially about the direction of interest rates. However.....the basic fundamentals of investing do work over long perods.

Retired VP
Major Wall Street Investment Firm

[slidey]

Came across this link (https://finance.yahoo.com/news/401-k-plans-101-guide-123000210.html) about basics of 401 (k) on Y finance. Very simplified, i think.

[Louis]

No one really in the investment business can give specific (to you) free advice over the Internet. It could cost them their career.

There's no need someone "in the business" when he has us willing to provide our opinions. ;)

[MattTuck]

The bond allocation question is another example of looking back rather than ahead. Bonds (as defined by Vanguard) these days have terrible returns AND will go down in price as rates rise, which they will if the economy is doing well in a way that helps stocks. So all they are today is a hedge against a good economy. If you are optimistic enough to have a lot of stocks, I'd take cash over bonds as a hedge, because at least it won't go down if you are right about your stocks.

I'm glad I'm apparently not the only one staying away from bonds these days.

centaur, I'm actually surprised to hear this from you.

The reason to have bonds in a portfolio is because bond returns historically aren't correlated tightly with stocks. Yes, I agree that bonds look overvalued in this current low interest rate environment, but you could make the same argument for stocks.

In a world where you can rebalance your portfolio at low/no cost, I would look at bonds as an essential component of a well diversified portfolio. If you start rebalancing based on your feelings about the bond market (though they might be right), that is preaching a philosophy of market timing/active management.

Again, not saying it is an incorrect investment thesis, just talking about the implications.

[yngpunk]

Dekindy and Tumbler you guys are awesome. This definitely answered my question. I have started the process of opening an account with Vanguard to start funding an EFT and IRA. So far I went through their recommendation survey based on my risk and amount invested and they spit out what seems like a reasonably diversified EFT.

49% in Vanguard total stock market
21% in International stock
24% in bond market
6% in international bonds

Their entry amount to creating an account with them is $3k. So I'm going to call and see if my 3k has to all go into an EFT or if I can diversify those funds between and EFT and an IRA.
Also I will see what sort of fee's apply and if there are any other charges I am not seeing. But before pulling the trigger on any of these options I'll wait till I have another 1-2K in saving as a safety net, and contact some of you folks for a last round of advice.

Thanks again for your help! and let me know if that EFT diversification looks odd or out of balance. Cheers

Based on their asset allocation recommendation, let me guess that you put in a high to very high risk tolerance given the almost 30% in international equities and bonds. Given the state of the world and its economies, be prepared for some volatility.

Another option to think about is to further split up the 50% of total stock market into some sub sectors...small-mid cap, large cap, value vs. growth, etc.

In the end, you pays your money, you takes your choice.

Good luck

[1centaur]

centaur, I'm actually surprised to hear this from you.

The reason to have bonds in a portfolio is because bond returns historically aren't correlated tightly with stocks. Yes, I agree that bonds look overvalued in this current low interest rate environment, but you could make the same argument for stocks.

In a world where you can rebalance your portfolio at low/no cost, I would look at bonds as an essential component of a well diversified portfolio. If you start rebalancing based on your feelings about the bond market (though they might be right), that is preaching a philosophy of market timing/active management.

Again, not saying it is an incorrect investment thesis, just talking about the implications.

Exactly..."bond returns HISTORICALLY." One of the things that bothers me about asset allocation choices is that they so often implicitly project the past into the future regardless of the facts at hand. "Stocks return 11%" would be the asset allocator's answer whether at the top of the Internet bubble or the depths of the global financial crisis. It is important not to confuse trepidation about "market timing," a truism that is dubious at various times, with the bald-faced arithmetic at hand. Bonds built their reputation as diversifiers and income producers over many, many years of varied circumstances, not all of which justified holding them. Bonds are also, unlike stocks, driven by bond math, not just earnings and emotion. So if the bond math is utterly unforgiving today, don't ignore it in favor of the magic of the last 50 years. The next 5 years are not going to be magic in that the world we hope for and the Fed is fighting to achieve is unfriendly to bonds. There will be (I hope) plenty of chances to make bonds part of a "normal" asset allocation scheme for the long term, for exactly the reasons you suggest, but this is not one of them. The reasons? Bond math, how little you are giving up vs. cash (also non-correlated with stocks, notably), and the rest of the asset allocation scheme we have been given.

A mostly equities bet (fine for a young person) is a bullish bet. It is not attempting to market time, and for equities I have some sympathy with that view. It's easy to be scared out of stocks but there's a reason they outperform over long periods where capitalism can flourish. If you are going to make an overwhelmingly bullish bet, what does your bond position represent? If the bullish bet really pays off in the next 5 years, the bonds will get killed. If the bullish bet gets killed, bonds will do very well but the portfolio will still be down. If we're somewhere in between, which is probably most likely, stocks will do OK, bonds will be down some, and cash will be neutral. I'd pick cash over bonds for those scenarios, and look to up my bond position when the Fed is not manipulating rates to levels far below their natural level. The odds of a money-losing few years in bonds are so high that I would not want to start my asset building years taking that bet since I would not be desperate for income at a young age. A lifetime's investment returns would be helped significantly by not having a very foreseeable bond decline early in the IRR stream. I'd rather have junk bonds at this point in the cycle. I might rather have high dividend stocks than investment grade bonds too. There are various ways to reduce correlation that don't involve taking a seriously negatively skewed allocation because as a category it looks good over a past that does not look like the future. Plenty of time to adjust the asset allocation, many times, over an investment lifetime.

Of course, if the choice is to be paralyzed by fear or just go with standardized asset allocation advice and invest I'd pick option B because investing is smarter than not and the stock payoff should exceed the bond losses in a recovering world. I am just talking arithmetic, consistency of thought, and forward rather than backward looking ways to think about asset allocation.

[jlwdm]

Freddy, it is great to see your desire to invest at a young age. Don't worry about finding the perfect way to invest, as there is no perfect way. Invest a little, pay of your loans and keep learning more about investing. Find what works best for you. My wife has had incredible success investing in companies that she believes in.

Don't be too frugal though. You need to enjoy life and do things that you enjoy - just find a balance. I do not understand the people that save every penny and retire rich, but miss out on a lot of life.

Some of your expenses are driven by what work you do. I drive clients around so a good car is important to me.

I am not a great example of saving for retirement as twice I left jobs and cashed in vested retirement dollars to start new careers in new states. I am sure I could have made it without spending my retirement dollars.

I am a big believer in taking work risks though. I find tremendous personal growth in doing new thinks. I don't like it when I get stale. These risks can bring great rewards and help you retire early.

Working for yourself can be very rewarding if you are ready to work hard and have the finances to develop your business. Even though I had many good earning years I was not financially in a position to retire. So 3 1/2 years ago I went to work totally on my own and worked from morning to late night. My life balance was terrible, but I saved enough money in that time to never work again. Personally, I will have a hard time retiring completely.

So start your investing young, but realize your retirement funds can be increased substantially by making more money and not just by investing.

Jeff

[Ken Robb]

I am a graduate of The Business School at Northwestern U. I learned enough to know that I don't know enough to "time the market" nor do I have the insider info to hit consistent "home runs" in IPOs and other exotic investments.
I have been pretty sure that net cash flow and consistent dividend payments and growth are hard to fake so my portfolio has been short on stocks billed as "hot growth" and long on good dividend payers. I like them better than bonds.

The thing I realized when I reached a certain maturity (mid 30's I think) was that I was more fearful of being broke than driven to be very rich. Now starting when I was 29 I was a real estate broker on straight commission with plenty of fixed overhead and no guarantied income so that may have also pushed me to a very conservative attitude about investments. I never knew when a "bad year" might come along. How about 1981 when interest rates for home loans hit 18%? That was a tough time to put deals together and I was happy to have liquid investments.

Anyway, I saw the real estate market was going to go in the dumper 7 years ago so I retired and I have never regretted that decision. :banana:

[Steelman]

After the tremendous run that bonds have had, and with the possibility that yields will eventually begin to return closer to an historical mean, I wouldn't invest there now.

Here is Warren Buffet's recent advice:


My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers

http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13

[tumbler]

Here is Warren Buffet's recent advice:

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers

http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13

For someone young and someone who doesn't (naively) expect that they can consistently outperform the market, this is a decent strategy that is backed by a lot of academic research. Another good quote from his letter:

"Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."

[Matsumae]

Don't be too frugal though. You need to enjoy life and do things that you enjoy - just find a balance. I do not understand the people that save every penny and retire rich, but miss out on a lot of life.


This is the balance me and the girlfriend are finding really hard to find. We really like taking short vacations, and as we're starting to earn more are definitely interested in taking more exotic vacations and seeing the world, hopefully not at the expense of our retirement later in life though.

Very hard to see the big picture sometimes :/