Newbie - How to start investing

[userind]

I have set aside a decent 3 month worth of money as emergency fund till date. I am now wondering if I could start investing (stocks, MF, bonds), Any help/suggestion is welcome.

Thanks,

[jIM_Ohio]

T Rowe Price or Vanguard might be a good place to start.

[userind]

Considering the current market situation, any specific products/services from T Rowe Price or Vanguard.

[jIM_Ohio]

Equity mutual funds are what I invest in. But I know how much risk I want to take, I understand the various risks and forces at play and accept my allocation will solve those risks for me.

Your risks will be different. They might be similar, but everyone is different.

Your first post was generic, so you need to be specific about what you want before you can get specific ideas, suggestions, or advice on what options might work for you.

General problems get general answers.
Specific problems get specific solutions.

[userind]

I have my emergency fund at an account which pays 3.75% APY. I am looking for products/services which may pay a similar % with-in a short term (6 - 8 months). Since its my very first step in this direction, I am not looking for riskier options.

[jIM_Ohio]

I have my emergency fund at an account which pays 3.75% APY. I am looking for products/services which may pay a similar % with-in a short term (6 - 8 months). Since its my very first step in this direction, I am not looking for riskier options.

I do not understand your investing problem.

age?
amount of risk?
amount of return desired?
how long will $$ be invested?
why are you investing?

[userind]

age - 25
amount of risk - less risk
amount of return desired - atleast 8% return
how long will $$ be invested - 8-12 months
why are you investing - to multiply money

[jIM_Ohio]

age - 25
amount of risk - less risk
amount of return desired - atleast 8% return
how long will $$ be invested - 8-12 months
why are you investing - to multiply money

What you want at the risk level defined does not exist. Less risk- the best return I can find is probably close to 4% and would be a CD. Minimum $5000.

8% return would require significant risk to principal, especially over such a short time period. To get 8% you either need to change the time horizon to 7-10 years, or change the risk profile to moderate/aggressive.

[userind]

What would be my best options if my risk profile is moderate, time horizon is 2-5 yrs and % return around 5%-6%

[jIM_Ohio]

Returns around 5-6% can be achieved in bonds over medium term time horizons (3-14 years). Some of this would be taken away in taxes (if you made $1000 in interest, the goverment will collect between $150 and $350 depending on tax bracket- and your state will take more too-if you have a state tax).

If you go balanced (50% equities and 50% bonds) you still have the tax issues above, but you open up for a possible 7-8% return before taxes and 6% return after taxes. The shorter the time period, the more risky this is. If you have only two years you have significant risk to get 6%. If you have 14 years, the risk for 6% goes to close to zero.

If you invests 20k and the investment went to 10k in 3 months what would you do? If it went to 5k in another 3 months what would you do?

If you do 50-50, it is very possible the 50% equity (10k) drops to 5k in 3 months. It is possible it also grows to 15k in 3 months. If you cannot take that risk, do not do the 50-50 plan. Maybe 20-80 or some other weighting where you are comfortable with the risks you are taking.

You have not specified what this money is being invested for- the more vague you are, the tougher it is to make a recomendation. Do you have a specific need for the money you are investing? How did the time horizon change from 8 months to 5 years between posts?

You need to disclose more specific information.

New house?
College?
Wedding?
Retirement?

Is the money you have now enough to fund the goal you have? Getting max return is not the goal- the goal is getting the best risk adjusted returns.

I know I can get 5% in a bank CD over next 5 years.
I think I can get 9% in market over the next 5 years for retirement 18 years away. I am taking significant risk for the extra 4%. I don't plan on retiring in 5 years, so I choose to take significant risk to get the extra 4% return.

In your case you are looking for a 6% return and want money in 6 months-5 years (which is it- that is quite a difference in time horizon). I know CDs could get between 4-5%, so you need to define how much risk is worth that extra 1%. To me it is not worth seeing a 75% loss of investment to get 1% more out of my returns, but it is worth seeing 75% loss to get the other 4% because my time horizon is much longer (if I lose 75% I will still invest as aggressively as I am now).

[MYOM]

There are two ways to start investing. One way is to learn by losing your money; the other is to start with a sound financial education. The less expensive way is with a good financial education.

Dan Clemons

[Russell]

Dan, with all due respect, and I really mean that too, I haven't seen you suggest anything concrete to the author of this post or the other post I was reading earlier. I've only seen you say a few cryptic words about exit strategy but not what it means, should be etc.

Yes I understand and agree that good financial education is the way to go...so let's hear it, let's teach and learn.

[userind]

Returns around 5-6% can be achieved in bonds over medium term time horizons (3-14 years). Some of this would be taken away in taxes (if you made $1000 in interest, the goverment will collect between $150 and $350 depending on tax bracket- and your state will take more too-if you have a state tax).

If you go balanced (50% equities and 50% bonds) you still have the tax issues above, but you open up for a possible 7-8% return before taxes and 6% return after taxes. The shorter the time period, the more risky this is. If you have only two years you have significant risk to get 6%. If you have 14 years, the risk for 6% goes to close to zero.

If you invests 20k and the investment went to 10k in 3 months what would you do? If it went to 5k in another 3 months what would you do?

If you do 50-50, it is very possible the 50% equity (10k) drops to 5k in 3 months. It is possible it also grows to 15k in 3 months. If you cannot take that risk, do not do the 50-50 plan. Maybe 20-80 or some other weighting where you are comfortable with the risks you are taking.

You have not specified what this money is being invested for- the more vague you are, the tougher it is to make a recomendation. Do you have a specific need for the money you are investing? How did the time horizon change from 8 months to 5 years between posts?

You need to disclose more specific information.

New house?
College?
Wedding?
Retirement?

Is the money you have now enough to fund the goal you have? Getting max return is not the goal- the goal is getting the best risk adjusted returns.

I know I can get 5% in a bank CD over next 5 years.
I think I can get 9% in market over the next 5 years for retirement 18 years away. I am taking significant risk for the extra 4%. I don't plan on retiring in 5 years, so I choose to take significant risk to get the extra 4% return.

In your case you are looking for a 6% return and want money in 6 months-5 years (which is it- that is quite a difference in time horizon). I know CDs could get between 4-5%, so you need to define how much risk is worth that extra 1%. To me it is not worth seeing a 75% loss of investment to get 1% more out of my returns, but it is worth seeing 75% loss to get the other 4% because my time horizon is much longer (if I lose 75% I will still invest as aggressively as I am now).

I had to change my time horizon to 5 yrs after I knew that I could not make any significant money in 8 months considering the risk factor.

more specific information-
New house - yes
College - no
Wedding - no
Retirement - yes

I don't have the enough money to fund my goal(s) right now. I'm planning to workout things toward the goal(s) from this post.

[jIM_Ohio]

I had to change my time horizon to 5 yrs after I knew that I could not make any significant money in 8 months considering the risk factor.

more specific information-
New house - yes
College - no
Wedding - no
Retirement - yes

I don't have the enough money to fund my goal(s) right now. I'm planning to workout things toward the goal(s) from this post.

Your last sentence spoke more of the issues you are dealing with than all of your previous posts combined.

You need a financial plan which includes a budget, a savings plan, an overall philosophy, and then from there one part of the overall financial plan would be saving for the two things you want the most (a house and retirement).

For example, my first advice to you is know your gross income. If I suggested to you you need to put 20% of your GROSS income to the goals you stated (house and retirement) I would then follow that up with do you consider 20% of your income to be a lot of money? That would be enough to fund both goals.

It is important to handle issues like this from top down. Budget, save 20% as part of the budget and work from there.

Because if I only answered the first question (house and retirement) they really have two different investing strategies.

Retirement savings needs to be invested for growth. Growth on two levels- if you are 20 or 30 years old, the money needs to grow until you retire around 65 years old. This is a 30-40 year time horizon. In addition the money needs to grow from age 65 to when you die or run out of money. Maybe age 90? So add another 25 years of growth.

If money needs to last 65 years, I would suggest you could accept significantly more risk than you indicated (if account drops 30% now for hopes of 40% gain in two years, does that change a retirement plan 40 years away?).

The house falls on the other side of the risk spectrum. This is a very specific goal (purchase a house) and you can probably put both a time on it (2-5 years) and a price on it.

My advice is always fund the longest term goal first (retirement) then fund short and mid term goals based on priority.

Put 15% of gross pay towards retirement. If you make 10k per year, this is $1500. If you make 100k per year this is $15000. Use 401k or other methods to do this before taxes are taken out and the bite you will feel in your paycheck will not be that bad (you can find 401k and paycheck calculators all over the web). In general I can raise my 401k by 1% per year and get no raises and my take home pay barely changes. For example if you made 100k, you might be paying around $6200 in FICA, another $21k in federal taxes (assuming single-married would be less) for a net take home of $72,800. If you put 15k into 401k, FICA went down to 5270, federal tax went down to 17k (net of $62,730). Investing 15k only reduced take home pay by 12k is the point.

Put 5% of gross pay towards short and mid term goals of choice. This will be $500 if you make 10k per year and $5000 if you make 100k per year.

How you invest each of above will be different. My comment would be this- if you put the 5% portion in cash (very conservative investments) earning around 3%, you can probably invest the 15% portion with more risk because you have cash on hand for when things go wrong.

Does this help?

[userind]

It was really worth reading your suggestions.
Sure, It will help me towards reaching my goals.

Thanks a lot!!