Some quality advice, PLEASE!

[UCFKnight85]

I'm 25 years old, have a good job with a good salary, am DEBT FREE, have no wife or kids, and am currently renting an apartment. I'm honestly in no rush to buy a house until I'm married as my job may or may not be moving me in the near future.

I have roughly $40,000 that I'm looking to make moves with and another $16,000 that is sitting in a poorly performing BOA CD.

My problem is that I'm having trouble finding a portoflio that makes sense, is diverse, and combines acceptable risk with conservative savings. I'm looking for some qualified opinions of what type of mix would be best- i.e. an online bank CD? Money market? Mutual funds vs. stocks vs. bonds?

Any advice is appreciated......I'm having trouble moving forward on this.

[ktmarvels]

What are you planning on doing with this money? Is it for retirement, savings for the eventual down payment, for a trip, an emergency fund? Each of these would probably have a different answer. Your emergency fund should probably be in a high interest savings account or CD. Retirement though could afford to be more risky and in mutual funds/stocks.

[Beppington]

I'm 25 years old, have a good job with a good salary, am DEBT FREE, have no wife or kids, and am currently renting an apartment. I'm honestly in no rush to buy a house until I'm married as my job may or may not be moving me in the near future.

I have roughly $40,000 that I'm looking to make moves with and another $16,000 that is sitting in a poorly performing BOA CD.

My problem is that I'm having trouble finding a portoflio that makes sense, is diverse, and combines acceptable risk with conservative savings. I'm looking for some qualified opinions of what type of mix would be best- i.e. an online bank CD? Money market? Mutual funds vs. stocks vs. bonds?

Any advice is appreciated......I'm having trouble moving forward on this.

First, don't be in too big a hurry to make any move; Earning a little in BOA is better than losing a lot by making a quick, bad move. Read & learn enough first until you feel knowledgeable & confident in what you should do.

That said, modern financial advice says most portfolios should be diversified by having a combination of cash, bonds and stocks, & the amounts of each varies depending on your age and your situation. Having some in each of those three asset classes gives you great diversification; i.e. If one's failing, the others might be rising; i.e. You're not putting all your eggs in one basket, which could drop & break all your eggs!

For a young person like you with a lot of working years ahead & willing to handle a little risk, you might have 80-90% in stocks, 5-10% bonds & 5-10% cash. A more conservative portfolio

The definitions, to me:

Cash = Cash, savings account, checking account and/ or money market. You can have some in each if you want.

Bonds = Bond index mutual funds, such as Vanguard's fund symbol VBISX

Stocks = Stock index mutual funds, such as Vanguard's fund symbol VFINX

[Beppington]

Yes, time frame should also be considered; If you need the money say next week, it wouldn't be smart to put any $ into stocks.

[UCFKnight85]

What are you planning on doing with this money? Is it for retirement, savings for the eventual down payment, for a trip, an emergency fund? Each of these would probably have a different answer. Your emergency fund should probably be in a high interest savings account or CD. Retirement though could afford to be more risky and in mutual funds/stocks.

Retirement is a "Yes". I'm already funding my company 401K at 8% and I have a Roth IRA that I currently have funded at roughly $2,200 on the year.

Yes on the emergency fund. I want a pot of money, put away, that is going to collect interest but isn't locked away to the point that it's not liquid. Given I'm in no financial danger right now, figured a 24 month CD might work?

Investing for a house. The timeframe is a little "ways away" on this, so I'd rather seek a moderately agressive investment vehicle to earn money towards buying a house. I think a historically well performing mutual fund may be appropriate?

I'm not really seeking single stock trading.

I'm also not well versed in the bond world, so some help there would be appreciated.

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[jefffou]

Investing for a house. The timeframe is a little "ways away" on this, so I'd rather seek a moderately agressive investment vehicle to earn money towards buying a house. I think a historically well performing mutual fund may be appropriate?

Determining an appropriate investment to satisfy this goal will be dependent on what you mean by a "ways away." Generally, the further away the goal, the more risk you could/should take.

But, whether 5 years or 15 years, your question on bonds is pertinent here.

During the crash of 2008, bonds, that is corporate bonds, correlated with stocks and crashed in almost perfect unison. Solvency was questioned across the board, from large companies to small. And rightly so.

Historically, it may be true that when investors sell stocks and buy debt there is an inverse relationship between the asset prices of the two. Supply and demand. However, when the ongoing concern of the business is in doubt, both their equity prices (stock) and their debt values (bonds) began to fall at the same time. And this makes sense. If I believe a company is not going to be around this time next year, would I want to own either? Not me.

So, yes corporate bonds generally offer some diversification. However, when it's really needed, it's nowhere to be found. And honestly, what is diversification for if it's not for events like the tech crash of 2001 and 2002, or the crash of 2008 and the spring of last year?

To attempt to mitigate this problem, look outside of corporate bonds. Instead look to government bonds. No, they don't have the returns of corporate bonds historically. But what they have offered is much more valuable. Diversification, not dilution. This has been born out over the most recent decade.

As an illustration, let's say you had bought only two funds on January 1, 2000. First, with 50% of your cash you bought a Vanguard Long-Term Treasury Bond Fund. With the other half, you bought a Vanguard Mid-Cap Index Fund.

From 2000-2009, as the most brutal decade in the history of America (not 10-year stretch, but decade e.g. 30's, 40's etc.) you would have returned an annual compound growth rate of 8.06% with the only down year being 2008 at -9.65%.

Not too shabby for a couple of old index funds, bought in their proper amounts.

Jeff

[Beppington]

During the crash of 2008, bonds, that is corporate bonds, correlated with stocks and crashed in almost perfect unison. Solvency was questioned across the board, from large companies to small. And rightly so.

The only "bonds" I invest in are in the form of shares of Vanguard's Short-Term Bond Index Fund (fund symbol VBISX). It did not correlate with stocks really at all: Click here for a chart of the Dow vs VBISX from May 29, '08 to Jan 28, '10.

(If the chart doesn't show you the correct date range, just change it at the bottom right)

[Beppington]

FYI ... My parents' Vanguard-index-funds-only portfolio, which uses only VBISX for bonds, is up 1.11% from Feb 21, '07 until yesterday, whereas the Dow is down 20.02% over that same period.

[rjames]

Try finding a CD at another bank that pays better than what BofA offers. The big banks often don't pay much. Try a local community bank or a credit union.

[snafu]

No one cares about your money as much as you do! Perhaps you will read something like Coach Potato or Investing for Dummies; easy reads for someone like yourself who is smart enough to manage their money.

I hope you will look at Continuing Ed. courses @ a nearby college to help you to understand how to chose investments to grow your money.

[jIM_Ohio]

Retirement is a "Yes". I'm already funding my company 401K at 8% and I have a Roth IRA that I currently have funded at roughly $2,200 on the year.

Yes on the emergency fund. I want a pot of money, put away, that is going to collect interest but isn't locked away to the point that it's not liquid. Given I'm in no financial danger right now, figured a 24 month CD might work?

Investing for a house. The timeframe is a little "ways away" on this, so I'd rather seek a moderately agressive investment vehicle to earn money towards buying a house. I think a historically well performing mutual fund may be appropriate?

I'm not really seeking single stock trading.

I'm also not well versed in the bond world, so some help there would be appreciated.

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Welcome
read these 2 threads and help us figure out your current state of affairs. Post questions here

http://www.savingadvice.com/forums/investing-banking/50669-questionaire-people-starting-retirement-planning.html

http://www.savingadvice.com/forums/investing-banking/50734-investment-risk-questionaire.html

Based on the posts thus far, here are my comments

1) I think your retirement savings needs to be higher. Guessing you are contributing about 10% of your gross income to Roth+401k. Try getting that number to 15% within 2 years.

2) Risk is relative to a person and situation. You are asking the right questions, you need to do some reading and take some online questionnaires (web sites like Fidelity, T Rowe Price and Vanguard all have risk assessment questionnaires similar to one I linked to).

Here would be some common risk profiles

Retirement porfolio- 100% stocks, 80% stocks/20% bonds and cash, 60% stocks/40% bonds and cash.

Each of those has an expected return with an expected volatility. Volatility is one way to measure risk of an investment. Because retirement is 20-30 year planning, time mitigates some of the market risks and other risks (the risks go away with time is what history shows). And because retirement is a gray area, if you plan to retire at 62, then have to wait until 65 (3 more years) that is not a terrible consequence to missing a calculation or taking on a too much risk.

For a house, my suggestion is no more than 5% equities for every year out on the purchase, and no more than 10% bonds for every year out on the purchase. Balance in cash based investments like CDs and money markets.

Meaning if you want to buy in 10 years, no more than 50% equities and 100% bonds would be OK. At year 5, you want no more than 25% equities and no more than 50% bonds (meaning start to move money to cash)
at year 1 you want no more than 5% equities and no more than 10% bonds (85% of money you need within 1 year needs to be cash).

I am sure there are more details on shifting assets from equities to bonds and from bonds to cash, my thought is when you have a specific timetable on something... "I want a house in 7 years" or "I want a car in 4 years" or "My kid is going to college in 6 years", you should not RISK the money to chase return with a specific timetable... could you imagine telling a kid, wait 6 years for college because the investments tanked? The timetable on college is finite, so take little risk with the money if the timetable is very specific. And because the time periods are so short, the power of compounding will have less impact on total amount available.

If you set aside 40k for a house over a 5 year period, the difference between a 3% interest rate and 7% return in a mutual fund is minimal.

3% gives you $43,747
7% gives you $49,226

is that $49k going to get you a better house than 43k? Might be one upgrade in kitchen or bathroom. Maybe... so difference over a short time period is little even though return of one investment is much more than the other...

the downside... to get 7% return, you will need to take on much more risk to principal, and its possible the 49k you project is actually 39k or 29k because market can take away over 5 years as much as it gives you (if 2008 and 2009 are any indication, I would not want savings for a house in stocks for a 2011 purchase for example).


If you want moderate risk, there is an asset class of moderate risk mutual funds. I own one called PRPFX. If you were saving for something with a 10 year timeframe, it is a fund worth considering in a taxable account.