Investment Question, newbie

[KevinNJ25]

Hello to all,

Short and sweet, I'm looking for some investment advice and help as I am very new to it and believe its time I begin to understand the complexity of it. Although those in the field say its simple, to the average Joe it seems quite complicated.

A bit about myself: I'm 25 years old making 60,000 base salary a year carrying no debt (Full ride undergraduate and Graduate). I'm contributing 25% to my company sponsored 401K in which they match 7%. I've been living with my girlfriend for a few months in our own apartment and getting by fairly well with paying rent, bills, groceries, etc, etc. Within my short professional career, I've managed to save nearly 20,000 which I have sitting a standard savings account I set up when I was a student. A good friend of mine was recently talking to me about my money situation since we have fairly parallel careers and he had mentioned he's been investing into his roth ira for about 3 years which opened up a long conversation.

He proceeded to mention he only keeps 5 months worth of living expenses in his account and has been investing the rest. I'd like to begin to get involved in investing and have done some preliminary research but just get overwhelmed by all the financial institutions I see, the type of investment funds, and different rates.

All I really want to know is where to begin with an investment strategy. I don't foresee a house or marriage in the foreseeable future and believe I have enough money saved to begin investing.

Any and all advise is greatly appreciated.

Kevin

[snafu]

I don't think you need to jump in with everything. Consider your goals; think about your risk tolerance level, you need to be able to sleep at night. My suggestion is to open an account with a low Management Expense Ration [MER] Index Fund [like Vanguard] that is bought monthly as Dollar cost Averaging [DCA] After an initial sum to open, a specific sum [$1,000.] is automatically sent the 30th of each month increasing number of units whose cost varies depending on the economy.

Index shares are easily sold to buy another Mutual Fund or specific stock, bond or convert to cash once you gain knowledge and feel more comfortable. Understand risk, stocks can go up, come down on emotion or a news item across the globe.

[MonkeyMama]

Consider maxing out retirement accounts for tax efficiency. $17,000 per year to 401k and $5k annually to ROTH. I realize this is an absurd percentage of your income (36%?), BUT you have no other shorter-range financial goals, and I also expect your income will increase over the years. Retirement is maxed and has a good start. Future income increases can be diverted elsewhere. (Or you can always back off the 36% contributions if a more pressing goal comes up down the road). ROTHs are infinitely easier to tap for non-retirement, so it is not so much "locked up until traditional retirement age" like a 401k is.

I would start at Vanguard - low cost index funds.

Check out their life cycle funds:

https://personal.vanguard.com/us/funds/byobjective/detail?category=LifeCycle

It's just hard to go wrong as a beginner with these "all in one" funds. You may need $3000 to open a ROTH or mutual fund, but from there just contribute a set amount every month. If I were you I would open a ROTH ASAP. Just go online at Vanguard.com to get set up - you can transact everything online. Once you have $5,000 for 2012 ROTH, you will want to consider opening a taxable account for additional investing.

I also believe these all-in-one funds are good for small sums. More diversifying. Over time you will build up more funds and may consider doing your own diversification over several funds. As your money grows, you will have more time to learn about investing and make more informed decisions about where to invest and how to invest.

[thesmartnickel]

I would echo what other people have said but look at a few different brokers. Vanguard funds are great but make sure they are what you are looking for. If you are just starting out, you may just want to look at how much you want your overall allocation to be in stocks, bonds, and cash and just buy ETFs that cover the entire stock market or a majority of safe bonds. For stocks, you could also just invest in the S&P 500. Retirement funds are another thing you should look closely into.

Just make sure you are diversified, meaning you don't have an overly large part of your money in a single stock, a single sector/industry, a single asset class.

Also definitely open a ROTH. Especially since tax increases are likely to happen in the future, a ROTH will save you tons.

[KevinNJ25]

Thank you for the excellent guidance. I'm going to sit down with my father's CFP this weekend to discuss the ROTH route.

Kevin

[BuckyBadger]

Thank you for the excellent guidance. I'm going to sit down with my father's CFP this weekend to discuss the ROTH route.

Kevin

That's great, but don't meet with him if he wants to charge you a fee. Setting up a ROTH is dead simple and you shouldn't have to pay anyone any money to get it done.

It's too bad you didn't post this even a few days ago. If it was before the 2011 tax due date you could have put in $5k for 2011 as well as $5k for 2012...

[green_goblin12]

Don't do it! Yes, open up a Roth, but don't talk to a "financial planner" about doing it. They will likely put you in an account with loaded funds and high expense mutual funds. Do a little research if you don't understand what these are or the impact they have. Never trust a financial planner, advisor, etc. As someone noted already, opening a Roth is easy and takes 10 minutes. Use a lifecycle fund if you don't know for sure what to invest in. Keep in simple!

[jpg7n16]

Don't do it! Yes, open up a Roth, but don't talk to a "financial planner" about doing it. They will likely put you in an account with loaded funds and high expense mutual funds. Do a little research if you don't understand what these are or the impact they have. Never trust a financial planner, advisor, etc. As someone noted already, opening a Roth is easy and takes 10 minutes. Use a lifecycle fund if you don't know for sure what to invest in. Keep in simple!

Spoken like someone who has no idea what advisors do for a living. Has probably just read about them online, or heard horror stories.

Goblin, have you ever actually worked with an advisor?

The CFP may be able to discuss savings strategies that could save you thousands in taxes long term. As well as cover your insurance situation, retirement benefits, estate planning measures, etc.

A little bit of planning goes a long way.


P.S. I'm an advisor. If his father was my client, I'd set up the Roth at no charge and probably use a target date fund until its large enough to personalize. And no those don't have large loads. I'd hope you guys trust me here. I know not everyone agrees with me, but we're not the terrible evil people this post portrays.

[kv968]

Spoken like someone who has no idea what advisors do for a living. Has probably just read about them online, or heard horror stories.

Granted Goblin's post was a bit on the paranoid side but the OP should ask the advisor how he/she is getting paid.

I agree, advisors can be very beneficial and should get paid for doing their job. However you also have to make sure you're not getting raked over the coals with fees and commissions either. Not all are as honest and forthcoming as you jpg

[thekid]

Set your goals (put "names" on your money). This is crucially important as your goals will determine your investment strategies. For long term money (ie. retirement savings) you can take on much more risk than shorter term money (ie. money for an eventual down payment on a house, car purchase, emergency fund, etc.). I would not recommend incurring any short term capital loss risk on money you may need under 10 years (preferably longer).

You need to understand the relationship between short term and long term risk. Basically, short term (under 10-20 years) price fluctuations will determine most if not all your overall returns. Assets with higher fluctuations (ie. stock) carry the greatest short term risk. Long term, asset returns will be almost all income produced by the asset (rent for real estate, interest for bonds, dividends and other forms of capital returns for stock). I believe the most dangerous long term risk is not achieving returns that at least keep up with inflation. The capital you invest today for retirement (30+ years away) will be almost completely wiped out by the effects of inflation (whatever amounts you invest today will be worth next to nothing in 30+ years because its purchasing power will have been eroded by the compounded effect of inflation). Idle money incurs an almost guaranteed risk of 100% real purchasing power loss. Long term, you need to achieve returns over inflation. Prices will adapt to yields (you will incur capital losses when yields rise and capital gains when yields fall) so that over long term your return will be the yield of the assets you own. Stocks have achieving long term returns above all other asset classes. Right now, bonds yield about 2% and stocks also carry a dividend of about 2%. The difference is that stock yields usually increase over time. Historically, stock yields grow by about 5% per year. That means that a stock purchased today should yield about 7% a year long term. That carries an expected premium over bonds of about 5%.

Long story short: Protect your capital (short term bonds) with short term money, but protect your returns with long term money (stocks). Your long term allocation, at your age, should have a heavy dose of stocks (at least 50%, preferably closer to 75%).

If you do decide to hold stocks as a long term investment, key concepts then become to broadly diversify and keep costs as low as possible. Index funds return the market average and are the cheapest way to invest in funds. It is well established that almost nobody -not even the biggest institutional investors- beats the average over long periods (ie. it's random). Therefore, I would recommend buying low cost index funds (Vanguard was mentionned). You can buy a total stock maket US fund, a total stock market "ex-US" fund (ie. everything but the US) and a total bond market fund. I don't think you need anything else for your long term allocation and it make sense to hold each as to 1/3 of your long term money. Dollar Cost Averaging means buying additional units at fixed intervals at fixed amounts (ie. 500$ per month or whatever you plan to contribution to your retirement account). You should also rebalance your holdings back to their original allocation (ie. if your allocation is 33%Total Bonds, 33%US Total Maket, 33% International and say bonds do better than US stocks over a certain period you may find yourself with 37%Bonds, 29%US Total Market and 33% International -what you should then do is sell bonds and with the sale proceeds buy US stock as to return to the original 33% allocation for each class. Doing both of these (dollar cost averaging and periodic rebalancing) will insure that you "buy low and sell high" and should give a boost to your long term returns.

I would recommend never trying to market time. Short term price fluctuations are random and, frankly, not material. What does it matter if stock prices drop 30% in a given year? Your yield will correspondingly rise and you will recoup your "paper loss" over the long run with the additional yield. Prices are material only when you buy (the yield at time of purchase will be the key component to your long term return) and when you sell. In between (probably 30+ years for you) DO NOT PAY ATTENTION TO PRICES. It is the best way to ensure that you don't lose your cool and sell at bad times (when prices are low) or "overbuy" at bad times (when prices are high). It sounds plain simple to "buy low and sell high", but believe me it takes real fortitude to not panic when everybody is predicting that "this time it's diffent" and sell or conversilly to not dump ever more money (usually borrowed) into run away bull markets. In investing, the best times are almost always when things look their bleakest and the worse when things look the rosiest. Dollar cost averaging and periodic rebalancing takes your emotions out of investing.

Gradually find your comfort point with risk exposure (in the end, your proper risk level is what your stomach can take). But understanding the crucial difference between short term risks and long term risks is probably the most important piece of information you can take on at this point of your life. You currently have the most valuable of all assets -time- on your side. You need to understand how to make that work for you.

Two very good books I would recommend are:

Random walk down wall street by Burton Malkiel and The Four Pillars of Investing by William Bernstein.

It's great that you are taking such a serious interest in investing at your age. Time is your best friend in investing and you have plenty of it. Develop your knowledge and exploit it fully.

Just remember, investing is about long term risk managed growth, not short term homeruns. Stick to the former and you will very likely find yourself quite well off by your 40s and 50s, the latter is the most likely road to the poor house.

Last, but not least, you invest what you save. Your savings rate will have far more effect on your long term wealth than your investment returns. Save diligently, invest sensibly and stick to the plan through thick and thin and you'll be set.

[thekid]

Spoken like someone who has no idea what advisors do for a living. Has probably just read about them online, or heard horror stories.

Goblin, have you ever actually worked with an advisor?

The CFP may be able to discuss savings strategies that could save you thousands in taxes long term. As well as cover your insurance situation, retirement benefits, estate planning measures, etc.

A little bit of planning goes a long way.


P.S. I'm an advisor. If his father was my client, I'd set up the Roth at no charge and probably use a target date fund until its large enough to personalize. And no those don't have large loads. I'd hope you guys trust me here. I know not everyone agrees with me, but we're not the terrible evil people this post portrays.

I think good advice is invaluable.

DIY is not exactly risk free. No matter that basic rules and principles seem simple to the financially interested, they sound as foreign as chinese mandarin to a large portion of the population. Set a newbie loose on the market without proper knowledge and he could very easily seriously hurt himself.

I think that anybody that has an interest to learn, is emotionally stable and is reasonably intelligent can do quite well by DIY. That's not anywhere close to everybody though.

[green_goblin12]

Spoken like someone who has no idea what advisors do for a living. Has probably just read about them online, or heard horror stories.

Goblin, have you ever actually worked with an advisor?

Yes I have worked with one. For five years until I realized why I wasn't getting ahead. The W&R 5.75% loaded funds and expenses over 1% on mediocre funds were killing any returns. He always showed my returns which looked good, but they were including new contributions, which was misleading. Funds were in B and C shares too, for no good reason.

I don't think it is unfair to say that this is how most advisors (salesperson) work. They put themselves first. The conflict of interest is too great. I'll give him credit for getting us started though (for $400 )

When you are just starting out, those high fees and expenses are killer. When I figured out my dog was just as qualified as my advisor, I got my money out of there.

[jpg7n16]

I don't think it is unfair to say that this is how most advisors (salesperson) work. They put themselves first. The conflict of interest is too great. I'll give him credit for getting us started though (for $400 )

Yeah of course, cause you know there's no better way to build a long term client relationship than by screwing them out of as much money as possible!

Want to have a reliable income for years to come? Sell them products they don't need, charge for services they won't use, never keep in contact, and just in general pray they forget that they have an account with you.

Sounds like a solid business plan right? The self-serving advisors are weeding themselves out of the industry.

What did he do to get you started?

When I figured out my dog was just as qualified as my advisor, I got my money out of there.

Sorry, what do you do for a living again?

Just a couple things to think about:
Topic List for CFP Examination
Investors Are Still Behaving Badly - NYTimes.com

[green_goblin12]

Sounds like a solid business plan right? The self-serving advisors are weeding themselves out of the industry.

There are good and bad, as with any profession. I do believe the business plan includes lack of transparency, confusion, and the illusion of difficulty. Most salesmen are probably ethical and answer questions honestly when asked, but they hope their customer isn't interested in knowing what is going on, as long as they are making them money. And some don't want to know or don't care, which is their choice and why there will always be salesmen of these products.

But getting back to the OP, he is a highly educated individual. Taking a few hours to educate himself might save him some money in the long run. Or if he has no interest or time, then yes, check out a salesman. But still educate yourself a little and don't invest in anything you don't understand.

My salesman's buy-and-hold approach wasn't bad. I didn't feel like it was worth the money though. He was only peddling products he knew about and paid him the most. I'd say he's one of the better ones ONLY because he didn't try to peddle a whole life policy or something unsuitable like that.

Sorry to hijack the thread.

[ronita.gosh]

investment basics

Hello to all,

Short and sweet, I'm looking for some investment advice and help as I am very new to it and believe its time I begin to understand the complexity of it. Although those in the field say its simple, to the average Joe it seems quite complicated.

A bit about myself: I'm 25 years old making 60,000 base salary a year carrying no debt (Full ride undergraduate and Graduate). I'm contributing 25% to my company sponsored 401K in which they match 7%. I've been living with my girlfriend for a few months in our own apartment and getting by fairly well with paying rent, bills, groceries, etc, etc. Within my short professional career, I've managed to save nearly 20,000 which I have sitting a standard savings account I set up when I was a student. A good friend of mine was recently talking to me about my money situation since we have fairly parallel careers and he had mentioned he's been investing into his roth ira for about 3 years which opened up a long conversation.

He proceeded to mention he only keeps 5 months worth of living expenses in his account and has been investing the rest. I'd like to begin to get involved in investing and have done some preliminary research but just get overwhelmed by all the financial institutions I see, the type of investment funds, and different rates.

All I really want to know is where to begin with an investment strategy. I don't foresee a house or marriage in the foreseeable future and believe I have enough money saved to begin investing.

Any and all advise is greatly appreciated.

Kevin

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