Author Topic: Starting my investment journey  (Read 2154 times)

Hopeful Hegemon

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Starting my investment journey
« on: December 20, 2015, 09:37:45 PM »
So I stumbled on the MMM site several days ago when I decided to learn a little bit about investing after reading a post on reddit about balancing consumption and learning to invest. I've spent these past few days reading MMM articles along with a few other blogs he has linked to like jlcollinsnh until around 2 in the morning. I am a 20 year old 3rd year college student majoring in English. Over the years I've managed to save well over 10,000 dollars in a savings account, largely because I've worked even though my parents have covered most of my expenses.

I want to put $10,000 into a Vanguard index fund, preferably Total Stock Market Index Fund Admiral Shares (VTSAX), but I have a few questions. Should I make it a Roth IRA or a regular brokerage account (I think that's the term for a normal taxable account)? Or something else? I guess I could start with this year's maximum contribution to the non-admirable version, VTSMX I believe. Then when January rolls around deposit another $5,000 or so and switch it over to the Admiral version. Is it easy to change index funds within Vanguard?

Then once I've graduated and gotten myself an actual job, would I continue to max out the Roth and then put any extra investment-saving money into a brokerage account since as a hopeful mustachian I'll be saving more than $5,500 a year? Should that second account also be the VTSAX or another index fund?

Also should I try to dollar cost average this initial $10,000 investment or go ahead and lump sum it. I know lump sum generally outperforms DCA, but I didn't know if the extra risk should be avoided because this is the majority of my investment money.

Basically I've been inspired by MMM and want to emulate him as much as possible. I just want to make sure I've wrapped my head around everything properly and established a reasonable course of action. Any confirmation or general advice would be much appreciated.

csprof

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Re: Starting my investment journey
« Reply #1 on: December 20, 2015, 11:03:59 PM »
Assuming you're paying basically no taxes as a student, and you don't anticipate needing the funds in the near future:  Roth.

(You won't benefit much from the tax reduction if you're only working part-time, and you've got many years of tax-advantaged growth in that Roth and then get to yoink it out tax free at the end.)

The general rule is that Roth is a great idea if you're making substantially less now than you expect to in retirement.  I followed this path when I was a student, and my Roth is great.  It's tiny, because I didn't bother doing any of the other tricks to get money into it after I graduated and had too much in 401k-type funds to contribute to it, but -- hey, $50k of completely tax-free money that I can continue to let grow for the next while is hard to complain about. :)

DCA vs lump sum:  In the long run, whatever.  If it were me, I'd lump sum the 5500 2015 contribution now - the market's a little down, and then you can just let it sit there and ignore it.  But, again - the key here is assuming that you're not going to need this money in the next 10 years.

Frugalman19

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Re: Starting my investment journey
« Reply #2 on: December 22, 2015, 08:26:19 AM »
Assuming you're paying basically no taxes as a student, and you don't anticipate needing the funds in the near future:  Roth.

(You won't benefit much from the tax reduction if you're only working part-time, and you've got many years of tax-advantaged growth in that Roth and then get to yoink it out tax free at the end.)

The general rule is that Roth is a great idea if you're making substantially less now than you expect to in retirement.  I followed this path when I was a student, and my Roth is great.  It's tiny, because I didn't bother doing any of the other tricks to get money into it after I graduated and had too much in 401k-type funds to contribute to it, but -- hey, $50k of completely tax-free money that I can continue to let grow for the next while is hard to complain about. :)

DCA vs lump sum:  In the long run, whatever.  If it were me, I'd lump sum the 5500 2015 contribution now - the market's a little down, and then you can just let it sit there and ignore it.  But, again - the key here is assuming that you're not going to need this money in the next 10 years.

I will say that if you don't have any other money saved, it wouldn't be a bad idea to keep the $5,000 as an emergency fund, so invest $5000 now, and at the start of 2016 start dollar cost averaging $400 a month into a Roth. Making most of your deposits from cash flow from some part time work.

Lookilu

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Re: Starting my investment journey
« Reply #3 on: December 22, 2015, 11:43:33 AM »

I want to put $10,000 into a Vanguard index fund, preferably Total Stock Market Index Fund Admiral Shares (VTSAX), but I have a few questions. Should I make it a Roth IRA or a regular brokerage account (I think that's the term for a normal taxable account)? Or something else? I guess I could start with this year's maximum contribution to the non-admirable version, VTSMX I believe. Then when January rolls around deposit another $5,000 or so and switch it over to the Admiral version. Is it easy to change index funds within Vanguard?
Once you hit a $10K balance, Vanguard will automatically convert your non-Admiral shares to Admiral. You won't need to do anything, but exchanging funds is easy if/when you want to do so.

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Then once I've graduated and gotten myself an actual job, would I continue to max out the Roth and then put any extra investment-saving money into a brokerage account since as a hopeful mustachian I'll be saving more than $5,500 a year? Should that second account also be the VTSAX or another index fund?
Take advantage of any tax-deferred options like a 401k that your employer offers before opening a brokerage/taxable account, especially if they offer a match. You never want to miss out on free money and pre-tax deductions will lessen your tax liability if you have only standard deductions.

It's great that you're developing an interest in investing at such an early age! Keep reading and learning. :)