Fidelity Brokerage Account and after tax investing basics - help please

[ZiziPB]

Hello fellow investors -  I am newly single (almost a year now...) and my ex dealt with all of our after tax investing mechanics in the past.  I feel a bit ashamed that I need help with the basics but please bear with me as I am learning to stand on my own two feet again ;-)

I have a Fidelity brokerage account that currently holds stock of my employer that I receive as part of my incentive compensation.  I have about $40K in a MM account and CDs at my local bank (earning basically nothing) that I would like to invest.  I would also like to start putting money into taxable investments on a regular basis, through direct deposit from each paycheck if possible (2x monthly, goal is to invest $2K from each paycheck).  My investment philosophy is of the "set it and forget it" type and it has worked pretty well for my retirement accounts so far.  So I am hoping to set up some type of an automatic program for after tax investments here that will be low cost and will require minimal input from me.
Any advice as to how to go about it?  Do I need to open a new account or can I just use the existing brokerage account? Direct deposit into the Fidelity account and a standing order to buy?  I don't even know if such a thing exists... Buy twice a month as money is coming in ($2K each purchase) or once a month ($4K - I would only pay one fee per month then)?  What to invest in with a 5-10 year investment horizon?  The company I work for imposes certain restrictions on personal trading but I am free to invest in mutual funds and certain ETFs without restrictions.

I would appreciate any help you can give this novice on the road to FI.  Thank you.

[livetogive]

You have everything you need!  Fidelity will walk you through how to set up automatic investments when you're ready, but first you need to figure out what to invest in.

If you want to understand the what and why, I reccomend the Bogglehead's guide to investing:
http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

here are the cliffs notes:

1.  set aside a cash cushion for emergency expenses
2.  Take your age and turn it into a %.  That percentage is what you should put into a low cost braod based bond mutual fund.
3.  Take the rest (should be 100 - your age) and put it into a low cost stock fund.
4.  Set up automatic investments with the above % going into stocks and bonds.


Edit:  Also don't forget that you are Fidelity's customer, not the other way around.  You're the one providing income for them, so never hesitate to contact them with even the simplest of questions (i.e. 'where on fidelity.com do i set up automatic investing?').  I do it all the time.

Also:
Some people will suggest ETFs instead of mutual funds.  You're probably better off with mutual funds.
ETFs make sense to me only if you are buying large quantities at a time. 

Example:  If you are saving 2k per month and invested in 2 different funds, you'll be investing roughly $500 per fund per paycheck.  If you pay $7 per trade with an ETF your effective fee comes out to be about 1.6%.

Alternatively you could invest in a mutual fund and pay 0.1% in fees.

[ZiziPB]

Thank you - very helpful.  I will call Fidelity and have them walk me through it after I decide what to invest in.

I have 6 months+ emergency fund (not earning anything in a liquid CD but allowing me to sleep well at night;-) - it is staying as is.  The $40K initial investment plus 2x$2K per month are my other cash savings that I need to put to work.

I am 45, BTW, and would welcome some suggestions of low cost balanced mutual funds.

[matchewed]

I think the bond mix as a function of your age may be a bit conservative depending on your age and when you start investing. Should a 40 year old who's just starting saving for retirement put 40% in bonds?

If you're starting late you need growth, as you near your goal you can adjust for stability. Give jlcollinsnh a read, his stock series is a good rundown for beginner investors.

Just my take on it.

[ZiziPB]

Thanks - looks like I need to get myself educated pronto ;-)

I am 45 and have about $350K in retirement savings (IRAs and 401k mostly in two Vanguard Target Funds (2030 and 2035) and some individual stocks (non-employer)) plus about $100K in restricted employer stock that will be vesting over the next 3 years.  I will continue contributions to the 401k (about $40K per year between my contributions and company match). 

The Fidelity account has about $13K in vested, unrestricted employer stock.  The money I am now looking to invest is in addition to that.

[Eric]

Also:
Some people will suggest ETFs instead of mutual funds.  You're probably better off with mutual funds.
ETFs make sense to me only if you are buying large quantities at a time. 

Example:  If you are saving 2k per month and invested in 2 different funds, you'll be investing roughly $500 per fund per paycheck.  If you pay $7 per trade with an ETF your effective fee comes out to be about 1.6%.

Alternatively you could invest in a mutual fund and pay 0.1% in fees.

EFTs are mutual funds.  They are mutual funds that buy stocks at the same holding percentage as whatever index they're following, such as the S&P 500.

But in this case, I'm not sure why you pay a fee to buy an EFT but don't pay a fee to buy a non-EFT.  Is it specifically a Fidelity thing?  Like you buy a sponsored Fidelity fund and pay no fees?

[livetogive]

a bit off topic, but ETFs trade like stocks so if you want to invest, say, $1,000 in an ETF you'll pay $7.95 or whatever fidelity charges to do so.  If you buy a fidelity mutual fund you won't pay a trading fee.


OP:  I didn't realize your assets were so sizable.  The concept remains the same BUT if you would really like to save on fees you can buy both ETFs and Mutual Funds.  The funds will be where your automatic investments will go, but you can "park" existing invested savings into ETFs to be more tax efficient in your taxable account.

If you want to assume more risk, lower your bond percentage and increase your stocks.  Also with your level of assets I'd suggest having both a US based index fund (most common) and a global excluding US fund.

Next, I'd strongly consider selling your employer stock if you're allowed to do so, particularly if it's in a retirement account (and therefore has no tax consequences).  You're already too closely tied with your employer just by working there; there's no reason to make it worse and hold the stock longer than necessary.  Is there a benefit to keeping it? (Discounted purchase program rules, trading clearance, whatever?)


Funds to consider:
FSTVX - domestic stock index
FSGDX - international stock index excluding US
FSIVX - international stock index
FSITX - domestic bond index

Look for the words "Spartan" and "Advantage class" for the lowest fees in Fidelity mutual funds.  I would steer clear of international bond funds while you're just starting out because you expose yourself to much more than people realize.  As you get comfy with the process feel free to jump in international bonds as well.  As global interest rates rise your bond funds will likely start losing money from day 1 but fear not, no one can predict the future and by the time the stock market crashes it'll likely be too late to diversify back into bonds.

example portfolio of $45,000 in a retirement account and $55,000 in a taxable account:
45 years old

Retirement:
$45,000 - FSITX  [put your bond funds in your retirement accounts bc they are tax inefficient]

Taxable:
$40,000 - FSTVX [keep your stock funds in your taxable accounts to defer taxes]
$15,000 - FSGDX

[livetogive]

Sorry I just realized one last thing.  Vanguard is a fantastic company and a target account is great for many people, but you will have a hard time controlling your personal asset allocation if you use them.

If you don't have a choice they're not the worst funds to be in by any means, but to figure out your % bonds and % stocks you'll have to check up on each fund and find out what they're in.

I suspect most of your taxable income will be going straight into a stock fund for quite some time, which certainly isn't a bad thing.

[aj_yooper]

Welcome, Izeve!

I like your idea about simplicity and set and forget.  With your company policy on equities, I think an index fund that you don't disturb  would suit you well.  The Bogleheads site is excellent for all investors.  They also did a book on investing.

Is your 401k held at Vanguard?  If it is, why keep adding to Fidelity when you have a cheaper alternative at Vanguard that you are already using?  It is much easier to track if the investment vehicles are all in the same place.  If your company 401k isn't, just keep the Fidelity.  Typically, the brokerage account is for trading stocks; it is usually a separate listing from your fund taxable account. 

Unlike TurboLT, I think the target accounts would be very easy for you to track your allocations because they do the balancing for you; literally you don't do anything.  Additionally, with my accounts at V, they tell me what my asset allocation is very easily.  If I want to make any changes, there is a What If app on the site that lets me know how some changes might affect the overall AA. 

You have substantial assets and good earning power so learning about investments will be a very productive activity for you.  Best wishes.

[Eric]

I'd also read through this post and all the links at the bottom too, if you haven't already.

http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/

[ZiziPB]

Thank you all for the warm welcome and further advice!

The 401k and one IRA are at Fidelity.  Both are invested in Vanguard funds as that seemed to me the simplest low cost option where someone else does the allocations for me.  The 401k offers a bunch of other options and I can pick whatever I want for the IRA but I liked the Vanguard funds so that's what I went with.  One IRA is at Schwab - it is invested in individual stocks that I bought in 2000 on the advice of my ex.  Haven't touched it since and it grew from $10K or so to about $60K (thanks to sheer luck, mostly ;-).

I can only sell the vested $13K of my employer stock (I have to get pre-clearance for the transaction but that's typically not a problem) - but the stock has done very well over the last year and is now paying an increased dividend so I'm inclined to keep it for now.  The unvested portion ($100K) I can't touch until it vests. My employer uses Fidelity for all of our accounts (401k, HSA, stock awards, etc.), so I'm inclined to stay with Fidelity for future investing since it's easy to see my investments all together.

So it sounds like it would be a good idea to invest my current cash stash of $40K into ETFs and then pick a good mix of 3-4 mutual funds for the automatic investments going forward.  I will read up some more tonight - thanks for the various links and references.  And I need to get some investment books from the library....

Until I started reading this blog a couple of weeks ago I haven't really thought about a specific date for retirement.  Now I'm thinking that I could get there sooner than I ever expected?  I would love some help with math to figure out when that could happen!!! Would any of you help me with that?

[Eric]

Until I started reading this blog a couple of weeks ago I haven't really thought about a specific date for retirement.  Now I'm thinking that I could get there sooner than I ever expected?  I would love some help with math to figure out when that could happen!!! Would any of you help me with that?

It's great, isn't it?!  As a general rule, you'll want a 'stache that's 25 times your annual expenses.  See this post here:

http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/?doing_wp_cron=1374796545.8169989585876464843750

[ZiziPB]

Thanks Eric!  Based on that I can probably live my dream retirement life in no more than 5 years - wow!!! That seems very hard to believe.

[livetogive]

...but the stock has done very well over the last year and is now paying an increased dividend so I'm inclined to keep it for now.

Many people do this and are very successful, so take this thought with a grain of salt, but your stock does very well until it doesn't which inconveniently tends to coincide with layoffs.  See also Zynga, Enron, Goldman Sachs, Yahoo!, etc.

[ZiziPB]

Good point, TurboLT.  I'm planning to do some research and reading this weekend and make some decisions next week.  The sale of the employer's stock would involve capital gains so I need to consider the tax impact as my taxes are very high as it is anyway.  I'll wait for the company's 2nd quarter results and then decide if I want to sell, I guess...

[ZiziPB]

Just an update and a thank you to all who responded to my questions.

I have moved the funds to my Fidelity account and as of yesterday they are invested!  I have also set up direct deposit to the brokerage account and automatic investments going forward so, starting with August, I will be investing $4K a month after tax.  The only thing left to do is to redo the investments in my IRA so that the overall portfolio has the allocation I want.

Thanks again for giving me the motivation to research and execute on my plan!