Author Topic: Overwhelmed newbie  (Read 5572 times)

Cookie

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Overwhelmed newbie
« on: November 17, 2014, 01:34:34 AM »
I've read through many MMM posts and the forums and have learned a lot, but still feel overwhelmed because I want to do it the right way from the start. My husband and I are both 21 and were never taught how to invest. Luckily we are both pretty frugal so we have been able to save 20k. Thanks to these forums I now know that our original plan of buying a house in 2 years is not the best for our situation. But what should I do with the money? Also, we both opened up Roth IRAs through Thrivent Financial- a family member's suggestion, but now we want to go through Vangaurd because the fees are lower. Which specific investment do you suggest?

We currently have:
20k in our savings account. Want to invest right away
3k each in Thrivent IRA. We want to switch to Vangaurd and max them out
DH has 17k in 401k

All advice welcome. I've tried searching through the forums for the IRA question but haven't found much, but I'm sure this is a repeat question.

Thanks!

act01

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Re: Overwhelmed newbie
« Reply #1 on: November 17, 2014, 02:11:38 AM »
It's really easy to switch to Vanguard - I did it earlier this year. You can start the process on their website. They'll give you docs to print, sign and mail back. Then, they handle the transfer. The whole process took about 2-3 weeks.

For a Roth IRA, the contribution limit is $5500/year each. So with 20k, you won't be able to put it all in this year. But, do you want cash on hand for an emergency? Do you have any debt you need to take care of first?

As for what to invest in, search MMM for "index funds". There's multiple posts he gets into why he chooses them. I got keen on index funds after reading John Bogle's "the little book of common sense investing." It's an quick read with a great overview on what they are, and why they work.

Good for you guys for starting so early!

Terrestrial

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Re: Overwhelmed newbie
« Reply #2 on: November 17, 2014, 07:30:17 AM »
First, well done for how young you guys are.  I'd bet it's a rare person whose socked away over 40k by age 21 even on these boards.

To answer your questions:
You can roll over your account to Vanguard and then use the 20k in savings to basically max out this year, and in a couple months next year's contribution as well.  I don't know when you put in the 3k each but if most of it wasn't this year, you can probably pretty much push that entire 20k over into Roth's in a couple months span (be sure to leave a small emergency fund for whatever is appropriate for your situation).

For funds, I use VTSAX if you want mutual funds or VTI if you want an ETF.  They are essentially different ways of owning the same thing....google ETF vs mutual fund if you need help deciding.


The bigger question is, what do you need to invest FOR....what are your short and long term goals.  If this money is all retirement focused then push it all into the Roths.  If you do want to buy a house at some point (maybe not in 2 years, but at some point), you will need some after-tax money available to do so.  If you are planning on retiring quite early (very possible for you given your advanced level of savings at such a young age) then there are ways of getting at roth money early but most people still need SOME after-tax money to tide them over.  So pushing everything to roth's may not be the optimal solution for you, depending on what your capacity to save more and what your time frames for these types of things look like.

Again, great start!  Way ahead of where I was at 21.

nereo

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Re: Overwhelmed newbie
« Reply #3 on: November 17, 2014, 07:32:13 AM »
Hello Cookie

Always nice to see people in their early 20s who want to live the mustchian lifestyle instead of the more common alternative (debt, consumerism, etc)

To specifically address "which funds should we invest in, that depends largely on what your Asset Allocation (AA) is.  Basically, your AA is how much of your money you want in equities, bonds, real estate and cash/liquid investments.  Within each of those categories there are sub-categories, like how much equities you want in large US corporations, how much in emerging foreign markets, small-cap stocks, etc. etc.  There are as many different AAs as there are individaul investors, and each person needs to find the one that they are most comfortable with.

Personally, I've taken the dirt-simple approach of having a 95/5 AA (95% in equities, 5% in bonds/savings).  My money is invested in Vanguard and mostly in their SP500 index fund (VFIAX).  It gives me shares in the 500 largest US companies, which have substantial foreign business as well.  It has the lowest fees of any fund.  Another popular choice around here is the Vanguard Total Market Index (VTFAX), which is dominated by the same 500 companies but also includes the smaller US companies as well.  It has done slightly better than the SP500 over the last few decades and will give you some exposure to small US companies that may become very large companies some day.

That's just my personal example.  Historically stocks have beaten bonds the majority of the time (~80% of the time when you look at 10 year periods), and so most people around here have a high % of their portfolio in low-cost index funds like the VFIAX.  The caveat is that markets will drop from time to time and you need to stay rational enough not to take money out when the markets drop and to keep investing.  The drops can be painful when you look at your statement and find that you have ~20-30% less than you had a year ago.  But If you leave it alone and keep adding to it it will recover in time (usually in 1-3 years, although sometimes it takes longer).  Owning bonds will help smooth out these drops since they don't drop like stocks do, but you will likely sacrifice some long-term growth, especially if you have hold more than 20% in bonds.  Because people near or at retirement are more interested in preserving their principle than making it grow, a lot of people will hold a much larger % in bonds when they are FI (financially independent) - they are willing to miss out on some growth in order to avoid loosing money in the short term.  But since you are 21 and in the "accumulation phase," I wouldn't recommend this path.

Finally, this may be more information than you are ready to digest.  Take your time, read a lot on the subject, and in the meantime I'd recommend the following strategy
1) participate in any 401(k)/403(b) plans your work offers, at least enough to get the full company match.  This is the absolute best return you can get (free money!)
2) start and fully fund IRAs for both you and your spouse every year
3) spend less than you earn and invest the difference.  Forget 10% savings goals and instead shoot to save 25%, 30% or more of your income (this includes the 401(k) and IRAs).


Do this while investing in low-cost index funds and you will be FI well before you hit 40.  It really can be that simple.

Cheers
N



Kenoryn

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Re: Overwhelmed newbie
« Reply #4 on: November 17, 2014, 10:18:40 AM »
About the choice between ETFs and mutual funds: generally, if you invest in ETFs, there are fees for transactions, but the management fees (which are percentage-based) are lower. In mutual funds there are higher management fees, but no fees for transactions. ETFs often have higher minimum initial amounts and contributions, too.

Here's a good comparison of costs, with a spreadsheet you can download. It's Canadian but I believe the same principles would be true in the US, though not the specific funds:
http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/

That site also provides some links to American options for model portfolios as well.
http://www.marketwatch.com/LazyPortfolio/
http://assetbuilder.com/our_portfolios/portfolio_list.aspx

I understand that in the US you can take money out of your retirement funds to buy a house if you're a first-time homebuyer. You should look into the details of that (limits, requirements to pay back) but it could be an option for you that lets you put as much of your money as possible in your retirement funds worry-free and without having to think about tax implications.

Terrestrial

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Re: Overwhelmed newbie
« Reply #5 on: November 17, 2014, 10:41:00 AM »
About the choice between ETFs and mutual funds: generally, if you invest in ETFs, there are fees for transactions, but the management fees (which are percentage-based) are lower. In mutual funds there are higher management fees, but no fees for transactions. ETFs often have higher minimum initial amounts and contributions, too.

This isn't entirely correct...ETFs generally don't have any minimums, unlike mutual funds (aside from whatever the price of 1 share is, assuming you cannot buy fractional shares).   The process of buying an ETF is exactly like a stock...the concept of 'minimum initial/additional amounts' does not exist beyond the price of whatever one share costs.

This isn't to say EFTs are  better/worse.  Yes you will pay commissions for EFTs...this isn't necessarily bad, it depends on the situation and how much your comms are.  If you are buying in large chunks infrequently, they wont be much of a factor.    If you want to frequently invest $100 every week/month or something, commissions will kill you and a fund is probably much better.  There are other reasons you may want to consider one or the other.  EFTs can be more tax efficient when held in taxable accounts and you can sell them instantly for market ask instead of waiting until the NAV is recalculated at days end. 

Also note, for Vanguard, the Admiralty funds generally have the same benefit of the ETFs for low expense ratios....but there's a 10k minimum.  Does anybody know if you have a Vanguard account, can you invest in their EFTs without commissions?  I don't have a vanguard account but I seem to have heard something about this.


« Last Edit: November 17, 2014, 10:46:54 AM by Terrestrial »

Radagast

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Re: Overwhelmed newbie
« Reply #6 on: November 17, 2014, 11:17:55 AM »
Yes, Vanguard ETF's are commission free at Vanguard. I believe you additionally get 25 free trades per year of non-Vanguard ETF's, which increases as you have more money. Schwab also has large numbers of commission free ETF's, and the Schwab ETF's have fairly low expense ratios. Others exist also. Commission-free ETF's seem like a logical choice to me, especially for buy-and-holders, those with less than 100k, those making very small regular investments, or who like to slice real thin.

epipenguin

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Re: Overwhelmed newbie
« Reply #7 on: November 17, 2014, 11:46:56 AM »
Personally, I would (and do) invest in an all-in-one fund at Vanguard. Either a target retirement fund, or a lifestrategy fund. You pay a bit more in fees (the lifestrategy fund that I use has fees of 0.16%), but it truly is a simple way to invest. I used to have a fancy, complicated portfolio, but found that rebalancing is actually hard to do - taking money out of a fund that is doing well, and putting it in to a fund that is doing badly is very counterintuitive and (I found) emotionally difficult. Now I let Vanguard do all of that for me.

Cookie

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Re: Overwhelmed newbie
« Reply #8 on: November 21, 2014, 04:24:10 PM »
Thanks for the advice everyone! I think I will choose the target retirement fund for my Roth because it sounds easier and less work. Maybe after I read several investing books I will change my mind. I don't have to use the same fund for my entire Roth right?

Also, after we max out the Roths we will have about 13k which I would like to put into a lump sum investment. We do plan on retiring early (mid 30s), so what do you suggest for this lump sum investment? Is the Vanguard fund FVIAX a good place for this?

*Edit*
About the down payment, we realized that since we have yet to start our "real jobs", that it will be best to live in apartments for about 5-6 years because we want to be able to move where our careers take us. So we are focusing on investing the money rather than saving it.
« Last Edit: November 21, 2014, 04:27:25 PM by Cookie »

nereo

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Re: Overwhelmed newbie
« Reply #9 on: November 21, 2014, 05:24:21 PM »
Thanks for the advice everyone! I think I will choose the target retirement fund for my Roth because it sounds easier and less work. Maybe after I read several investing books I will change my mind. I don't have to use the same fund for my entire Roth right?

Also, after we max out the Roths we will have about 13k which I would like to put into a lump sum investment. We do plan on retiring early (mid 30s), so what do you suggest for this lump sum investment? Is the Vanguard fund FVIAX a good place for this?

*Edit*
About the down payment, we realized that since we have yet to start our "real jobs", that it will be best to live in apartments for about 5-6 years because we want to be able to move where our careers take us. So we are focusing on investing the money rather than saving it.
you can have your Roths invested in as many funds as you want.  However, you should figure out what your AA (asset allocation) is and stick to that.  A simple target retirement fund is a good way to go, as is an SP500 or Total Market Index fund (like the FVIAX).  Once you know what you wnat your AA to be, invest the 13k accordingly.

btw, a perfectly acceptable strategy would be to invest everything in one fund, like the target retirement fund or the FVIAX.  You can have your ROTH portion and your taxable portion.