Author Topic: Don't understand where to put money  (Read 4824 times)

MMMnewbie

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Don't understand where to put money
« on: July 24, 2014, 01:12:30 PM »
Hello everyone,

I just recently found the MMM blog and got hooked on the Mustachian lifestyle. I was happy to note that my husband and I have already been following a number of MMM tenets, but noticed a big exception. Most of the dollars we've saved aren't working for us - they're lying in a bank account earning zero interest.

We don't have any debt. We rent an apartment because we are currently moving around often for my husband's job, so no mortgage to pay off. Thus, we would need to invest our money to get some use out of it.

I know the standard answer is index funds of some sort, but the market is so high right now and I keep hearing that we're in another bubble. When I look at how much stocks have run up since 2008-2009, I feel that we've missed the boat on this.  Bonds, CDs, etc offer basically zero interest these days. I got excited when I read about Lending Club, but saw a number of threads on this forum that are quite critical of it.

Any advice? Any investment types I'm missing?

seattlecyclone

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Re: Don't understand where to put money
« Reply #1 on: July 24, 2014, 01:22:48 PM »
Don't try to time the market. The stock market is at an all-time high this year, but years where the market doesn't hit an all-time high are less common than years when it does. The next market decline could happen next month, or it might not happen for ten years. You have no way of knowing. Decide on an asset allocation that works for you, implement it at today's prices, and stick with it through whatever happens in the markets.

frugaliknowit

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Re: Don't understand where to put money
« Reply #2 on: July 24, 2014, 01:46:58 PM »
If you are leaning towards the stock market/index funds:

1. Figure out how much cash you and the spouse want to hold for emergencies or upcoming large purchases and deem that amount "emergency fund", separated from investments.
2.  Since you are concerned about market levels right now, invest the rest over a period of time (24-48 months?) to reduce your risk (this is known as "dollar cost averaging").  For example, if you have $10,000 you would like to invest over 36 months, first plunk down the minimum for the fund, say $3,000, then invest the $7,000 over the remaining 36 months ($194.44 per month).
3.  Going forward, figure out how much you have each pay period or month to invest and do it regularly.  That way you will dollar cost average over time and reduce your market risk.  Add that to the $194.44 per month or whatever you decide.

If that is not specific enough, please provide more information to the mustachians:)

neo von retorch

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Re: Don't understand where to put money
« Reply #3 on: July 24, 2014, 02:05:32 PM »
2.  Since you are concerned about market levels right now, invest the rest over a period of time (24-48 months?) to reduce your risk (this is known as "dollar cost averaging").  For example, if you have $10,000 you would like to invest over 36 months, first plunk down the minimum for the fund, say $3,000, then invest the $7,000 over the remaining 36 months ($194.44 per month).

I'd advise against number 2 here. Refer to http://affordanything.com/2012/04/23/why-dollar-cost-averaging-stinks/

If you're going to invest it, invest any that you can afford to keep invested for 7-10 years. If the market dips, keep it in! If you dollar cost, and the market just keeps going up for the next 36 months, you've missed even more of the growth opportunity you've seen from 2009 through now.

I rolled a 401(k) into an IRA over a year ago... and I didn't invest it all right away. I thought I'd dollar cost average it. And I'm sad that I did that. I didn't know any better, and I missed a great year of growth.

(As noted in the linked article, this only applies to this lump sum situation. #3 is recommended. As you save money each month, invest it right away.)

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Eric

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Re: Don't understand where to put money
« Reply #5 on: July 24, 2014, 02:56:36 PM »
I know the standard answer is index funds of some sort, but the market is so high right now and I keep hearing that we're in another bubble. When I look at how much stocks have run up since 2008-2009, I feel that we've missed the boat on this. 

What time frame are you investing for?  That's what you have to consider.  In 20 years, is the stock market going to be higher than it is today?  If yes, it matters very little when you invest and much more that you invest.  If it's not higher in 20 years, well, then you'll still be working, the same as if you keep everything in cash.

MMMnewbie

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Re: Don't understand where to put money
« Reply #6 on: July 24, 2014, 06:51:51 PM »
Thanks for the advice, all! Just one follow up question. In the name of diversification, I am thinking that part of our savings should not go into the stock market - in case of some prolonged, Great-Depression type event. Normally, I suppose one would diversify by investing in bonds. But since interest rates are nearly zero, is there another alternative?

G-dog

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Re: Don't understand where to put money
« Reply #7 on: July 24, 2014, 08:24:11 PM »
Don't try to time the market. The stock market is at an all-time high this year, but years where the market doesn't hit an all-time high are less common than years when it does. The next market decline could happen next month, or it might not happen for ten years. You have no way of knowing. Decide on an asset allocation that works for you, implement it at today's prices, and stick with it through whatever happens in the markets.

I agree with this, trying to time the market just keeps you out of the game, your money still sits on the slide lines doing nothing.  Get in there. Assuming time (like 10 years or more) is on your side.

Re:diversification, bonds have not been great, but they are an option. I wonder what folks think of REITs. Or, if you have or can access enough money, you could get into rentals (they have their own forum with good info).

gimp

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Re: Don't understand where to put money
« Reply #8 on: July 24, 2014, 08:50:26 PM »
REITs tend to be a decent hedge.

Eggman111

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Re: Don't understand where to put money
« Reply #9 on: July 24, 2014, 10:29:29 PM »
REITs tend to be a decent hedge.

One might think so, but they are not that different from stocks. See http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/

I like jlcollins' entire stock series: http://jlcollinsnh.com/stock-series/

Stocks and bonds together makes sense if you prefer a smoother ride. Pick your ratio and re-balance periodically (roughly every year seems about right). That way, you force yourself to buy low and sell high between the two.

surfhb

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Re: Don't understand where to put money
« Reply #10 on: July 24, 2014, 10:58:35 PM »
Thanks for the advice, all! Just one follow up question. In the name of diversification, I am thinking that part of our savings should not go into the stock market - in case of some prolonged, Great-Depression type event. Normally, I suppose one would diversify by investing in bonds. But since interest rates are nearly zero, is there another alternative?

This is where asset allocation comes into play.    You need to stop right here and read some books and get educated.   I suggest you read the Boglehead Wiki COMPLETELY so you understand the concepts.....Its all pretty straight forward.    Read the suggested books section as well

http://www.bogleheads.org/wiki/Main_Page

These simple concepts completely changed the way I looked at investing.     GREAT STUFF!!

http://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy
« Last Edit: July 24, 2014, 11:01:53 PM by surfhb »

arebelspy

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Re: Don't understand where to put money
« Reply #11 on: August 13, 2014, 11:05:13 AM »
You're starting to ask the right questions, which is good.  Educating yourself is very important when it comes to investments.  :)

So many people make mistakes (typically buying/selling on financial news, or caring what the markets are doing) and cost themselves a lot of money.

I recommend you start with JLCollins' Stock Series, then branch to Bogleheads and some books from there: http://jlcollinsnh.com/stock-series/
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morjax

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Re: Don't understand where to put money
« Reply #12 on: August 13, 2014, 11:49:59 AM »
Thanks for the advice, all! Just one follow up question. In the name of diversification, I am thinking that part of our savings should not go into the stock market - in case of some prolonged, Great-Depression type event. Normally, I suppose one would diversify by investing in bonds. But since interest rates are nearly zero, is there another alternative?

I second arebelspy's comment to check out jlcollinsnh's series. Within that series is an article pertaining to your concerns of "the big ugly event" such as the great depression. Do stick it out through the whole series (in parts or at once); it provides a good base.