Author Topic: Stock market, dividends, IRA? Where do I start?  (Read 4379 times)

ak404

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Stock market, dividends, IRA? Where do I start?
« on: August 01, 2012, 10:59:04 AM »
Hello all,

I'm having a bit of a problem here.  I work a fairly low-paying job to work off student loans and scrape up a bit of cash for myself, I've got a bit of money in an IRA (I think I drop in something small like $50/a month, through Primerica) from a few years back, I don't drive a car, and I live with the parents until I get this debt cleared off.  Thing is, I'd like to get a foot into investing so what little money I have left at the end of the month can be used make more money, but other than going through a stock broker or investor, I'm not exactly sure how to do it, or even how much money I'm going to need to start.

This isn't to say that I haven't done my research: I've gone through numerous sites and read more than a few books, but the one thing they seem to miss (or I seem to miss) is where to go to get started: e-trade? An actual flesh-and-blood broker?  My bank?  I have no idea.

Suggestions?
« Last Edit: August 01, 2012, 11:00:48 AM by ak404 »

JohnGalt

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #1 on: August 01, 2012, 11:41:58 AM »
I would recommend contributing to a Roth IRA until maxing it out.  These can be opened up any number of places depending on your specific needs.  Check out vanguard, e-trade, share builder, tdameritrade, schwab, betterment, etc.  Stay away from flesh and blood brokers.  I have no idea what your bank would offer.

Vanguard - is probably the best option for you.  Their mutual funds and ETF's are low fee and ETF's are transaction fee free as well.  Stock trades are $10 or $7 depending on how much you have invested.

Since you will have a small starting amount and will be making frequent, small transactions for the near future - I would recommend just picking 2 or 3 of their ETF's and alternating which you invest in each month.  This should give you the lowest possible total fee, dollar cost averaging, diversified investment you can get.  I would just set this up on auto-pilot as much as possible for the time being - you just won't have enough to invest for a while for it to be worth your time.  Focus on finishing up paying off your debt, improving your income, and improving your DIY skills. 
« Last Edit: August 01, 2012, 11:44:59 AM by JohnGalt »

grantmeaname

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #2 on: August 01, 2012, 12:04:23 PM »
I'll echo the above advice.

I do want to say, though, that it doesn't make sense to invest if you're carrying around student loans that are charging more in interest than the return you would be making by investing. If your student loans are at 6% or so, it may be best for you to use your extra money to pay them down instead. If they're lower than that, it depends more on your disposition whether it's better to keep them around or pay them off.

ak404

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #3 on: August 02, 2012, 09:36:51 AM »
So drop the debt first, invest later?

grantmeaname

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #4 on: August 02, 2012, 10:07:58 AM »
Could be, but it depends on the interest rate on the debt. If the debt has a really low interest rate, like 3%, you should probably invest first.

Think about it this way: paying off your debt is like getting a guaranteed return equal to the interest rate on the debt now. If you're loans are at 4%, then you could either invest in the stock market and get a highly variable return that will likely be around 7% over time, or you could get a guaranteed 4% by paying off the debt. Depending on your disposition, you may want to invest in the market knowing you'll probably end up ahead, or you may want to pay off your loans to be sure. On the other hand, if your debt is at 6.5%, it is likely better to get a guaranteed 6.5% than a highly variable return that's around 7%: you're not getting that much better of a return for taking on all that uncertainty.

Does that make sense?

JohnGalt

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #5 on: August 02, 2012, 10:10:07 AM »
So drop the debt first, invest later?

The mathematically correct answer to that depends on your debt interest rates vs your investment return rates (after accounting for taxes, transaction fees, etc).  Basically - go with whichever is greater.

The correct answer though is that the differences in the numbers are probably so small that you should go with whatever makes you most comfortable.  Some people are uncomfortable with debt, even if mathematically holding debt to invest more earlier may make sense.  In the end - the important part is your savings rate.  The less you spend compared to what you earn - regardless of whether that money initially goes towards debt or towards debt + investing - is by far the biggest determinant of how quickly you reach financial independence.

Personally - as long as your debt interest rates are <6% - I would for sure get money into a Roth since there is a $5,000 / yr limit.  If >6% I'd first see if there is a way to refinance to a lower rate, but, if not, pay it off as fast as possible. 

Kriegsspiel

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #6 on: August 02, 2012, 05:42:17 PM »
I paid off my low interest rate debt first, just because I mentally didn't want to deal with it.  Makes taking a hit in the stock market more bearable ("man, my portfolio has been down for weeks now, I should have paid off that loan!").

ak404

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #7 on: August 12, 2012, 01:22:35 AM »
Thanks, guys.  Had a talk with some people in charge of the student loans.

I guess I'm going to keep chipping away at it.

simonsez

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #8 on: August 13, 2012, 08:14:24 AM »
This topic illustrates the various preferences of individuals with regard to risk and your student loans.  Ignoring risk-takers for a moment as that doesn't factor strongly in investment decisions (e.g. not too many investors throw money into a vehicle they know will probably lose money just so they can experience the thrill of investing), you could establish a continuum from extremely risk-averse all the way to purely risk neutral.  Galt is seemingly close to risk-neutral (albeit perhaps still slightly risk-averse since pick based on which way yields returns only and would probably pay down loans if the expected payoff difference was zero).  War games seems to be more risk-averse.  A better payoff relative to the variance of the investment returns is required for war games to enter the market.  Psychic costs are much greater on this end of the continuum (i.e. peace of mind is worth a significant amount) while psychic costs approach zero as you move to risk neutrality and a choice is made simply on the better return.  Grant seems to be in the middle and admits the risk is not worth it if the investment market expected payoff is minimal compared to the loan interest rate.  So AK, it seems you have already made a choice, but once you know your own preferences, you can fine tune any financial decision to maximize your personal utility (which is different and more important than simply maximizing dollars since there are non-pecuniary factors involves, e.g. psychic costs).

My personal opinion would side somewhere between grant and war games, having student loan balances stresses me out to a degree, and that degree is increased as the loan balance is higher (100k in loans would wear on me more than 10k), but I couldn't ignore an investment opportunity that was expected to easily outperform the interest rates paid on the loans.

rugorak

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Re: Stock market, dividends, IRA? Where do I start?
« Reply #9 on: August 13, 2012, 09:55:39 AM »
Ultimately as everyone said it is a personal choice.

I went with paying off all my debt first then investing. For me it was a security thing. I had to pay so much towards my debt. I don't have to invest. I treat it as a bill so I invest all the time, but in the back of my head I know that if something really bad ever happened and I couldn't afford to invest that I would be able to use that money for whatever the emergency was and I wouldn't be penalized with a late fee and extra interest, get a ding on my credit report, get sued, etc.

My values/concerns may not be yours but from your story it sounds like you feel buried by your debt. So I would say dig out with everything you have. And to speed that up see what you can do about getting a better paying job. Whether that be a raise or another job.

Remember investing is just 1 way to FI. There are others and you can combine them as well.