Simple Vanguard Investment Question

[sassy1234]

Hi,

I don't know too much about investing, so any advice is appreciated. 

I have $20,000 sitting in my savings and I need to invest it.  It is technically my emergency fund, but I am willing to put it at risk, as job loss is a low possibility, and I want my money to grow. 

I want to use Vanguard, as the fees are really low.  My understanding is there are 4 risk levels:
1. Money Market (low risk)
2. Bonds
3. Balance (stocks and bonds)
4. Stocks (high risk)

I think I want to put my money in #2 Bonds or #3 Balance (stocks and bonds), but I really don't know.  From there I have about 100 different choices to choose from, which is really confusing too.  What should I do? 

A bit more about me.  Married, 2 month old daughter, household income $160,000 (increased dramatically over past few years), student loans are at $20,000 at 3% interest, only $15,000 saved for retirement, 32 years old, $10,000 car loan. 

[arebelspy]

4 should read "stocks".

You also need to define risk.

To me, stocks are the least risky.  They are the most volatile, but over the long run of an early retirement, they're the most likely to keep you from running out of money.

What you need to do is start educating yourself.  Start reading about investing.

Here is a good place to start:
http://www.bogleheads.org/wiki/Bogleheads'_Guide_To_Investing

[sassy1234]

Thanks for the book reference.  I am not sure if I am up to educating myself on investing in that level of detail. 

Is there an easy answer to my question, or should I get a financial advisor? 

[arebelspy]

Thanks for the book reference.  I am not sure if I am up to educating myself on investing in that level of detail. 

Is there an easy answer to my question, or should I get a financial advisor?

If you're not willing to read a book on the topic that will save you hundreds of thousands of dollars, probably a lot more (I calculate 1% less in returns will cost you maybe 5 million, if you're investing over the next 50 years), I'm of the opinion you may want to rethink that.  :)

A financial advisor taking a 1% fee is 1/4th of your retirement funds, assuming a 4% SWR.  (In other words, about 1/4th of your retirement budget will go to them.)

The basics can be learned in a matter of hours, IMO.

Read this series of blog posts over the next week or two, and you'll know more than enough to get started:
http://jlcollinsnh.com/stock-series/

All that being said, if you still don't want to spend a few hours educating yourself, I'd recommend using http://www.bettermint.com (note: I normally don't recommend Mustachians use their service, as it's not worth it for someone willing to put in a tiny amount of effort.  But if you don't even want to do that tiny amount, Bettermint is the way to go.)

I wouldn't recommend a financial advisor, but if you do use one, make sure they're "fee only" (i.e. you pay them a flat, set amount), and not commission based (i.e. they get paid to push inferior financial products on you) and not a hybrid of the two, just fee only.

[sassy1234]

Well, when you put it that way, you are totally right.  The topic seems totally overwhelming, but I'll give it a shot. 

Thanks for the punch in the face.  :) 

[arebelspy]

It does seem overwhelming, because there is a lot of information out there, and a lot you could learn.

Fortunately, you don't have to know it all!  And you don't have to know it all right away.

(In fact, it turns out that the simplest ways to invest - index funds - are also the most profitable for the vast majority of investors.)

Start with those posts by Jim Collins, his stock series.

When you make it through that, come back and ask more questions.  :)

For now, I'd stick half of your investing money in the Vanguard total bond market, and the other half in the total stock market.  Just keep contributing regularly, and don't worry about the value.  As you learn more, you'll tweak that to your preferences.

[RapmasterD]

To the OP, I don't understand what you mean by 'risk.' To me, the MM is the riskiest investment. You're guaranteeing a return less than that of inflation, and your money is essentially in cash, the value of which decreases each year.

[arebelspy]

To the OP, I don't understand what you mean by 'risk.' To me, the MM is the riskiest investment. You're guaranteeing a return less than that of inflation, and your money is essentially in cash, the value of which decreases each year.

OP is defining risk via volatility and potential loss of principal on any given short time frame.

It's a (no offense to the OP) layman's understanding of risk, but typical of the VAST majority of people out there.

[Ishmael]

To the OP, I don't understand what you mean by 'risk.' To me, the MM is the riskiest investment. You're guaranteeing a return less than that of inflation, and your money is essentially in cash, the value of which decreases each year.

OP is defining risk via volatility and potential loss of principal on any given short time frame.

It's a (no offense to the OP) layman's understanding of risk, but typical of the VAST majority of people out there.

It's not a great word, because it triggers a big emotional reaction in people. "Risk? Oh, no, I don't want that!". The reality is that there is a variety of possible tradeoffs while investing. Some examples:

• "I want to strike it rich ASAP, and I don't care if I totally lose my invested money to do it." Penny stocks, otherwise known as gambling, is perhaps the right tradeoff for this person.
• "I can't handle it emotionally if I see my invested portfolio number go down at all. I don't care how fast it goes up, as long as it never goes down." Money Markets for this person, although maybe coming to understand why you feel that might be a good idea as well.
• "I don't mind seeing it fluctuate somewhat, but those swings can't be too low, because I might panic and I know that's a bad idea." I think most people fall into this category, and the typical "balanced" approach probably is right for them.
• "I want to make as much money as I can over the long term. I know it will fluctuate wildly at times, but I can handle that; I won't panic and sell if things go down a lot. I just want my little employees working for me as hard as possible, but I don't want to get into stock gambling." I think this describes the typical Mustachian, and therefore stocks are the way to go.

Risk means a lot of things, but most people think of it as their portfolio value dropping a lot. There's actually a lot of different types of "risk". Some examples:

• What if I miss out on investment gains and have to work 5 years longer than I needed to?
• What if I pay more in investing fees than I have to?
• What if stocks make a big run and I miss out? Will I feel like a dummy?

This is why investing/money is such a personal thing. Understanding all the "risks", i.e. tradeoffs, is important.

[arebelspy]

Awesome post Ishmael.  Well said.

[George_PA]

I would not put all your emergency fund money into stocks or bonds.  I recommend invest 10k in stocks or a balanced fund and leave the other 10k out of investments all together. 

Personally, I leave 10k in a savings account for my emergency fund.  An emergency by definition is an unexpected expense thus will you no know in advance when it is coming.  Take for example, if you or someone in your family is arrested (whether they were at fault or not) and you need to post bail to keep them out of jail, or there is some type of car repair emergency and your stranded far from home.  If all your money is in investments, it could take several days or up to a week or longer to get that money in cash again.  Emergency fund money needs to be immediately accessable.

As far as the 10k you have in investments, usually a portion will go into bonds and another portion into stocks.  It depends what your goals are for that money. If you plan on having it build up say for 10+ years to make a stash to retire, then you want probably 75% or 100% in stocks (where stocks are more volatile but offer higher returns).  If however, you plan on withdrawing that money 3 years from now for a down payment on a house, in that case you probably want most if not all of it in bonds (which offer less volatility and some return).

[LostInTheWoods]

Remember: the lower the fees the higher the returns - stay with Vanguard

[GGNoob]

I actually use Betterment (referral link) for my investing. I know there has been a lot of debate on that on this website, so I'll post about both Betterment and Vanguard.

With Betterment I have a Safety Net goal set up that's invested in 50% stocks and 50% bonds. I feel thats a good level of risk for me. That goal is just $10,000. Then I also have an Early Retirement goal set up. That's my main savings goal and is currently 90% stocks and 10% bonds. I'll adjust that down the road to stick with Betterment's advice as I get closer to my early retirement date. Then my last Betterment goal is my Roth IRA that is currently 100% stocks since I have a ways to go before I can touch that money.

Now with Vanguard, you can really do the same thing with lower fees. Sticking with Betterment's safety net advice, you could invest in the Vanguard LifeStrategy Conservative Growth Fund for your safety net. This is a 40% stock and 60% bond fund that is well diversified. Then for the rest of your savings and a Roth IRA, you could go with a Target Retirement fund that will adjust its allocation of stocks and bonds as you get closer to retirement to reduce your risk.

So whether you went with Vanguard or Betterment, you can easily choose a portfolio or fund with lower risk for an emergency fund and one with more risk for the rest of your savings. Personally, I'd much rather have a little risk with my emergency fund invested in stocks/bonds than keep it in a savings account while it loses value due to inflation.

[Glenstache]

The posters above have said some great things. But, one thing I'll add that I keep seeing over and over again in my reading is that unless you are an exceptionally proactive researcher (like those hired by the Yale Endowment who actually visit brick and mortar locations in their research) it is nearly impossible to beat the stock market over any period of time. This has been shown statistically for long term evaluations of individuals, hedge funds, etc.
So, the average investor is exceptionally unlikely to be able to successfully game/time the market buying and selling individual stocks. Index funds average over many stocks, so while some go up and some go down, your investment only really feels the long-term trends in the market that the index covers. They are your friend for the long haul- especially when you select strongly for low overhead funds such as those offered by Vanguard (see comments above)... and especially those that don't insert a financial planner as a middle man.

This is a long game and relatively simple strategies executed consistently can work. If you want to delve deeper, there are potential benefits, but it doesn't have to be a horrendously complicated endeavor.

[Alectejas]

You may want to consider investing in your own debt.  You have a "no risk investment" if you pay back the car loan or the student loans.  That is what I would do before investing in anything else.  Good luck :"