Author Topic: Beginner Investor Asset Allocation  (Read 16159 times)

StudentEngineer

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Beginner Investor Asset Allocation
« on: April 20, 2016, 07:21:26 PM »
Thanks for everyones comments!
« Last Edit: June 06, 2017, 10:02:11 AM by StudentEngineer »

Jack

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Re: Beginner Investor Asset Allocation
« Reply #1 on: April 20, 2016, 07:42:11 PM »
If you're a "beginner," sector funds and individual stocks aren't for you. (Even if you're not a beginner, those things probably still aren't for you, because they're really for almost nobody.)

100% VTSMX/VTSAX/VTI (the different share classes of total stock market) would be fine, but I'd do up to a 60/40 split with that and VGTSX/VTIAX/VXUS (total international stock market).

I don't think you need bonds except maybe as rebalancing fodder (maybe call it "damp powder") to take advantage of downturns, so maybe 0-10% VBMFX/VBTLX/BND. So, anything between 100/0/0 and 50/40/10 overall.

Captain Cactus

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Re: Beginner Investor Asset Allocation
« Reply #2 on: April 20, 2016, 08:21:51 PM »
First off, congrats on starting at such an early age.  If I were in your shoes I would be super aggressive:  75% VTSAX, 25% VTIAX (I'm not far from that now at 35 years old, but I work full time and have a small pension so I feel that I can be pretty aggressive). 

Just keep contributing and watch that baby grow.  I know that it's not exciting to stick to a few boring old index funds but it'll pay off for you in the long run. 

MustacheAndaHalf

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Re: Beginner Investor Asset Allocation
« Reply #3 on: April 21, 2016, 12:28:10 AM »
"Make about 5-7k a summer."

Roth IRA.  Put your first $5,500 per year in a Roth IRA.  Your tax rate will probably be close to 0%, and that money will never be taxed again.  You can make mistakes and fix them later - and not owe capital gains tax when you sell one investment and buy another (because Roth IRA never gets taxed again).  When you want to buy a house years from now, you'll discover contributions can be withdrawn - but the earnings must stay in the Roth IRA.  If you contribute $5,500 and it grows to $7,500... that allows $5,500 withdrawal (don't do it!) and $2,000 in earnings that stay until retirement.

I'd encourage you to start with a 3 fund portfolio and put your efforts into school/career... but I would really strongly encourage you to open a Roth IRA with your annual investment money (up to $5,500).

ecomic

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Re: Beginner Investor Asset Allocation
« Reply #4 on: April 21, 2016, 09:37:12 AM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

StudentEngineer

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Re: Beginner Investor Asset Allocation
« Reply #5 on: April 21, 2016, 09:55:53 AM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

Thanks for your comment.  I agree everyone should look for bargains when buying anything, but to 'look for timing oportunities" makes me think you are proposing to time the market?  From what I've read here and elsewhere this leads to stress and loss of capital, if we make the factual assumption that the general curve of the stock market is up, historically about 8% a year for stocks then wasting any time 'timing' the market will make you hesitant to enter the market and cut your future earning potential.  I think its much healthier financially and mentally to stick to a well diversified portfolio and dollar cost average what you are buying through a long term consistent buying approach. 

StudentEngineer

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Re: Beginner Investor Asset Allocation
« Reply #6 on: April 21, 2016, 10:01:38 AM »
"Make about 5-7k a summer."

Roth IRA.  Put your first $5,500 per year in a Roth IRA.  Your tax rate will probably be close to 0%, and that money will never be taxed again.  You can make mistakes and fix them later - and not owe capital gains tax when you sell one investment and buy another (because Roth IRA never gets taxed again).  When you want to buy a house years from now, you'll discover contributions can be withdrawn - but the earnings must stay in the Roth IRA.  If you contribute $5,500 and it grows to $7,500... that allows $5,500 withdrawal (don't do it!) and $2,000 in earnings that stay until retirement.

I'd encourage you to start with a 3 fund portfolio and put your efforts into school/career... but I would really strongly encourage you to open a Roth IRA with your annual investment money (up to $5,500).

That is an excellent idea.  I will definitely look into that and see how Vanguard does it (I bet it isn't terribly complicated), would you recommend what the above posters mentioned? VTSMX and VTIAX?

nereo

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Re: Beginner Investor Asset Allocation
« Reply #7 on: April 21, 2016, 10:06:29 AM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

Thanks for your comment.  I agree everyone should look for bargains when buying anything, but to 'look for timing oportunities" makes me think you are proposing to time the market?  From what I've read here and elsewhere this leads to stress and loss of capital, if we make the factual assumption that the general curve of the stock market is up, historically about 8% a year for stocks then wasting any time 'timing' the market will make you hesitant to enter the market and cut your future earning potential.  I think its much healthier financially and mentally to stick to a well diversified portfolio and dollar cost average what you are buying through a long term consistent buying approach.

I have to disagree with ecomic here. 1) your goal should be to use make much more than 1-2%/year over the next few decades.  5-7% real adjusted is a much more realistic and better target.  I would never recommend 'bit stock picking' to a beginner.  I also disagree that [asset allocation] depends on how much money the investor has.  Except in rare cases your AA should be similar regardless of whether you have $5k to invest or $50k (the only thing that will change is which bucket you will use).  I'd also advise caution whenever a stranger on the internet says "now is the time to buy XXX".

+1 to putting it $5500 into a ROTH.  I recommend investing in a low cost, broad market index fund that you are comfortable with.

StudentEngineer

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Re: Beginner Investor Asset Allocation
« Reply #8 on: April 21, 2016, 10:12:03 AM »
If you're a "beginner," sector funds and individual stocks aren't for you. (Even if you're not a beginner, those things probably still aren't for you, because they're really for almost nobody.)

100% VTSMX/VTSAX/VTI (the different share classes of total stock market) would be fine, but I'd do up to a 60/40 split with that and VGTSX/VTIAX/VXUS (total international stock market).

I don't think you need bonds except maybe as rebalancing fodder (maybe call it "damp powder") to take advantage of downturns, so maybe 0-10% VBMFX/VBTLX/BND. So, anything between 100/0/0 and 50/40/10 overall.

There we go, figured out how to reply to multiple people in one post.  I agree with your asset types, but I am leaning towards being more aggressive and sticking with the US market more, and probably 0 % bond for a few years at least.  Right now I like a 80/20 US/International distribution (maybe 90/10).  Thanks for your comment!


First off, congrats on starting at such an early age.  If I were in your shoes I would be super aggressive:  75% VTSAX, 25% VTIAX (I'm not far from that now at 35 years old, but I work full time and have a small pension so I feel that I can be pretty aggressive). 

Just keep contributing and watch that baby grow.  I know that it's not exciting to stick to a few boring old index funds but it'll pay off for you in the long run. 

Thanks Captain.  The goal is to get the snowball of compound interest working in my favor as soon as I can.  I'll look into selling my funds shortly and getting the two you recommend.  Is there a reason why you recommend 25% international besides the diversification?  From what I've read it has tended to perform a bit worse than the US market, seeing as how I have a long time horizon should I stick with more US?
« Last Edit: April 21, 2016, 10:15:29 AM by StudentEngineer »

StudentEngineer

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Re: Beginner Investor Asset Allocation
« Reply #9 on: April 21, 2016, 10:18:10 AM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

Thanks for your comment.  I agree everyone should look for bargains when buying anything, but to 'look for timing oportunities" makes me think you are proposing to time the market?  From what I've read here and elsewhere this leads to stress and loss of capital, if we make the factual assumption that the general curve of the stock market is up, historically about 8% a year for stocks then wasting any time 'timing' the market will make you hesitant to enter the market and cut your future earning potential.  I think its much healthier financially and mentally to stick to a well diversified portfolio and dollar cost average what you are buying through a long term consistent buying approach.

I have to disagree with ecomic here. 1) your goal should be to use make much more than 1-2%/year over the next few decades.  5-7% real adjusted is a much more realistic and better target.  I would never recommend 'bit stock picking' to a beginner.  I also disagree that [asset allocation] depends on how much money the investor has.  Except in rare cases your AA should be similar regardless of whether you have $5k to invest or $50k (the only thing that will change is which bucket you will use).  I'd also advise caution whenever a stranger on the internet says "now is the time to buy XXX".

+1 to putting it $5500 into a ROTH.  I recommend investing in a low cost, broad market index fund that you are comfortable with.

Thanks for the comment nereo. I agree with all of your sentiments.  Do you any have specific funds you like over another for whatever reason?

nereo

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Re: Beginner Investor Asset Allocation
« Reply #10 on: April 21, 2016, 11:38:58 AM »


Thanks for the comment nereo. I agree with all of your sentiments.  Do you any have specific funds you like over another for whatever reason?

My AA is dead-simple.  80% in the SP500 (Vanguard's VFIAX) and 20% in their international fund (VTIAX).
Many will recommend the total market index fund (VTSMX) which gives you additioanl exposure to small and mid-sized companies.  Which will do better in the future is anyone's guess... they are both fairly close with a lot of overlap (the 500 largest companies compromise about 80% of the total market index).

Ultimately though, you need to come up with your own Investor Policy Statement that defines your AA.  Once you have that, stick to it.  It doesn't need to be complicated (i'd argue that it should be as simple as possible).  Having an ISP prevents you from chasing different market sectors which almost always leads to buying high and selling low.

Jack

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Re: Beginner Investor Asset Allocation
« Reply #11 on: April 21, 2016, 12:29:10 PM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

This guy's advice is just as good as his writing!

If you're a "beginner," sector funds and individual stocks aren't for you. (Even if you're not a beginner, those things probably still aren't for you, because they're really for almost nobody.)

100% VTSMX/VTSAX/VTI (the different share classes of total stock market) would be fine, but I'd do up to a 60/40 split with that and VGTSX/VTIAX/VXUS (total international stock market).

I don't think you need bonds except maybe as rebalancing fodder (maybe call it "damp powder") to take advantage of downturns, so maybe 0-10% VBMFX/VBTLX/BND. So, anything between 100/0/0 and 50/40/10 overall.

There we go, figured out how to reply to multiple people in one post.  I agree with your asset types, but I am leaning towards being more aggressive and sticking with the US market more, and probably 0 % bond for a few years at least.  Right now I like a 80/20 US/International distribution (maybe 90/10).  Thanks for your comment!

Can't argue with that... my portfolio is essentially 80/20 VTSAX/VTIAX too. (Except for my crappy 401k, where I had to approximate with an S&P 500 fund instead.)

ecomic

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Re: Beginner Investor Asset Allocation
« Reply #12 on: April 22, 2016, 02:43:19 AM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

Thanks for your comment.  I agree everyone should look for bargains when buying anything, but to 'look for timing oportunities" makes me think you are proposing to time the market?  From what I've read here and elsewhere this leads to stress and loss of capital, if we make the factual assumption that the general curve of the stock market is up, historically about 8% a year for stocks then wasting any time 'timing' the market will make you hesitant to enter the market and cut your future earning potential.  I think its much healthier financially and mentally to stick to a well diversified portfolio and dollar cost average what you are buying through a long term consistent buying approach.

I have to disagree with ecomic here. 1) your goal should be to use make much more than 1-2%/year over the next few decades.  5-7% real adjusted is a much more realistic and better target.  I would never recommend 'bit stock picking' to a beginner.  I also disagree that [asset allocation] depends on how much money the investor has.  Except in rare cases your AA should be similar regardless of whether you have $5k to invest or $50k (the only thing that will change is which bucket you will use).  I'd also advise caution whenever a stranger on the internet says "now is the time to buy XXX".

+1 to putting it $5500 into a ROTH.  I recommend investing in a low cost, broad market index fund that you are comfortable with.

Thanks for the constructive response, 
I just wanted to tint a bit my own words from that post.
When i say that making a 1-2% profit is good enough, i was refering to a specific investment (not the total output for the whole year). It is better to make a 2% in one year than losing a 1% we all agree on that.
About the timing, I was referring to be patient enough to wait for the right time to buy and sell. I have seen many people walking in the bank with some heritage they got and my colleagues offering them to buy whatever is hot at that time, lets say some fund, stock, bond, etc. These people just need to be lucky in order to make a profit, becasue maybe they are entering the market when it is hitting a resistance. The majority of "comercial" advisors are people who studied all that theory and apply it as it is written in the books. That is not good enough. I am my own financial advisor and (knock on wood) I have never lost a dollar from my own money.

(My opinions are just opinions and this is one of them) Keeping in mind the actual situation in the OIL sector, it is not a bad advise to say that the time to buy oil companies is coming to an end. To make real returns (above 10%) with oil companies it is now time to buy because OPEC won't be able to afford these prices much longer. Saudi Arabia has a 20% public deficit, Russia around 10% and Venezuela is about to collapse if things donīt change soon.

Jack

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Re: Beginner Investor Asset Allocation
« Reply #13 on: April 22, 2016, 12:43:58 PM »
About the timing, I was referring to be patient enough to wait for the right time to buy and sell. I have seen many people walking in the bank with some heritage they got and my colleagues offering them to buy whatever is hot at that time, lets say some fund, stock, bond, etc. These people just need to be lucky in order to make a profit, becasue maybe they are entering the market when it is hitting a resistance.

Bullshit. All they have to do is simply buy everything, i.e., a total stock market index fund. They'll easily "make a profit" sooner or later, just not the alpha that you seem to be chasing.

StudentEngineer

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Re: Beginner Investor Asset Allocation
« Reply #14 on: April 22, 2016, 10:20:31 PM »
well, all this is very nice becasue it gives people a job... and it is useful to know all this stuff... but please dont stick to the theory because if you do you are sentenced to fail...

All advisors know all this, but not all of them get good results... even worse, the majority get bad results at the end of the year.. just move with the trends... when economy is going well, everyone makes money... We want somneone who can make money when nobody else can...

Asset allocation is important, yes!! bit stock picking its even more important!! To decide whether a person is too old to asume certain risks it is obvious... it will always depend how much money theinvestor has tho...

Focus on values... stocks that are undervalued... look for timing oportunities (Now its time to buy oil) maybe in 3 years it time to sell oil stocks... The only goal is NOT TO LOSE MONEY... its ok if you just make a 1% or 2%...

Thanks for your comment.  I agree everyone should look for bargains when buying anything, but to 'look for timing oportunities" makes me think you are proposing to time the market?  From what I've read here and elsewhere this leads to stress and loss of capital, if we make the factual assumption that the general curve of the stock market is up, historically about 8% a year for stocks then wasting any time 'timing' the market will make you hesitant to enter the market and cut your future earning potential.  I think its much healthier financially and mentally to stick to a well diversified portfolio and dollar cost average what you are buying through a long term consistent buying approach.

I have to disagree with ecomic here. 1) your goal should be to use make much more than 1-2%/year over the next few decades.  5-7% real adjusted is a much more realistic and better target.  I would never recommend 'bit stock picking' to a beginner.  I also disagree that [asset allocation] depends on how much money the investor has.  Except in rare cases your AA should be similar regardless of whether you have $5k to invest or $50k (the only thing that will change is which bucket you will use).  I'd also advise caution whenever a stranger on the internet says "now is the time to buy XXX".

+1 to putting it $5500 into a ROTH.  I recommend investing in a low cost, broad market index fund that you are comfortable with.

Thanks for the constructive response, 
I just wanted to tint a bit my own words from that post.
When i say that making a 1-2% profit is good enough, i was refering to a specific investment (not the total output for the whole year). It is better to make a 2% in one year than losing a 1% we all agree on that.
About the timing, I was referring to be patient enough to wait for the right time to buy and sell. I have seen many people walking in the bank with some heritage they got and my colleagues offering them to buy whatever is hot at that time, lets say some fund, stock, bond, etc. These people just need to be lucky in order to make a profit, becasue maybe they are entering the market when it is hitting a resistance. The majority of "comercial" advisors are people who studied all that theory and apply it as it is written in the books. That is not good enough. I am my own financial advisor and (knock on wood) I have never lost a dollar from my own money.

(My opinions are just opinions and this is one of them) Keeping in mind the actual situation in the OIL sector, it is not a bad advise to say that the time to buy oil companies is coming to an end. To make real returns (above 10%) with oil companies it is now time to buy because OPEC won't be able to afford these prices much longer. Saudi Arabia has a 20% public deficit, Russia around 10% and Venezuela is about to collapse if things donīt change soon.

I appreciate your knowledge and you seem to have it fairly well figured out for yourself, it has been proven that buying broad index funds is a pretty foolproof way of making a good return over a long time period.  Getting into the minutia of the market requires an enormous amount of time to properly see everything about all the factors that affect the stock market (such an amount of information that may not be able to be sifted through alone).  Personally, I would rather spend my time in other areas.

Slightly related to your point of inheritances, I read an article on Vanguard a while ago and their study concluded that investing with a lump sum is generally better than dollar cost averaging and that is due to the longterm rise of the stock market (more time in = more opportunity for return).  Regardless it's key to make an ISP (which I'll be doing shortly) and stick to it to mitigate emotional investing which you mentioned with people buying whats hot.