Author Topic: Convinced spendy parents to open investment account - don't want to fuck it up!  (Read 3129 times)

Hey It's Me

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I convinced my spendy parents to open up an investment account with $10,000 (nearly their entire savings, unfortunately). The back story is, I've been trying to get my mother to save for a long time, but she didn't understand the big picture of why anyone would do that and what the benefit was of having money "sitting around."

She recently complained that she had this money in the bank and was upset that it was just losing value each year. (She doesn't understand inflation, per se - just that she can't buy as much with her dollar as she used to be able to.) I used this as an opportunity to explain investments, and show her (for the first time) my investments which had earned ~$200 in the past month. I think if I can show her that her money can make her more money, she will be more motivated to save rather than blow her money away.

So I'm opening up a  Fidelity account for her. (She's not a permanent resident in the US yet, and so Vanguard asks for documentation mailed. I know this will just freak her out... baby steps...) We're going to be putting in $5,000 to start, and - hopefully - adding money periodically. I need to come up with investments for her, which is where I need your help. (Both in terms of asset allocations, and funds you'd recommend.)

General guidelines:
  • The investments need to be super conservative. I need to build trust with her here, and I know if she sees she lost money she will freak out and want to withdraw.
  • They need to provide better returns than a money market, or savings account. (This one is kind of obvious, but she needs to see the money working for her)
  • The investments need to be fairly liquid (she, in all honesty, will probably not need to withdraw the funds in the short term, but wants to be assured that she can access the money and someone isn't "taking it away from her.")

My parents are super spendy and have basically no financial literacy. I want to introduce them to investing, hopefully be able to show them the benefits (without initially getting too technical; if this lands, we can get into that), and give them an incentive to save and invest. Any advice here is much, much appreciated.
« Last Edit: May 02, 2015, 04:23:47 PM by moe_rants »

Dodge

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Usually I'd recommend a Vanguard LifeStrategy fund for situations like this.  Unfortunately, Fidelity's Asset Allocaiton funds aren't impressive.  I find the allocation to "short-term/money markets" to be pointless, but the fees are also quite ridiculous at 0.53% compared to Vanguard's 0.14% for the same 20/80 stock/bond fund I'd recommend here.

If you also find these fees to be ridiculous, you can go with the standard 3 fund portfolio:

10% - Fidelity Spartan Total Market Index Fund (FSTMX)
10% - Fidelity Spartan Global ex U.S. Index Fund (FSGDX)
80% - Fidelity Spartan U. S. Bond Index Fund (FBIDX)

Why do I recommend a 20/80 stock/bond portfolio?  Because it's the least volatile stock/bond asset allocation, and you've indicated you want a "super conservative" portfolio.


Hey It's Me

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Dodge, that asset allocation is very helpful; I think the 20-80 split makes sense in this scenario.

With regards the actual funds, I know all three have minimum investment requirements (FSTMX AND FBIDX require $2,500 and FSGDX requires $10,000). Since they're starting out with $5,000, can you recommend funds with lower minimums?
« Last Edit: May 02, 2015, 04:42:50 PM by moe_rants »

Dodge

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Dodge, that asset allocation is very helpful; I think the 20-80 split makes sense in this scenario.

With regards the actual funds, I know all three have minimum investment requirements (FSTMX AND FBIDX require $2,500 and FSGDX required $10,000). Since they're starting out with $5,000, can you recommend funds with lower minimums?

Opps, sorry. I assumed it was $1,000 like Vanguard.  You can use FSGUX instead of FSGDX, but even that won't let you get all 3 funds with $5000 to start.  You can either skip international for now, and go 50/50 US Stocks/Bonds, or go with their 20/80 asset allocation fund.  Really, the more I think about it, I think I'd just do that.  Keeps things very simple for the parents, since they won't see the stock fund moving up and down rapidly and freak out, even though the bond fund is consistently moving up.

Along those lines, it might be worth bumping up to the 30/70 fund, since the "short term/money market" allocation really tones down the risk.

Financial.Velociraptor

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Dodge has hit the nail on head with 20 stock 80 bond AA.  You might discuss the international part with your parents to see what they are comfortable with.  Instead of total intl, they might one X-frontiers to reduce volatility further (or maybe no intl at all?!?).

Will this be a taxable or advantaged account?  You need to plan for dividend distributions.  If taxable, might put at least some of the total bond allocation to a municipal bond fund (super safe and tax efficient.)  Over the next 3 years or so, I'll be putting almost all new money towards closed end municipal bond funds NIO and NEA. 

You might look for a short duration bond fund as well.  If interest rates start to rise in the US, a short duration fund will suffer less.

Hey It's Me

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I don't think I'm going to get into the AA with them at all to begin with. At this point, I think it would confuse them more than it would help - this will be their first investment.

It is also a standard brokerage account, not a tax advantaged/deferred account, because they want access to the money (again, it's more of a psychological thing, as they likely will not actually need the money in the short term). Once they get comfortable with the idea of investing, I'm going to approach the conversation of tax advantaged retirement accounts. My mother is already nearly 50 and my father 54, so they're not that far off from retirement, but it's an education play and I want to take this slowly.

EDIT: On that note, now that I think of it a Roth IRA might work perfectly for them... They're under the income limits and they can withdraw principal at any time if they wish. Additionally, since they're pretty low income, they should receive a portion of their contributions back at tax time with the Retirement Saver's Credit. Thoughts?
« Last Edit: May 02, 2015, 05:13:40 PM by moe_rants »

superannuationfreak

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On that note, now that I think of it a Roth IRA might work perfectly for them...

A Roth IRA is a great idea and approximately 20% Equities sounds solid.

Two lower starting balance options come to mind.

If your parents may look at the individual investments it may be better to use an all-in-one fund even at a slightly higher expense ratio.  This means they won't see the shares fund drop substantially and you won't need to rebalance.  I suggest Fidelity FreedomŽ Index Income Fund (gross expense ratio 0.25% p.a.)

If you're happy to do trades for them, a cheaper choice is to use iShares ETFs for the equity portion.  These have no commissions at Fidelity if you aren't buying and selling constantly.  For example ($ figures for the ETFs will be rough as you can only buy whole shares):
$1,000 Core S&P Total U.S. Stock Market ( ITOT )
$1,000 Core MSCI Total International Stock ( IXUS )
$3,000 Fidelity Spartan U. S. Bond Index Fund (FBIDX)


Hey It's Me

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Thanks superannuationfreak, ITOT and IXUS are great suggestions since they have no minimum investment requirements. I think I'm going to stick to 10-10-80 (US, International, Total Bond) though, as suggested a bit further up. This will allow me to meet the minimum for FBIDX. I will be doing the trading for them exclusively, especially in the beginning - my fear is they will sell at the first drop and end up losing money. Better to give them access when they're better educated on the market.

Thanks also for the feedback on the Roth. I think I'll definitely start them off with that, and try to get them to max out at least one Roth. Any additional money (strange to think of the possibility of my crazy parents who have been paycheck to paycheck their whole lives investing 11,000 in a single year - stretch goal to the extreme, but you never know), I can put in a brokerage account.

So:
- $500 Total US (ITOT?)
- $500 Total Int (IXUS)
- $4000 US Bond (FBIDX)

Look good for the initial $5000 investment?
« Last Edit: May 02, 2015, 07:38:11 PM by moe_rants »

superannuationfreak

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Thanks superannuationfreak, ITOT and IXUS are great suggestions since they have no minimum investment requirements. I think I'm going to stick to 10-10-80 (US, International, Total Bond) though, as suggested a bit further up. This will allow me to meet the minimum for FBIDX. I will be doing the trading for them exclusively, especially in the beginning - my fear is they will sell at the first drop and end up losing money. Better to give them access when they're better educated on the market.

Thanks also for the feedback on the Roth. I think I'll definitely start them off with that, and try to get them to max out at least one Roth. Any additional money (strange to think of the possibility of my crazy parents who have been paycheck to paycheck their whole lives investing 11,000 in a single year - stretch goal to the extreme, but you never know), I can put in a brokerage account.

So:
- $500 Total US (ITOT?)
- $500 Total Int (IXUS)
- $4000 US Bond (FBIDX)

Look good for the initial $5000 investment?

Yep, that was just me miscalculating.  You'll find with ETFs it won't be exact (e.g. ITOT was most recently $96.30 so you'd buy 5 shares) but close enough is good enough.

Hey It's Me

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Great, thanks so much for all your help here. I'm so excited to have my parent on board with this!

I'll update in a few days when we've made the investment (we need to enroll by mail to link up their bank accounts because of their crappy local bank... if anyone knows a way around this I'd greatly appreciate it!!)