Author Topic: Balancing short and long term investments  (Read 1272 times)

hamman88

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Balancing short and long term investments
« on: May 23, 2016, 10:38:30 AM »
Some background..

I'm a 24 year old masters student making $17k a year with a couple extra k a year from ebay.  Starting January I will probably be an engineer making about $40-50k a year.  I have about 20k saved up know.  No debt, no nothing.  My current job has a 403b but no matching, I do not use it.  I recently opened up a Vanguard account with a Roth IRA but have yet to purchase anything.  Previously I have lost about $2k on bad investments, but I consider it a lesson well learned and will not repeat that.

My goals...

I hope to semi retire in less than 10 years.  Purchasing a large piece of rural river front property is a major priority of mine, this will likely be about $500k.

My question...
Even though I will be retired well before I can do normal withdraws from my IRA, its foolish not to use that to its fullest extent.  But what about my short term goals?  I dont what my money disappearing to inflation, or all my principal disappearing due to a down stock market.  A major delay to my goal of owning property because the stock market crashed would not make me happy.  Should I be saving for this goal in a taxable account?  Bonds seem to be about the amount of risk I want for this goal, but I heard they are bad for a taxable account.  Put the bonds in the IRA and stocks in the taxable and withdraw the principal from the IRA? 

Any advice would be great.

AlmstRtrd

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Re: Balancing short and long term investments
« Reply #1 on: May 28, 2016, 07:26:46 AM »
hamman88, you are trying to figure everything out in one post. Looks to me like you need to better understand what different investments can do for you over time. And, of equal importance, you need to understand and accept that all investments come with some risk. For example, if you think losing $2K is not going to happen again, you need to understand the numbers on a larger scale. Someone with a million bucks invested in stocks "loses" $100,000 if the market corrects by 10%. They don't then consider the stocks as a "bad investment." It's just a portfolio fluctuation that comes with the territory of having accumulated a good amount of money.

Get that job first and save your money. You're probably going to want some combination of retirement accounts and taxable investments. You can reevaluate in five years and take another look at the riverfront property dream. You may find that when it starts to become potentially realistic, it's no longer a priority for you. Just my opinion, of course, but I would recommend to take it all in smaller steps.

Radagast

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Re: Balancing short and long term investments
« Reply #2 on: May 28, 2016, 09:40:20 AM »
I don't think you can both buy a 500k property and retire after ten years on a 50k salary. It might best to invest in a more agressive manner with a long term view and take things as they come and as you learn more about investing and your dream.

Bonds by themselves are not great and generally riskier than if combined with stocks. If you have a specific date in mind I recently learned of an iShares series of corporate bond etf's that mature on a specific date, which seem like a good deal if you know your date to the nearest year.

Barring that the best option is probably Vanguard's balanced funds. The constant allocation ones have little writeups that say "use this fund if your goal is x years away" just go by that. I guess you could choose a target date fund as well. You'd have to find one that started with a high stock allocation and then moved largely to bonds over your time frame. 2030 or 2035 maybe. These dates are too conservative for a long run plan though.

MustacheAndaHalf

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Re: Balancing short and long term investments
« Reply #3 on: May 28, 2016, 10:10:13 AM »
"You can't always get what you want... but if you try sometimes, you might get what you need."
- Rolling Stones

You haven't left college and want to retire in 10 years.  Rather than focus on getting something you want on your time frame, focus on the habits that will get you closer to your goal.  It's hard to focus for 3,600 days in a row on a 10 year goal, so you should break it down into smaller goals.  Also, you lack data - will all $40,000 go to savings, or will you need to pay rent and taxes?  So focus on good habits or shorter term goals for now, starting with what you can do with $17,000 / year income.

Are you incurring student debt?  What interest rate will you be paying?  When you have debt, that establishes your base line value of money.  If bonds are paying 2% (taxable) but your student loans cost you 4%, then you should take the 4% risk free return by paying down the loan (which means no more interest payments on the amount you paid off, which is where the 4% comes from).

Do you have an emergency fund?  Finding a place to rent before you have a job may be challenging, and you might need to put up more than a month's rent.  An emergency fund can tide you over while you find a job, but an emergency fund needs to be in cash.

You have the right idea saving in a Roth IRA.  It should be hard to make a mistake at Vanguard, but aim for low cost index funds.  Things like Total Stock Market, or Target Retirement will work well for starters.  Besides the Roth IRA, you can save in a taxable account.

So overall, check your student debt interest rate, build up an emergency fund, max the Roth IRA, save in taxable... and aim for low cost index funds.  When your situation changes, then you analyze your new situation with the new information (like rent and taxes on a $40k income).