Author Topic: Please help a newbie  (Read 4550 times)

pumen

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Please help a newbie
« on: October 26, 2015, 05:18:05 PM »
Hi. I am very glad I found this forum. I am fairly new to the investment and will really appreciate any advice.

I live outside the US, in a relatively low cost of living country in the Eastern Europe. I have a well paying and relatively stable job (considering the average wages in this country). I live quite frugally with monthly spending of no more than $2500 and am a good saver. I have no debt. I have been saving money to buy my own house; however, opted not to buy, so I am all in cash, which is sitting in the savings accounts, earning nothing. The reason I have not been investing is perhaps my lack of knowledge (being outside the US is not really helpful also) and very uncertain economic situation. However, I also understand that I need to start some investing, otherwise inflation will eat everything. So any advice here will be appreciated.

My main concern (and has been in the past few years) is whether now is the right time to buy. I personally believe equity markets are significantly overvalued due to the vast amounts of cheap/printed money and major correction is on its way (however, I had similar thoughts in the past years as well, so due to being afraid, missed a golden opportunity to significantly increase my net worth!). I felt that what has happened in August and September was a major correction starting and decided that I will start buying if stocks go down at least 25-30%; yet, the markets came back and are now again on track to reach all time high. I still believe there are no fundamental reasons for such amazing stock market growth in the past few years , the only reasons - QE and other government policies.

I have around US$570K in cash sitting in the various savings accounts, earning nothing. I realise that I am losing value due to inflation and due to my ignorance, am not increasing my net worth. Additional information:

Age: 31

Income: about $95-110k (net of tax)

Emergency funds: I would like to keep at least 12months in case I lose my job. My monthly spending is not huge just around $2,500, so having $30,000 as emergency funding should be sufficient.

No debt

Status: single

Tax rate: 0%

State: n/a as I left US about 8 yrs ago and live outside the US

Cash: Savings accounts: $570,000

Investment money (linked to my employer):

Money contribution plan = $68,000 (this is an investment account with almost 80% contributed by the employer. The funds are invested in the USD biased fund)

Defined benefit plan: balance as of today is about $190,000. This amount I can receive if I leave my current employer. The amount depends on the final gross annual salary and number of years worked.

Desired Asset allocation: 80% stocks / 20% bonds. Ideally, I can even tolerate 100% in equity, but am concerned with the timing. The markets are almost at all time high, so I am very unsure if it is the right time to buy now.

I am also considering buying a property for myself for around no more than $180,000-200,000 in early 2016; so, really need to find a proper investment strategy for the remaining amount of ca. $370,000-400,000

Questions:

- How should I start investing? Buying at once or during a certain period of time?

- Is it a right time to buy now, given the uncertainty in the markets and generally not so good fundamental reasons for the stocks to continue their growth? In my view, major correction might be coming, but, as I said before, I thought so a few years ago as well and basically missed the boat.

- If I choose to invest into equity, can you recommend any ETFs which I should consider?

Interest Compound

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Re: Please help a newbie
« Reply #1 on: October 26, 2015, 05:32:13 PM »
It's hard to give investing advice without knowing which country you're in, as each country may have different laws on how/where you can invest.

Also, here's a fun quote I saw on the forum the other day:

FACT: Since 1928, on average the S&P 500 index has hit a new high every 18 days.
FACT: Since 1928, the stock market has fallen 50% or more only 3 times.

Jeremy E.

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Re: Please help a newbie
« Reply #2 on: October 26, 2015, 06:20:34 PM »
I'd recommend researching investment possibilities in your country and going from there. I'd probably recommend an equivelant of VT for a european investor if one is available. Once you find out the best way to invest, I'd put a majority of your money into said investment. Here is an article that might help, you should also read his entire stock series if you have not done so yet.
http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/
http://jlcollinsnh.com/stock-series/

FrugalFan

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Re: Please help a newbie
« Reply #3 on: October 26, 2015, 07:25:20 PM »
Wow, you have a lot of money! Time to start putting it to work for you! I research shows that it is best to invest in a lump sum than over time, but I don't remember where I read that. If you are really nervous, you could invest it once per month , 20-30 k at a time.

DaveR

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Re: Please help a newbie
« Reply #4 on: October 26, 2015, 09:43:59 PM »
Vanguard did a study on lump sum vs dollar cost averaging (buying over time): https://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
Worth a read.

How I would approach the situation: set aside the $30k emergency fund and $200k house fund. See if you can at least get those into something with a little bit of yield. The remaining cash use to buy your 20% bond allocation and more equities, but save a portion for the potential market drop. How much? It depends on how risk averse you are...since you are sitting on so much cash, worried about a market drop, then maybe 80/20 isn't the right allocation for you (at this point). Maybe go 25/60/15 bond/equity/cash right now...you'll put most of your cash to work but still have some in reserve if the market drops.

Heckler

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Re: Please help a newbie
« Reply #5 on: October 26, 2015, 11:13:29 PM »

pumen

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Re: Please help a newbie
« Reply #6 on: October 27, 2015, 05:36:42 AM »
Vanguard did a study on lump sum vs dollar cost averaging (buying over time): https://pressroom.vanguard.com/content/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf
Worth a read.

How I would approach the situation: set aside the $30k emergency fund and $200k house fund. See if you can at least get those into something with a little bit of yield. The remaining cash use to buy your 20% bond allocation and more equities, but save a portion for the potential market drop. How much? It depends on how risk averse you are...since you are sitting on so much cash, worried about a market drop, then maybe 80/20 isn't the right allocation for you (at this point). Maybe go 25/60/15 bond/equity/cash right now...you'll put most of your cash to work but still have some in reserve if the market drops.

Many thanks for your advice. It makes sense. Ideally, I want to put a significant proportion into equity as I am relatively young and will probably not need at least $400,000 in the next 5-10 years (unless I lose my job, but I will have some emergency funding for that purpose and should I lose my job, will get a severance package for about further 8-9 months of my salary and will get access to my defined benefit plan funds). However, as noted above, I am still very sceptical about the current situation in the stock markets and believe a major correction is possible in the coming 6 months (yet, I thought about this in 2012, 2013 and it never happened). It will be stupid to invest everything at the peak and then wait another 5-6 years for the markets to recover. Therefore, when I say about the 80/20 allocation, that would be in an ideal setting.

DaveR

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Re: Please help a newbie
« Reply #7 on: October 27, 2015, 10:31:21 AM »
Sitting on the sidelines with 85% cash is silly.

I'm suggesting you go 25% bonds, 60% equity, and only 15% cash. You have $68k in an employer plan and another $400k in cash. Buy some bonds, buy some stocks.

I'll hand-wave a little on the math, but can elaborate if needed.

Let's say a year from now, you're right and the market has declined 20% (which has a 4.4% probability based on S&P 500 closing prices over all 252 day periods since 1950). Because of the cash and bond buffer, your portfolio is only down 13.4%. And the stocks and bonds will pay out a few thousand in dividends. Yeah! stocks are on sale, so you rebalance to 80/20, selling bonds and using the proceeds plus cash to buy more stocks. After another year, lets say the market has only recovered 10% (so still 10% below today; probability 50.1%). Dividends + gains means your portfolio is only down 4.5%, not 10%.

What that looks like in table form:

TodayYear 1(Down 20%)RebalanceYear 2(Up 10%)
Bonds25% $117,000 28% $117,000 20% $83,515 19% $83,515
Equities60% $280,800 54% $224,640 80% $334,058 80% $357,442
Cash15% $70,200 18% $75,933 0% $-   1% $5,428
Total100% $468,000 100% $417,573 100% $417,573 100% $446,386

But... that scenario is not that likely. It's much more probable the market will slump 5% (prob 19.4%) then bounce back the mythical 7% (prob 58.7%). If that happens, then the exact same strategy as above will result in portfolio up 8.4% vs. the market's 1.65%.

Full disclosure: I'm 10%+ cash right now. It was higher, but I put 1/3 of my cash into the index funds a few weeks ago when down 10%.

forestj

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Re: Please help a newbie
« Reply #8 on: October 28, 2015, 09:39:31 PM »
If I had as much money as you, I would shove it all in a low cost target date fund, retire, and let it ride. But I only spend about $1k a month, so YMMV.

DaveR

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Re: Please help a newbie
« Reply #9 on: October 29, 2015, 09:05:30 AM »
Thank you. This really makes sense. For the equity, do you recommend ETFs or stocks?

ETF = Exchange Traded Fund. It's a mutual fund packaged up to sell like a stock. The fund can be equities (stocks), bonds, REITs, exotic stuff, or combinations.

A combo might be one of those target date funds, which has a mix of stocks/bonds; when the target is, say 2045, it might be a 85/15 mix; as the date gets closer, the mix is rebalanced and gets more conservative...so less stock and maybe a 55/45 mix in the end. It's a one-stop-shop that changes as you age.

As a newbie, you are best sticking with simple index funds for all of your investments. You could purchase direct, or get them wrapped in an ETF. Since you have a majority in taxable accounts, ETFs are a little more tax efficient. Being an expat though, I have no idea on how all of this affects your taxes.

A couple of resources to check out:
http://jlcollinsnh.com/stock-series/ (Good foundation for all investors)
https://www.etf.com/docs/IfYouCan.pdf (a 15pg ebook by Bill Bernstien. His Four Pillars of Investing is also worth a read)
https://www.bogleheads.org/wiki/Main_Page (Bogelheads wiki and forums have lots of good info and helpful people)

Jeremy E.

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Re: Please help a newbie
« Reply #10 on: October 29, 2015, 10:13:29 AM »
Personally,
I think 15% cash is ridiculous, I don't see any reasons to have more than an emergency fund of 3-6 months.

pumen

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Re: Please help a newbie
« Reply #11 on: October 29, 2015, 10:29:46 AM »
Thank you. This really makes sense. For the equity, do you recommend ETFs or stocks?

ETF = Exchange Traded Fund. It's a mutual fund packaged up to sell like a stock. The fund can be equities (stocks), bonds, REITs, exotic stuff, or combinations.

A combo might be one of those target date funds, which has a mix of stocks/bonds; when the target is, say 2045, it might be a 85/15 mix; as the date gets closer, the mix is rebalanced and gets more conservative...so less stock and maybe a 55/45 mix in the end. It's a one-stop-shop that changes as you age.

As a newbie, you are best sticking with simple index funds for all of your investments. You could purchase direct, or get them wrapped in an ETF. Since you have a majority in taxable accounts, ETFs are a little more tax efficient. Being an expat though, I have no idea on how all of this affects your taxes.

A couple of resources to check out:
http://jlcollinsnh.com/stock-series/ (Good foundation for all investors)
https://www.etf.com/docs/IfYouCan.pdf (a 15pg ebook by Bill Bernstien. His Four Pillars of Investing is also worth a read)
https://www.bogleheads.org/wiki/Main_Page (Bogelheads wiki and forums have lots of good info and helpful people)

Thank you for your help! I will read these now. Yes, tax situation is more complex for an expat, but I do not plan selling anything in the short term, so should not worry about this at this stage. Hopefully when I start selling, I will not be an expat.