Author Topic: what to do with this first 30K?  (Read 8796 times)

DenverStache

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what to do with this first 30K?
« on: January 28, 2013, 04:13:57 PM »
So far this message board has been very valuable and I can not begin to thank the people who consistently reply.  I would like to get some input from the group.  I have read MMMs posts about Vanguard funds and his investing philosophy but now I must put it to work.  Since this will be my first contribution to my "young man" money, I would like your advice.

I have recently sold ~30K of individual stocks (employee stock purchase program).  I would like to use this as my first cash into my "young man" money and therefore I was planning on putting it an an taxable individual account that can be accessed prior to 69.  From this month forward I will be contributing to it.  Here are my questions:

1.  My 401k is with Fidelity but most people tout Vanguard on this forum.  Is it worth opening an account with Vanguard or should I just use Fidelity?
2.  ETFs or Index funds? 
3.  Allocation?
4.  How would you invest this first 30K?  Buy all at once or make purchases over several months/weeks?


Any other advice that you can provide is appreciated.  What is your process of building up your "young man" money?  Do you buy at the same time every month or wait for a market drop?  Do you buy the same allocation every month or change it?

Thank you in advance.

Another Reader

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Re: what to do with this first 30K?
« Reply #1 on: January 28, 2013, 04:48:13 PM »
Most folks here prefer Vanguard.  With some folks, the preference borders on a religious fanaticism that I don't share.  I like Fidelity because it has offices you can walk into and get help, a better website, and a broader choice of products.  In your shoes, I would talk to both companies and I would compare returns and expenses on various funds and ETF's. 

Have you fully funded your IRA?  If not, in your shoes I would look at that first.  There is a lot of discussion in a number of threads about the plusses and minuses of Roth and Traditional IRA's.  Roth IRA's are generally more useful in your younger years, because contributions can be withdrawn without tax or penalty.  Taxable accounts are subject to income taxes on interest, dividends, and capital gains. 

It sounds like you have made a good start.  Just pay attention to your money, learn as you go along and you will be fine.

momo

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Re: what to do with this first 30K?
« Reply #2 on: January 28, 2013, 05:04:30 PM »
DenverStache: Congratulations on deciding to dedicate your ESPP sales to proactively fund your retirement! This is a lifelong habit and it's great that you want to start young. BlackRock the world's largest private asset manager has excellent educational material here http://www.blackrock.com/investing-for-a-new-world and http://www2.blackrock.com/us/individual-investors/retirement/20s-30s-starting-out

Here are some some questions to consider before taking action:
1a) Does your company offer the Roth401k option? If yes, strongly consider it since you are young your income is at the lowest point in your career. You will be taxed now but the earnings growth will not be taxed again. Just something to consider.

1b) Also if you make too much or if your company doesn't offer the Roth401k option consider separately opening and funding through a discount brokerage (e.g. Vanguard, Fidelity, Scottrade, etc) an individual Roth IRA account. If you have this you can contribute $5,500 to this in 2013 and $17,500 in your 401k too (pre-tax or post-tax).

1c) You may want to consider blending best of both options tax deferred and Roth options in your 401k. Doing so will help you lower your taxable income and at the same time allowing your Roth portion to receive favorable tax advantaged growth.

2a) Instead of opening yet another account elsewhere you may want to consider using Fidelity and open a separate IRA, tax-deferred or the Roth. I'd recommend this b/c of consolidated tracking benefits. Also Fidelity has a good amount of ETF, iShares, and no load mutuals, in addition to a good amount of educational materials and resources. Have you taken the Fidelity website for a test drive to see the Vanguard mutual funds offered? You might be surprised. Btw, I am not affiliated with the company and do not receive any compensation. Ha!

2b) If you open a new account like an IRA or roll over funds from a previous employer you may qualify for free trades. See here: https://scs.fidelity.com/other/offers/registration_200freetrades.shtml
Also even if you don't meet the full 50k requirement to get 100 trades or 100k to get one year worth of free trades, you can still negotiate with the reps and ask for something. It does work!

3) ETFs v. indexed funds? Depends on what your comfort level is and what are your individual hopes and dreams. What are your retirement goals? What is your risk tolerence? Do you have a time horizon for this do not touch and let it grow retirement money? BlackRock's iShares may be worth researching. http://us.ishares.com/home.htm and "understanding ETFs" http://us.ishares.com/understand_etf/index.htm

ETFs are a good way to spread out your money and get the best of different sectors at comparatively lower costs compared to other mutual funds. MMM lists in his older posts some of the m/f he prefers which can be priced even lower but be mindful of your goals and timeline. Costs are important but so is creating a comprehensive strategy that suits your individual needs.

Also have you looked into the ETFs and indexed funds currently offered on the Fidelity site? https://www.fidelity.com/etfs/overview
You can do quite a bit of research before even opening a separate IRA, brokerage, or even rolling over a monies from a previous employer. See here https://screener.fidelity.com/ftgw/etf/evaluator/goto/landing

4) Allocation IMO depends on your goals and risk tolerence. So you may want to examine what it is that you really want before determining your allocation. If you are in your 20s or early 30s you have some time and can use the Rule of 100 to get a basic idea of your suggested asset allocation. To test ideas http://personal.fidelity.com/planning/retirement/ise.shtml?refpr=ig0017 and http://www.fidelity.com/products/funds/fundpicks/overview.shtml and http://us.ishares.com/tools/tools.htm?investorType=RIA&toolId=108&c=FIPBLaunch#trg_108

5) What amount or percentage of your money are you comfortable losing? Have you considered what is your exit plan/strategy if you start losing money quickly? I found creating plans to get out helped me have more peace of mind. Also do you lose sleep over individual investments rollercoasting? If so you may wish to stick with ETFs and paper trade until you feel comfortable with your selections. You can gradually make purchases through your 401k and set up the purchasing percentage and future allocation. One thing I found helpful was learning you can adjust the percentage and strategies over time. Don't feel the pressure that you need to get it right immediately.

Hope this helps, it is a lot of information so pace yourself. Keep on growing your stache! Looking forward to reading about your experiences.

Cheers!
« Last Edit: January 28, 2013, 05:58:32 PM by Stashtastic Momo »

James

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Re: what to do with this first 30K?
« Reply #3 on: January 29, 2013, 08:16:44 AM »
My 401k is in Fidelity but my IRAs are at Vanguard.  I would be fine keeping everything at Fidelity, nothing wrong with keeping things as simple as possible.  Big thing is to compare actual expenses and fees, and don't be afraid to talk to customer service for each of them and get some questions answered.  If you are going to give them your money then you should feel comfortable taking some of their time talking to them, etc.

I use index funds, nothing wrong with starting there.  You can find opinions all over the map here, adding ETFs, etc, but the key is to know yourself and what you want to invest in.  It will probably change over time also.  Regarding $30,000 at one time, it's really hard to tell.  Spreading it out over a few months might prevent some losses, but it also might prevent some gains.  I would probably move it all at once, but that's just me.

RoseRelish

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Re: what to do with this first 30K?
« Reply #4 on: January 29, 2013, 12:46:09 PM »
I know I would prefer to invest it over time, but then I'd panic if the market was up or down on the next investment date. It's so much simpler to invest at once - especially for money that won't be needed for a LONG time. 5-10% better market prices won't make or break your 10+ year goals and investment returns.

sherr

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Re: what to do with this first 30K?
« Reply #5 on: January 29, 2013, 02:01:46 PM »
1. I'm actually in the same situation, 401k is with Fidelity but IRAs and non-tax-advantaged accounts with Vanguard. I prefer Vanguard over Fidelity, but if you want the simplicity of keeping everything in one place then Fidelity is a fine choice. I normally view all my bank accounts through mint.com, so to me Mint is the "one place" that keeps everything simple.

2. Either is fine really. In fact, you may find that a given index fund has an ETF equivalent. Sometimes one or the other will have a slightly lower expense ratio (usually by only a few hundredths of a percent), but probably not enough to make a huge difference. You might want to keep it simple to start with and invest in index funds, you can always branch out into ETFs later if you feel adventurous.

3. Allocation is a hard question. Given a long timeframe (10+ years) I would recommend investing heavily in stocks initially, and then learning about diversifying into other asset classes as you go. I recommend passively-managed index funds that track a large number of things to start, maybe 60% in a whole-US-market fund and 40% in an international fund to keep it simple at the beginning. This is definitely a question you should do a lot of reading up on over time though.

4. As long as you are not overly worried about not getting the best possible deal I would invest it all right away and be done with it. Spreading it out over months helps ensure that you'll get more of an average deal on the stock market. If you invest it all right now you might do better or worse than the average. Do whichever floats your boat.

Furthermore I disagree with the notion that Roth accounts are better when you're young because presumably that's the point in your career that you'll be making the least money. That is irrelevant. What matters is if you will be paying a higher percentage in taxes when you retire (and start withdrawing the money) than you are right now. If you will be then Roths are better. Most people will not be, and Traditional accounts are better.

It is true that you can withdraw principle payments from Roth accounts penalty-free at any time (not tax-free, you've already paid tax on that money so it can never be tax-free). You loose that ability with Traditional accounts, however it is possible that Traditional accounts would still be cheaper with the future tax + penalty than the Roth account is with only current tax. Of course, this is highly dependent on how much money you make now and how much you will be living on during retirement, so make sure you understand the difference between the two before you choose one. If you want to read more on the subject you can look at other posts I've made in different threads.

DenverStache

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Re: what to do with this first 30K?
« Reply #6 on: February 05, 2013, 08:11:43 AM »
Thank you all for such thorough responses.  I really appreciate it.  I have been doing some additional reading and research.  This is what I am thinking and I would love to hear your thoughts.

1.  I am going to do my 2012 taxes this week and I am hoping that my wife and I will be below the IRS max to contribute to a Roth.  I have not been contributing in the past since as a single person I was over the limit.  If we are below the limit then I will contribute 5500 in both my wife and my Roth IRA.

2.  I am going to just keep everything in Fidelity for simple accounting reasons. 

3.  I am going to divide the 30K over 4 weeks and invest it.

4.  This is the part that I am really having a hard time with.  Everything that I read suggests that ETFs are the right way to go.  I can get commission free ETFs through Fidelity and they are essentially the same as the corresponding index funds.  Why would anyone buy index funds in this case?  But people still buy index funds and I am leaning this way as well.  I am not sure, but I believe when you own an ETF you do not actually own a piece of a company and although ETFs have historically always tracked their corresponding index; relatively complex financial instruments concern me.  So what are your thoughts?  IVV or FUSEX?

5.  This is the second part that I am a little confused about.  MMM investment strategy seems to center around an index fund that tracks the S&P500.  If I read "Random Walk" correctly this is because he believes that it is impossible to "beat" the market and your best bet is to "own" the market.  So my question is why does he own the S&P500 index instead of something like the Russell 3000 index or even a total market index fund?


6.  I am 31 years old so I would like to be aggressive in my allocation as I have time on my side but I am not sure if I should be 100% equities.  Here is my thinking, I would love to hear your thoughts.

FSTMX (Total Market Fund): 80%
FPEMX (Emerging Markets): 10%
FBDIX (Bond): 10%  - Should I have any bond exposure at my age?

What do you think?  Am I missing something? 

icefr

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Re: what to do with this first 30K?
« Reply #7 on: February 05, 2013, 10:51:03 AM »
1.  I am going to do my 2012 taxes this week and I am hoping that my wife and I will be below the IRS max to contribute to a Roth.  I have not been contributing in the past since as a single person I was over the limit.  If we are below the limit then I will contribute 5500 in both my wife and my Roth IRA.

If you're in the middle of the limit, you can still contribute some amount: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2012
I'm planning on putting in a partial contribution.

2.  I am going to just keep everything in Fidelity for simple accounting reasons. 

Seems fair to me. My 401(k) is at Vanguard so that's where I opened my Roth IRA and taxable accounts.

This is an interesting reference: http://www.bogleheads.org/wiki/Fidelity It compares the Vanguard and Fidelity equivalents.

4.  This is the part that I am really having a hard time with.  Everything that I read suggests that ETFs are the right way to go.  I can get commission free ETFs through Fidelity and they are essentially the same as the corresponding index funds.  Why would anyone buy index funds in this case?  But people still buy index funds and I am leaning this way as well.  I am not sure, but I believe when you own an ETF you do not actually own a piece of a company and although ETFs have historically always tracked their corresponding index; relatively complex financial instruments concern me.  So what are your thoughts?  IVV or FUSEX?

I like index funds myself because you can buy partial shares, which works much better for dividend reinvesting and you can do automatic investments. ETFs you have to trade during market hours, but index funds you can buy/sell/exchange at any time of the day and it will be executed at the next close of business day. I personally tried using ETFs in my Roth IRA and it drove me crazy as they make me want to time the market. I'm much more content with index funds since they don't make me want to time the market. I would look at it that "I can get index funds at the same expense ratio as the ETFs, so why would I go through all the extra effort to get the ETFs."

6.  I am 31 years old so I would like to be aggressive in my allocation as I have time on my side but I am not sure if I should be 100% equities.  Here is my thinking, I would love to hear your thoughts.

FSTMX (Total Market Fund): 80%
FPEMX (Emerging Markets): 10%
FBDIX (Bond): 10%  - Should I have any bond exposure at my age?

What do you think?  Am I missing something?

A) I think you typo'd the bond one? http://quote.morningstar.com/fund/f.aspx?t=FTBFX looks like what you were looking for. It's an actively managed fund, not an index fund, with an expense ratio of 0.45%. The Bogleheads wiki I referenced above suggests using Fidelity Spartan U.S. Bond Index Fund (FSITX) which compares to Vanguard's Total Bond Market Index fund. It is an index fund AND has a lower expense ratio.

B) Why just emerging markets and not developing markets or a flat out total international one? It looks like Fidelity doesn't have one like Vanguard does (its is missing small-caps). ACWX (an iShares ETF) tracks the same index as the Vanguard Total International one. Maybe someone else can weigh in who actually uses Fidelity.

C) FSTMX looks good and even has a highly comparable expense ratio to Vanguard.

D) I think that you should definitely have some bond exposure, but everyone has different ideas on that. I'm younger than you and have a higher fixed income allocation. That's my choice though - I'm not all that risk tolerant.

chucklesmcgee

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Re: what to do with this first 30K?
« Reply #8 on: February 05, 2013, 10:54:52 AM »
Gah, could we get the terminology correct here? We're discussing whether or not we want index funds of the mutual fund variety or index funds of the ETF variety. We are not debating whether ETFs are better than index funds, that's like debating whether cars are better than Dodge Chargers. Any fund that tracks an index is an index fund. Some mutual funds are index funds, some ETFs are index funds.

My understanding is that there are a few theoretical concerns with ETFs vs. mutual funds- commissions, tracking, price and tax issues.

If you have a commission-free ETF, no big deal on commissions.

ETF prices can in theory have a larger tracking error than mutual funds, I believe because ETFs can be traded on the market in real-time, as opposed to only after closing for a mutual fund. This is not going to be much of an issue with big index funds by big companies.

Mutual funds can be bought in fractional shares, which means if you have $5000 to invest in a fund with a share price of 45.10, you can buy exactly $5000 worth-110.8647 shares. ETFs, with the exception of DRIP (see below) cannot be bought fractionally, from what I understand. This means if you have $5000 to invest and the share price of an etf is $45.10, you can only buy whole number quantities of the stock- so you could only buy 110 shares and would have to keep $39 floating around as cash. This could slightly dampen your returns by a fraction of a percent, especially if you're already maxing out an IRA or HSA, since you won't be able to put in another 7 bucks to buy another share.

Another issue is that many ETFs and providers pay dividends directly as cash whereas most mutual funds allow for automatic reinvestment of dividends. Payment of dividends in this way could be taxable income, wheras the mutual fund would only be taxable when sold. Also you'd have to have the hassle of reinvesting the dividends and possibly paying extra commissions. If you're in a tax-sheltered account like an IRA or 401k this isn't an issue, as it's all tax-sheltered. Even if you have an ETF in an a taxable account some trading companies offer DRIP (dividend reinvestment programs) that will automatically reinvest dividends into buying fractional shares of the stock, which gets around all this.

I'm still new to ETFs, but from what I understand the practical difference between major commission-free index-fund ETFs with DRIP and mutual funds of the same flavor is practically nil if you're a passive investor. You have to buy a whole number of shares generally with an ETF but you can buy in at just a single share wheras many mutual funds require a $1000-$5000 minimum purchase. It's pretty much a wash.

DenverStache

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Re: what to do with this first 30K?
« Reply #9 on: February 05, 2013, 11:26:00 AM »
Thank you very much for the response.




6.  I am 31 years old so I would like to be aggressive in my allocation as I have time on my side but I am not sure if I should be 100% equities.  Here is my thinking, I would love to hear your thoughts.

FSTMX (Total Market Fund): 80%
FPEMX (Emerging Markets): 10%
FBDIX (Bond): 10%  - Should I have any bond exposure at my age?

What do you think?  Am I missing something?

A) I think you typo'd the bond one? http://quote.morningstar.com/fund/f.aspx?t=FTBFX looks like what you were looking for. It's an actively managed fund, not an index fund, with an expense ratio of 0.45%. The Bogleheads wiki I referenced above suggests using Fidelity Spartan U.S. Bond Index Fund (FSITX) which compares to Vanguard's Total Bond Market Index fund. It is an index fund AND has a lower expense ratio.


I did typo, I meant FBIDX.  Which is the investor class of the FSITX that you mention.  Thank you.

Quote


B) Why just emerging markets and not developing markets or a flat out total international one? It looks like Fidelity doesn't have one like Vanguard does (its is missing small-caps). ACWX (an iShares ETF) tracks the same index as the Vanguard Total International one. Maybe someone else can weigh in who actually uses Fidelity.



Good question.  My reasoning, probably flawed, was that a lot of US companies already have general international exposure and that I really wanted to have additional exposure in just emerging markets.  Although it may be good to add something like ACWX.  What do you think of the allocation in terms of percentages?


DenverStache

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Re: what to do with this first 30K?
« Reply #10 on: February 05, 2013, 11:35:06 AM »
Gah, could we get the terminology correct here? We're discussing whether or not we want index funds of the mutual fund variety or index funds of the ETF variety. We are not debating whether ETFs are better than index funds, that's like debating whether cars are better than Dodge Chargers. Any fund that tracks an index is an index fund. Some mutual funds are index funds, some ETFs are index funds.

My understanding is that there are a few theoretical concerns with ETFs vs. mutual funds- commissions, tracking, price and tax issues.

If you have a commission-free ETF, no big deal on commissions.

ETF prices can in theory have a larger tracking error than mutual funds, I believe because ETFs can be traded on the market in real-time, as opposed to only after closing for a mutual fund. This is not going to be much of an issue with big index funds by big companies.

Mutual funds can be bought in fractional shares, which means if you have $5000 to invest in a fund with a share price of 45.10, you can buy exactly $5000 worth-110.8647 shares. ETFs, with the exception of DRIP (see below) cannot be bought fractionally, from what I understand. This means if you have $5000 to invest and the share price of an etf is $45.10, you can only buy whole number quantities of the stock- so you could only buy 110 shares and would have to keep $39 floating around as cash. This could slightly dampen your returns by a fraction of a percent, especially if you're already maxing out an IRA or HSA, since you won't be able to put in another 7 bucks to buy another share.

Another issue is that many ETFs and providers pay dividends directly as cash whereas most mutual funds allow for automatic reinvestment of dividends. Payment of dividends in this way could be taxable income, wheras the mutual fund would only be taxable when sold. Also you'd have to have the hassle of reinvesting the dividends and possibly paying extra commissions. If you're in a tax-sheltered account like an IRA or 401k this isn't an issue, as it's all tax-sheltered. Even if you have an ETF in an a taxable account some trading companies offer DRIP (dividend reinvestment programs) that will automatically reinvest dividends into buying fractional shares of the stock, which gets around all this.

I'm still new to ETFs, but from what I understand the practical difference between major commission-free index-fund ETFs with DRIP and mutual funds of the same flavor is practically nil if you're a passive investor. You have to buy a whole number of shares generally with an ETF but you can buy in at just a single share wheras many mutual funds require a $1000-$5000 minimum purchase. It's pretty much a wash.

You're right.  Thank you for the correction and the breakdown of the differences.  My debate is between mutual funds that track an index and ETF's that track an index.  Is there also a difference in what you are buying when you purchase one vs. the other?  When you buy an ETF do you actually own a portion of a company?

icefr

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Re: what to do with this first 30K?
« Reply #11 on: February 05, 2013, 03:20:10 PM »
Quote
B) Why just emerging markets and not developing markets or a flat out total international one? It looks like Fidelity doesn't have one like Vanguard does (its is missing small-caps). ACWX (an iShares ETF) tracks the same index as the Vanguard Total International one. Maybe someone else can weigh in who actually uses Fidelity.

Good question.  My reasoning, probably flawed, was that a lot of US companies already have general international exposure and that I really wanted to have additional exposure in just emerging markets.  Although it may be good to add something like ACWX.  What do you think of the allocation in terms of percentages?

That seems like a fair point. Personally, if you want emerging+developed, I would just stick with one fund instead of individual funds, but if you just want emerging, your logic makes sense. The general recommendation is that international stocks should be somewhere in the range of 20-50% of your overall stock allocation so 18-45% of your overall allocation. But I would say that since emerging markets is ~24% of the non-US stock market, you should look at somewhere around 4-11% for emerging markets.

I would play around with this chart. It compares the Vanguard Total International Stock Index fund to the Vanguard Emerging Markets Stock Index fund. (I know it's not Fidelity, but they likely track similar indices and it shows you how they dropped/gained differently.)

Some more reading from Bogleheads: http://www.bogleheads.org/wiki/Emerging_market_stocks

Conclusion: I think that choosing emerging markets over total international is a reasonable personal decision. If you choose emerging, don't combine it with a total international, just use it. I think the 10% (overall) allocation you've suggested is probably fine.

Do you have an IPS (Investment Policy Statement? I would recommend writing all of this down in a doc somewhere to help you remember why you made the decisions you did :)