Author Topic: A New Mustachian with a Question  (Read 4363 times)

scullingby

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A New Mustachian with a Question
« on: October 14, 2016, 09:37:29 PM »
Hi.  I found this website a few weeks ago and have been reading it every evening.  I feel like I've found my people!  And I'm learning a lot about managing money for financial independence.  My situation will likely have many of you shaking your heads, and perhaps this can be a lesson for those just starting out, so here goes.

I'm 43 and single with no children.  I've always been a saver, but I've also been VERY adverse to risk.  If the account wasn't insured against loss of principal, such as a certificate of deposit, I wouldn't put my money into it.  So I've been saving into certificates of deposits and savings bonds since I entered the workforce about 15 years ago.  I always strived to save at least 10% of each paycheck and have been averaging 20% of take home for the last few years.

What do I have to show for my past efforts?  Not as much as I feel I should.  To put it simply, my savings have not grown except for the money I add to them.  Well, duh.  This summer I finally set up my 401k for 6% contributions in order to receive the benefit of my employer's 3% match (50% match up to 6%).  I am kicking myself for not doing this sooner, much sooner.  Today I opened a $1000 Roth IRA mutual fund with a "moderately aggressive" approach and will max it out before the end of the year.  Deep breath.  I think I'm moving in the right direction.
 
I started tracking ALL of my expenditures this last weekend and will see where my money goes.  I have a rough idea, but I'd like see the actual totals.   

Here's where I stand now.  I have $280,000 cash or cash equivalent savings, plus a $55,000 emergency fund, and a $27,000 house purchase fund.  I have company stock received through profit sharing (in a 401k) currently valued at $145,000.  I am moving all of my cash savings to higher yield accounts, such as Capital One 360 and Barclays, as the money becomes available. 

I plan to keep putting $500/month into cash equivalents for now because I wouldn't be comfortable if I didn't build that up a little more (and I mean I really wouldn't be comfortable).  Clearly, I have issues in that regard.  Regardless, any recommendations on what I do with the other $500?  I could put it into my 401k, but my research indicates the funds are not performing as well as those available through Vanguard, etc.  Is owning individual stocks ever a good idea?  Is it reasonable to pursue a strong but not tax-advantaged fund in lieu of a non-optimal 401k?

Thanks for your time. 

trashmanz

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Re: A New Mustachian with a Question
« Reply #1 on: October 14, 2016, 09:44:13 PM »
You don't have an option in your 401k to invest in an index fund that tracks the s&p500?  Usually plans do offer at least that.

Monkey Uncle

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Re: A New Mustachian with a Question
« Reply #2 on: October 15, 2016, 03:54:01 AM »
Welcome, Scullingby!

For all your investing mistakes, you're actually doing pretty well.  If I added things up right, your net worth is just north of $500k.  Not too shabby.

You say you're going to move your $280k in cash to "higher yield accounts."  Do you mean money market accounts?  If so, that's still considered cash, and you're likely to lose ground to inflation.  If you expect your wealth to grow, you need to put that money to work in a brokerage account, where you can hold a mix of stock and bond funds.  It sounds like you don't know much about investing, so I would suggest going to Vanguard and picking appropriate index funds.  You'll want the stocks diversified across market capitalizations (small and large) and across countries (US and international).  Pick a bond fund that holds a mix of corporate and muni bonds and a mix of durations.  Stay away from high yield bond funds (i.e., "junk bonds"), which are too highly correlated with stocks.  Rebalance annually or when one part of the mix grows relative to the others.  Or if you're unsure of yourself when it comes to picking funds, use one of Vanguard's lifecycle funds, which will do the asset allocating and rebalancing for you.  The important thing is to get some exposure to stocks and bonds so your money can work for you.

Holding almost 30% of your net worth in your employer's stock is risky.  If I were you, I'd look into selling a good chunk of that and reinvesting it in a more diverse mix of funds (see above).  Do you have that option within your 401k?

You mention wanting to build up your cash reserves even more.  Seems like you need to do the exact opposite.  A $55k emergency fund should be more than adequate, unless your job is very insecure.

Given your newbie status as an investor, I suggest you stay away from individual stocks.  Even seasoned investors have a hard time picking individual stocks that outperform (or even match) the overall market.

I get that you're very risk averse.  I suggest you do some reading up on the comparative returns of investing in stocks, bonds, and cash.  Although short term declines in the stock market can be gut wrenching, the real risk to your long term financial well being comes from the lack of growth in cash holdings.
« Last Edit: October 15, 2016, 03:55:55 AM by Monkey Uncle »

MDM

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Re: A New Mustachian with a Question
« Reply #3 on: October 15, 2016, 07:08:36 AM »
scullingby, welcome to the forum.

You might take a look at http://forum.mrmoneymustache.com/investor-alley/help-me-figure-out-retirement-planning/msg1192351/#msg1192351, which addresses questions similar to yours.

TomTX

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Re: A New Mustachian with a Question
« Reply #4 on: October 15, 2016, 08:32:45 AM »
Yeah, that 30% of NW in a single company upon which you also depend for a salary is the opposite of the safety you wanted.

If possible, I would start clearing that out ASAP, with an eye to minimizing taxes on gains. Get it over to a LOW COST index fund. I prefer Vanguard Total Stock Market.

scullingby

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Re: A New Mustachian with a Question
« Reply #5 on: October 15, 2016, 09:42:30 AM »
You don't have an option in your 401k to invest in an index fund that tracks the s&p500?  Usually plans do offer at least that.

I checked this morning and my 401k does NOT offer that option. 

scullingby

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Re: A New Mustachian with a Question
« Reply #6 on: October 15, 2016, 10:04:04 AM »
Welcome, Scullingby!

Thank you.  This site, and the people on it, are awesome. 

You say you're going to move your $280k in cash to "higher yield accounts."  Do you mean money market accounts?  If so, that's still considered cash, and you're likely to lose ground to inflation. 

Yes, I'm moving the money to money market accounts and to certificates of deposit offered by Barclays. 

The important thing is to get some exposure to stocks and bonds so your money can work for you.

I understand.  Despite all of my reading in the last few weeks, I want to retain the cash fund.  I know, I know.  Bad me.  From this day forward, I want to start investing in stocks and bonds.  I feel comfortable with the cash fund and I sleep better at night knowing it's there.  This would be an example of a feeling unsupported by the evidence, but I still have the feeling. 

Holding almost 30% of your net worth in your employer's stock is risky.  If I were you, I'd look into selling a good chunk of that and reinvesting it in a more diverse mix of funds (see above).  Do you have that option within your 401k?

The company restricts sale of the stock.  It's a bummer.

You mention wanting to build up your cash reserves even more.  Seems like you need to do the exact opposite.  A $55k emergency fund should be more than adequate, unless your job is very insecure.

I believe my position is relatively secure, but the same can not be said for others at my company.  In case it isn't already apparent, I'm a worrywart.

I get that you're very risk averse.  I suggest you do some reading up on the comparative returns of investing in stocks, bonds, and cash.  Although short term declines in the stock market can be gut wrenching, the real risk to your long term financial well being comes from the lack of growth in cash holdings.

That risk to my long term financial well being, and the desire to become financially independent, is what is propelling me towards investing at this ripe old age.

Thanks for the guidance.

scullingby

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Re: A New Mustachian with a Question
« Reply #7 on: October 15, 2016, 10:06:47 AM »
Yeah, that 30% of NW in a single company upon which you also depend for a salary is the opposite of the safety you wanted.

If possible, I would start clearing that out ASAP, with an eye to minimizing taxes on gains. Get it over to a LOW COST index fund. I prefer Vanguard Total Stock Market.

The company restricts sale of the stock.  I would very much like to move it to a more diversified vehicle.

Exhale

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Re: A New Mustachian with a Question
« Reply #8 on: October 15, 2016, 10:07:54 AM »
For all your investing mistakes, you're actually doing pretty well.  If I added things up right, your net worth is just north of $500k.  Not too shabby...

+1 and welcome!

I second the Vanguard recommendations. I use Vanguard and highly recommend them as well as their online planner tools and helpful support staff. I also encourage you to figure out what emergency fund amount you actually need (vs what your fear says you need). This will depend on your job (unstable = higher EF; stable = 6 months-one year EF) and any other unique-to-you factors. For example my family all live far away so I added $1,000 to my EF in case I have to travel at the last minute. This is on top of my three-month EF (I have a very stable job). You may decide to add an extra layer of money, but perhaps you can be clear what's the reality EF and then there's the layer that's about your risk aversion EF - this might allow you to start separating them in your mind (anyway, it's just a thought...).

Finally, I strongly recommend that you seek counseling to address your risk phobia. I say this because right now your risk phobia is focused on your money, but it could extend to include being able to retire early, have a relationship, and any number other "risks" that are involved in this journey called life. I'm saying all this as someone who has strategically used therapy to free herself to life a richer life (no judgement, lots of empathy).

Best wishes & keep us posted!
« Last Edit: October 15, 2016, 10:12:05 AM by Exhale »

scullingby

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Re: A New Mustachian with a Question
« Reply #9 on: October 15, 2016, 10:21:16 AM »
Agree with the above, but wanted to make a point.  If you are extremely risk adverse, while you will likely perform less well by not investing in the stock market, that can be ok.

I understand I will not rise to the levels of bad***ity I see on this forum.  I'm okay with that.  For me, financial independence is maintaining my current lifestyle and working when/if I want to.  I am NOT seeking to increase my lifestyle.  If I'm honest, I'll probably always want to work.  My spending is pretty conservative, except for my apartment.  I really enjoy living in this apartment and am willing to incur this cost.  Otherwise, I've always been known as more than a tad on the frugal side and am willing to learn about other areas in which I can cut back.  The members of this forum offer a "wealth" of ideas.  (Pun intended.)


In terms of company stock, I have worked for two companies where I maxed out the employee stock purchase plan and held onto their stock, where the companies both ultimately went bankrupt with the stock worthless.  This happens more often than you might think and it is why I now avoid individual stocks.  Fortunately these companies only represent 5 years of my working life, but I lost about $200k vs if I had sold the stocks as soon as able and bought a vanguard index fund.  I had a friend with over $1M in vested options he held throughout the companies' spectacular failure.  His net worth went from $1.3M to .3M in 6 months.

When I started working at my company, two levels of my supervisory chain came from a company that went through that.  Both men were mid to near-end of their career and their wounds were still quite fresh.  It made a big impression on an new employee embarking on her career. 

Thanks for sharing your experience with me.

Gronnie

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Re: A New Mustachian with a Question
« Reply #10 on: October 15, 2016, 11:03:43 AM »
If you post the offerings in your 401k (Fund name, ticker symbol, expense ratio) we should be able to help you put together an allocation that will work for you.

If your 401k doesn't have any index funds and is all high priced, actively managed funds I would venture a guess that they may not be living up to their fiduciary standard. You may want to talk to somebody about that.

scullingby

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Re: A New Mustachian with a Question
« Reply #11 on: October 15, 2016, 03:46:46 PM »
scullingby, welcome to the forum.

You might take a look at http://forum.mrmoneymustache.com/investor-alley/help-me-figure-out-retirement-planning/msg1192351/#msg1192351, which addresses questions similar to yours.

Thanks for the link.  I'll check it out. 

scullingby

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Re: A New Mustachian with a Question
« Reply #12 on: October 15, 2016, 03:55:38 PM »
Finally, I strongly recommend that you seek counseling to address your risk phobia. I say this because right now your risk phobia is focused on your money, but it could extend to include being able to retire early, have a relationship, and any number other "risks" that are involved in this journey called life. I'm saying all this as someone who has strategically used therapy to free herself to life a richer life (no judgement, lots of empathy).

I had not looked at it from the perspective of what other areas in my life might be affected.  I believe I'm taking small steps to overcome this by moving into the stock market and I plan to increase my exposure to the market as time goes on.  I guess you could say I'm conducting my own exposure therapy. 

I didn't read your recommendation as judgmental and I appreciate that you were willing to "go there".  One of the things that really struck me as I was reading through forum posts is how supportive the members are.  That's what led me to join and post what I consider very personal details. 

Thanks for sharing your thoughts.
« Last Edit: October 15, 2016, 03:57:16 PM by scullingby »

Monkey Uncle

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Re: A New Mustachian with a Question
« Reply #13 on: October 15, 2016, 04:09:21 PM »
Finally, I strongly recommend that you seek counseling to address your risk phobia. I say this because right now your risk phobia is focused on your money, but it could extend to include being able to retire early, have a relationship, and any number other "risks" that are involved in this journey called life. I'm saying all this as someone who has strategically used therapy to free herself to life a richer life (no judgement, lots of empathy).

I had not looked at it from the perspective of what other areas in my life might be affected.  I believe I'm taking small steps to overcome this by moving into the stock market and I plan to increase my exposure to the market as time goes on.  I guess you could say I'm conducting my own exposure therapy. 

I didn't read your recommendation as judgmental and I appreciate that you were willing to "go there".  One of the things that really struck me as I was reading through forum posts is how supportive the members are.  That's what led me to join and post what I consider very personal details. 

Thanks for sharing your thoughts.

Looks like you may have had some trouble with the quote feature...it was Exhale who said that.

deeshen13

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Re: A New Mustachian with a Question
« Reply #14 on: October 15, 2016, 04:15:51 PM »
Welcome scullingby!

As others have pointed out, Financial Independence works based on the premise that the capital provides income instead of (or in addition to) your labor.

The most productive assets historically are owning businesses. Don't let "the stock market" scare you, it is just a publicly owned collection of businesses. When you buy a Vanguard index fund, you are buying tiny ownership in 5000+ businesses.

That said, I support you wading into the waters at your slower pace. You are in a great position, just work towards the behavioral aversion to investing your capital and you will be in great shape.


RedmondStash

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Re: A New Mustachian with a Question
« Reply #15 on: October 16, 2016, 07:05:15 PM »
Welcome.

My advice is to read the J. Collins Stock Series: http://jlcollinsnh.com/stock-series/

It's a crash course in the stock market and why index funds are more diversified and safer in the long term than you would think.

Good luck.

scullingby

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Re: A New Mustachian with a Question
« Reply #16 on: October 16, 2016, 08:12:31 PM »
The most productive assets historically are owning businesses. Don't let "the stock market" scare you, it is just a publicly owned collection of businesses. When you buy a Vanguard index fund, you are buying tiny ownership in 5000+ businesses.

Several people on this thread have named Vanguard specifically as a good company.  I'll take a look at them.

scullingby

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Re: A New Mustachian with a Question
« Reply #17 on: October 16, 2016, 08:17:11 PM »
If you post the offerings in your 401k (Fund name, ticker symbol, expense ratio) we should be able to help you put together an allocation that will work for you.

If your 401k doesn't have any index funds and is all high priced, actively managed funds I would venture a guess that they may not be living up to their fiduciary standard. You may want to talk to somebody about that.

There are no index funds available in my company's choices and that surprised me.  I'll need to check whether they are actively managed.  I've never worked at another company, so I don't know how many funds are typically available for 401k programs.  The number offered through my company seems on the low side, but I could be expected too much of a 401k program. 

RedmondStash

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Re: A New Mustachian with a Question
« Reply #18 on: October 16, 2016, 08:46:54 PM »
If you post the offerings in your 401k (Fund name, ticker symbol, expense ratio) we should be able to help you put together an allocation that will work for you.

If your 401k doesn't have any index funds and is all high priced, actively managed funds I would venture a guess that they may not be living up to their fiduciary standard. You may want to talk to somebody about that.

There are no index funds available in my company's choices and that surprised me.  I'll need to check whether they are actively managed.  I've never worked at another company, so I don't know how many funds are typically available for 401k programs.  The number offered through my company seems on the low side, but I could be expected too much of a 401k program.

FWIW, my company's 401k offers about 25 investment options, one of which is a Vanguard index fund. You'll never guess which fund 100% of my 401k goes into. (This 401k is a small percentage of spouse's & my retirement savings.)

Frugalman19

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Re: A New Mustachian with a Question
« Reply #19 on: October 17, 2016, 08:33:17 AM »

You say you're going to move your $280k in cash to "higher yield accounts."  Do you mean money market accounts?  If so, that's still considered cash, and you're likely to lose ground to inflation. 

Yes, I'm moving the money to money market accounts and to certificates of deposit offered by Barclays. 

The important thing is to get some exposure to stocks and bonds so your money can work for you.

I understand.  Despite all of my reading in the last few weeks, I want to retain the cash fund.  I know, I know.  Bad me.  From this day forward, I want to start investing in stocks and bonds.  I feel comfortable with the cash fund and I sleep better at night knowing it's there.  This would be an example of a feeling unsupported by the evidence, but I still have the feeling. 


Welcome!

Your situation is so common and it is a very sad situation to be in. There are 2 things I always think about, risk and opportunity cost. I had 2 friends who recently retired from a good paying job, they are both in their 60s now. Together they had saved over $650k in the G fund of the TSP, which is basically a money market fund, because they were risk averse. I ran the numbers and if they had each invested those funds in the other 2 index options that they retirement account allowed, they would each have well over $3 million each. That is lost financial freedom, that is opportunity cost.
Then there is risk, there are 2 types of risk, loss due to market risk (the fact that the market goes up and down), and risk of loss due to inflation, this is where your money does not buy as much as it used to. Only one of these risks is certain, and that is the inflation risk, so by being in money market, you are guaranteeing you are going to lose money.

Your situation is the exact situation where you need to go see a good financial planner to teach you about investing and explain that you need to invest, it is simply foolish for you to think that keeping your money in cash is a good idea. Go see a certified financial planner, if they get you to invest, it will be well worth any fee you pay.

bacchi

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Re: A New Mustachian with a Question
« Reply #20 on: October 17, 2016, 09:01:46 AM »
Investing in a high yield savings account is still a guaranteed way to lose 2% -- the opposite of risk adverse. Inflation is going to wipe out your substantial cash position.

robartsd

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Re: A New Mustachian with a Question
« Reply #21 on: October 17, 2016, 10:29:54 AM »
Investing in a high yield savings account is still a guaranteed way to lose 2% -- the opposite of risk adverse. Inflation is going to wipe out your substantial cash position.
There is no guarantee that inflation will exceed high yield savings account by 2% (but it is most likely to occur). I think the biggest thing for a new investor to learn is that unless you plan to withdraw significant funds in a short time frame volatility is not as risky as it appears.