21 and headed to college

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Marjimmy
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21 and headed to college

Post by Marjimmy »

Hello Bogleheads,

I'm currently 21 deployed in Afghanistan :oops:
I am in the Marines and plan on getting out roughly around May. I've already put in my applications and now it's just the waiting game! I'm financially savvy when it comes to saving money, however, investing I still have MUCH to learn. (Currently reading The Intelligent Investor). I have accumulated roughly 30 thousand over the past 4 years... 1/3 of what many of you make as an annual salary, I envy you. However, for my age, that's not too bad.

I have no debt to pay off, no car, no bills. I have enough emergency funds to last me at least 6 months. Now, granted college is months away... I figured I'd work up a plan now in my very little down time over here. By the time I get out of college I'll be 25 near 26. At that point in my life I plan to move out of my parents house and perhaps put a down payment on a house if I find a nice one. So the investing time frame for this 30k is roughly 5-10 years (intermediate). I've been looking at many mutual funds with Vanguard ( who I have my Roth IRA with ) and think some quality index fund bonds would be awesome.

I've only dug up information on stocks so if any of you are bond guru's the help would be more than grateful. What are some good Vanguard MF's for 5-10 years? Do I put 15k down initially and then feed a little every month ( or just drop 30k at a starting point )...?

Any information is welcomed! Thanks in advance!
-Marjimmy
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
Grt2bOutdoors
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Re: 21 and headed to college

Post by Grt2bOutdoors »

Marjimmy wrote:Hello Bogleheads,

I'm currently 21 deployed in Afghanistan :oops:
I am in the Marines and plan on getting out roughly around May. I've already put in my applications and now it's just the waiting game! I'm financially savvy when it comes to saving money, however, investing I still have MUCH to learn. (Currently reading The Intelligent Investor). I have accumulated roughly 30 thousand over the past 4 years... 1/3 of what many of you make as an annual salary, I envy you. However, for my age, that's not too bad.

I have no debt to pay off, no car, no bills. I have enough emergency funds to last me at least 6 months. Now, granted college is months away... I figured I'd work up a plan now in my very little down time over here. By the time I get out of college I'll be 25 near 26. At that point in my life I plan to move out of my parents house and perhaps put a down payment on a house if I find a nice one. So the investing time frame for this 30k is roughly 5-10 years (intermediate). I've been looking at many mutual funds with Vanguard ( who I have my Roth IRA with ) and think some quality index fund bonds would be awesome.

I've only dug up information on stocks so if any of you are bond guru's the help would be more than grateful. What are some good Vanguard MF's for 5-10 years? Do I put 15k down initially and then feed a little every month ( or just drop 30k at a starting point )...?

Any information is welcomed! Thanks in advance!
-Marjimmy

Hello Marjimmy. First, thank you for your service.

Typically we suggest you develop an asset allocation plan - % in equity/% in fixed income. That would be dependent on your appetite for risk - based on willingness, need and ability to take it. What are your expectations for this money? Growth, low-growth, etc. How much risk would you be able to absorb?

Bond funds can be useful in lowering risk in the context of a portfolio, however given we are in an ultra-low rate enviornment, if interest rates were to move dramatically up, your holdings could experience significant (+/- 5 or 10% moves) principal fluctuations, although yields would have to rise to compensate for price decline.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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CaliJim
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Re: 21 and headed to college

Post by CaliJim »

Hi,

Thank you for your service to the country.

You want safety with money you plan to spend in 5 to 10 years

In your position, I would do 20/80 like this:

20%: VT - Total World Stock Market
33%: I Bonds
33%: CD
13%: BND - Total Bond Market

As you save more and your horizon extends, gradually tilt more towards stocks

My $0.02

PS: max out whatever tax advantaged space you have first (401k or whatever is similar that you have available.) Perhaps some folks with more experience in the options available to our military can chime in.
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Topic Author
Marjimmy
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Re: 21 and headed to college

Post by Marjimmy »

if interest rates were to move dramatically up, your holdings could experience significant (+/- 5 or 10% moves) principal fluctuations, although yields would have to rise to compensate for price decline.
I understand this is probably one of the worst times to be investing in bonds. I don't plan to chase yields.

As for allocation with my age I'd have it be perhaps a little on the riskier side, maybe 70/30 or 60/40, to stay semi safe.
Expectation wise, if I were to invest 30,000 over 5 years. I'd at least like to be +5,000 afterwards. (Not sure if this is reasonable with bonds in 5-10 years)

-CaliJim
Thank you for the choices. I feel CD's are practically worthless at this time. I have a MMSA making currently .5 / essentially I'd like to make atleast 5% back over the course of these next years. Is there a good mutual fund that has a safe split?
Someone had recommended VBIIX I believe?
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
thebogledude
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Re: 21 and headed to college

Post by thebogledude »

Thank you for your service, Marjimmy.

I'm not a bond guru so please take with a grain of salt, from the advice I've seen on this site, it is NOT recommended to hold bond funds in taxable account because they are not tax efficient.

However if you still want to hold bond funds, I recommend holding funds with short term or intermediate term bonds and avoid long term bond holdings in order to see how interest rates play out. That is strictly my .02.
There is also recommendation to hold international or US stock index in your taxable account and then there are the I-bonds. So my final portfolio recommendation is International Stock Index, Total US stock market index,
and I bonds, assuming this is for taxable account and in an asset allocation in line with your risk level, possible Admiral shares.
sport
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Re: 21 and headed to college

Post by sport »

Marjimmy wrote:
As for allocation with my age I'd have it be perhaps a little on the riskier side, maybe 70/30 or 60/40, to stay semi safe.
Expectation wise, if I were to invest 30,000 over 5 years. I'd at least like to be +5,000 afterwards. (Not sure if this is reasonable with bonds in 5-10 years)
Marjimmy,
I believe you are greatly underestimating the risk involved in your expectations. You are looking for a 5k gain over 5 years by investing in stocks. Many people believe that the stock market is not a suitable place for an investment time of less than 5 years. Some people even say it is not suitable for less than 10 years. Keep in mind that if you need the money in 5 years, it will be only 4 years after a year, and then 3 years, etc. The reason for this belief is volitility. What happens if 5 years pass and your 30k becomes 20k, instead of the 35k you envision? Keep in mind that the stock market goes down, as well as up. You should also be aware that when it goes down, it can go down a lot very quickly. It can also go down and stay down for a long time. These risks are the reason you can make money in stocks. However, you can just as easily lose money, especially over a short time, like 5 to 10 years. One other thing: 60/40 is not even semi-safe. That allocation can easily lose 30% of its value. Taking risk is acceptable, but only if you are prepared to live with the consequenses if it does not turn out the way you hope and expect.

Jeff
The Wizard
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Re: 21 and headed to college

Post by The Wizard »

What's the 5-10 year thing?
We deal more with 40-60 year time horizons (lifetime investing).
Understand that you might want to buy a house or a new vehicle every 5 years, but the bulk of your investments should stay put for the long run.

As for the gains you might expect over five years, we have no idea. They could be down, flat or up 50%...
Attempted new signature...
mptfan
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Re: 21 and headed to college

Post by mptfan »

You are VERY VERY fortunate to have saved up $30,000 at such a young age of 21, and to have found the Bogleheads. Really, you have no idea how much of an advantage you have with so many years of compounding ahead of you.

If you invest that $30,000 and forget about it, and get an 8% annual return, here is how much you will have...

at age 30... $60,000
at age 39... $120,000
at age 48... $240,000
at age 57... $480,000
at age 66... $960,000.

Congratulations!
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CaliJim
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Re: 21 and headed to college

Post by CaliJim »

the investing time frame for this 30k is roughly 5-10 years
Don't put too much of the money that you want to spend in the next 5 to 10 years into the stock market. It is not how much you want to gain in 5 years on this 30k, it is how much you are willing to risk losing. Bear Adrian’s Rule in mind (set your equity percentage of your portfolio to twice the maximum bear market loss that you are willing to accept, but no more than 50%.) ie: if you are willing to lose 7.5k of the 30k, then put 50% (2x7.5k=$15k) in equity.

I think Harry Browne (RIP) has some good advice for younger investors in his "16 Golden Rules"

http://www.harrybrowne.org/articles/InvestmentRules.htm
Rule #1: Your career provides your wealth.


For most of us, it's labor and savings rates, (and disciplined conservative investing) and not investing returns, that creates long term wealth.
Aim for safety with moderate returns in investing; don't try to hit a home runs on your investments and end up striking out all the time.

And of course - the wiki here is good too!

http://www.bogleheads.org/wiki/Boglehea ... philosophy
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Topic Author
Marjimmy
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Re: 21 and headed to college

Post by Marjimmy »

Awesome points from everyone, thank you sincerly.

With all that being said, I couldn't agree more that I hadn't truly emphasized on the risk of a 5-10 year market fluxating up or down.

If we're going to look at life time investing (40-60 years) I know stocks are favored. Let's say now, for instance, that that 30k I have currently wouldn't be touched anytime soon. ( Not even 5 years from now and is just pure investing material ). With my Roth IRA in Vanguard I currently hold VASGX Vanguard LifeStrategy Growth Inv (80/20).
Obviously I know it's not smart to invest in the same company you have a 401k with, but is it different for me to invest more into the same fund that my Roth holds? For instance, 30k VASGX (taxable) and dollar cost average my Roth every month VASGX aswell? I know there are some other good funds out there like the Vanguard 500? (If anyone has heard of other great index funds please let me know). With the 30k I don't care if it's risky for the time being, 95/5 90/10 or 80/20.

Totally changes the scenario from the original post but o.O
Just trying to make the most out of the situation and learn from you all. Thanks
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
Caduceus
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Re: 21 and headed to college

Post by Caduceus »

Hi Marjimmy,

that's a great head start you have with your amount of savings! It is not just the amount that you save, but the habits you develop in your 20s and the mindset for saving and investing that will prove to be important. As I understand, you have two questions: (1) What you should invest in for the intermediate term, and (2) if you should invest your savings immediately, or move your money into your investments gradually. I'll leave it to others to make suggestions for the first question but have a suggestion for your second concern.

I do not know if you expect to work part-time in college, but if you do, you will be able to continue contributing to the Roth IRA that you currently already possess. (You need earned income in order to contribute to an IRA, up to the limit of $5,500 or the amount of your wages, whichever is the smaller amount). If you intend to work/contribute to a Roth IRA, keeping at least some of your savings in cash/CDs/shorter-term bond funds may be a good idea, because you can draw down from those savings for other living/study expenses as you channel most of your salary into the IRA. This is just a possibility you might want to think about. You mentioned that these investments will be for a potential down payment for a house. That is not a problem. You can withdraw your Roth contributions penalty-free in several years if you still want that house, and if you've changed your mind by then, well, then you have all that money sitting in tax-protected space. People in their 20s often move around a lot to follow jobs, and many things can happen between now and then, so shuffling as much money as you can into a Roth IRA might pay off handsomely in the very long run.

Apart from/Instead of Benjamin Graham's Intelligent Investor, may I also suggest reading the Bogleheads' Guide to Investing (Taylor Larimore et. al.) and Burton Malkiel's The Random Walk Guide to Investing or Burton Malkiel's A Random Walk Down Wall Street? If you are just beginning to learn about investing, those books might be better ones to start with. They are more comprehensive in terms of personal finance (because they are not focused specifically on investing) and deal with issues relating to saving, taxes, and asset location, which are very helpful, and in your situation, possibly much more useful.

Welcome - and good luck as you begin your journey through college!
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CaliJim
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Re: 21 and headed to college

Post by CaliJim »

Jimmy - with regard to your question about what funds to hold in which accounts - the approach many of us take is FIRST determine WHAT assets and funds we want to own (Asset Allocation and Fund Selection) and THEN figure out WHERE (401k, brokerage account, etc) it is best to hold them.

There is a little bit of interplay - as some funds are not available from within some accounts - but this is the general approach.

If your plan calls for $50k in fund-a, and $20k in fund-b, and you have an IRA account with $30k, and a taxable account with $40k, then, well, you're going to have to hold fund-a in two accounts. It's No Big Deal. We look at the entire portfolio as a whole.

The principles of tax efficient investing (and where to hold which funds) is discussed in the wiki here: http://www.bogleheads.org/wiki/Principl ... _Placement

As others have suggested - reading the books - and the wiki if you haven't read all of it yet - can clear up some of these questions for you, including the ones you haven't thought to ask yet.

BTW: VASGX is a perfectly good fund, and holding VASGX everywhere is perfectly fine if that is what your AA calls for. I think it is too aggressive an AA for my tastes - I'm more a 50/50 guy. But I'm and old retired conservative f*rt at a different stage in life.
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Topic Author
Marjimmy
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Re: 21 and headed to college

Post by Marjimmy »

Thank you Caduceus and CaliJim,

I will ask around if any Marines here have any of those books on hand.

Thank you for the best of regards, and to you all aswell.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius
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JupiterJones
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Re: 21 and headed to college

Post by JupiterJones »

Caduceus wrote: Apart from/Instead of Benjamin Graham's Intelligent Investor, may I also suggest reading the Bogleheads' Guide to Investing (Taylor Larimore et. al.) and Burton Malkiel's The Random Walk Guide to Investing or Burton Malkiel's A Random Walk Down Wall Street?
I agree with all of the above. Graham's book is a classic, but I don't think it's as useful to the average investor as it once may have been.

I'll also toss in Eric Tyson's "Personal Finance for Dummies" and "Mutual Funds for Dummies" as recommendations.

If it were me, I'd probably put $10,000 in iBonds right away. The rest I might put in something like Vanguard's LifeStrategy Income Fund (VASIX), which would be an easy way to get a wee bit of equity exposure, but not too much.

And yes, having $30,000 to play with at the age of 21 is phenomenal. Congrats!

JJ
"Stay on target! Stay on target!"
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ihckennedy
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Re: 21 and headed to college

Post by ihckennedy »

If you'll need the money in five years or so, you should not invest in anything intermediate (e.g., up to ten years) or long-term. You should use the Vanguard short-term corporate bond fund; you won't earn much return, but the money will be there when you need it. For someone with your investment time horizon, stocks are too risky.

ihckennedy
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