Help a 22 y/o invest an inheritance

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Sun Feb 03, 2013 11:27 am

I recently found out that I would be inheriting 150k from a deceased relative. I'm currently a college student (biology major) that has been living on a budget around 15k a year. I have no debts and no large expenses. I plan to set aside 50k of the inheritance in a high interest online checking account for any expenses. The remaining 100k I want to invest but lack the necessary education. I don't want to take high risk but also don't want to lose money due to inflation. I've done a little research and TIPS, ETF's and REIT's have catch my interest thus far. If anyone could lead me to literature on building a portfolio for someone in my situation it would be greatly appreciated.
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby damjam » Sun Feb 03, 2013 1:18 pm

Welcome to the forum. :)

You could start here: Getting Started.
User avatar
damjam
 
Posts: 834
Joined: 25 Mar 2010

Re: Help a 22 y/o invest an inheritance

Postby rfburns » Sun Feb 03, 2013 1:41 pm

First, DO NOT GET IN A RUSH to do anything. Sorry for shouting, but it is the wisest move you can make right now. Go ahead and put $50k in a high yield checking if you need to draw on it. Put the rest away in a 1 or 2 year CD for now and continue to concentrate on school. In your spare time read here, read books, ask questions and develop a personal plan you can live with for the long run. Just don't get in a hurry.
rfburns
 
Posts: 438
Joined: 18 Oct 2009

Re: Help a 22 y/o invest an inheritance

Postby zebrafish » Sun Feb 03, 2013 1:45 pm

If I can provide you with any advice, it would be:

1. Read the wiki reference above at absolute minimum
2. Take your time

Think about how much of this money you might need in the short term (next 5 years) for additional school, housing, moving, purchases (vehicle), and be very conservative about how you handle this portion.

At your age, I inherited a smaller sum of money and proceeded to invest it poorly by investing in tech stocks just before the tech bubble burst. If I had done my due diligence...
User avatar
zebrafish
 
Posts: 492
Joined: 24 Nov 2012
Location: Inside the tank

Re: Help a 22 y/o invest an inheritance

Postby retiredjg » Sun Feb 03, 2013 1:58 pm

AmatureInvestor wrote: I don't want to take high risk but also don't want to lose money due to inflation. I've done a little research and TIPS, ETF's and REIT's have catch my interest thus far.

If you do not have an income right now, that rules out Roth IRA and IRA for holding any of the money. That leaves your only option as a taxable account (an account that does not have any tax-advantage). That's fine, but it does affect what you should invest in.

Neither TIPS nor REIT is a good choice for a taxable account. Those are best held in an IRA/Roth IRA/401k/etc. If you have no income and are therefore in a low tax bracket, it probably does not matter at all right now (for you - I'm not sure about your parents). But there is no sense in buying into these choices because you know you will need to replace them later when your tax bracket goes up.

As for ETFs, that is a type of investment - like a mutual fund is a type of investment. Were there any ETFs that particularly caught your interest?

My suggestion is that you invest in a combination of stock funds (or ETFs) and bond funds (or ETFs) such as total stock market index, total international index, and a bond fund appropriate for your tax situation (tax-exempt or not). The amount of risk is controlled by your stock to bond ratio.

Gather some info from the Wiki (the Getting Started link is posted above) and don't rush this. There is plenty of time to get it done right.
retiredjg
 
Posts: 16291
Joined: 10 Jan 2008

Re: Help a 22 y/o invest an inheritance

Postby Fallible » Sun Feb 03, 2013 2:26 pm

damjam wrote:Welcome to the forum. :)

You could start here: Getting Started.


And also check here on the wiki: "How to Manage a Windfall," http://www.bogleheads.org/wiki/Managing_a_windfall
and/or the chapter on windfalls in The Bogleheads' Guide to Investing.
"The first principle is that you must not fool yourself - and you are the easiest person to fool." ~ Richard Feynman
User avatar
Fallible
 
Posts: 3532
Joined: 27 Nov 2009
Location: At home everywhere and nowhere.

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Sun Feb 03, 2013 2:38 pm

Thanks for all the suggestions everyone :mrgreen:

rfburns wrote:Put the rest away in a 1 or 2 year CD for now and continue to concentrate on school. In your spare time read here, read books, ask questions and develop a personal plan you can live with for the long run. Just don't get in a hurry.


CD's seem like a poor investment in the current market unless I'm misinterpreting things?

retiredjg wrote:Neither TIPS nor REIT is a good choice for a taxable account. Those are best held in an IRA/Roth IRA/401k/etc. If you have no income and are therefore in a low tax bracket, it probably does not matter at all right now.

As for ETFs, that is a type of investment - like a mutual fund is a type of investment. Were there any ETFs that particularly caught your interest?

My suggestion is that you invest in a combination of stock funds (or ETFs) and bond funds (or ETFs) such as total stock market index, total international index, and a bond fund appropriate for your tax situation (tax-exempt or not). The amount of risk is controlled by your stock to bond ratio.

Gather some info from the Wiki (the Getting Started link is posted above) and don't rush this. There is plenty of time to get it done right.


I'm in the low tax bracket my income is around 20k a year. Good to know about the TIP and REIT, no particular ETF's stood out to me but I've just started researching. I like your recommendations, If I were to invest hypothetically in VTSMX, VGTSX, VBMFX would that be a diverse enough portfolio?
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby sscritic » Sun Feb 03, 2013 2:48 pm

AmatureInvestor wrote:I'm in the low tax bracket my income is around 20k a year.

If this is earned, you could start saving for retirement by putting money into an IRA.
For 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:
$5,500 ($6,500 if you’re age 50 or older), or
your taxable compensation for the year.

Then keep repeating every year you are eligible. There is an income limit for taking a tax deduction for a contribution to a traditional IRA and an income limit for even making a contribution to a Roth IRA, but you are far below that limit today (for the Roth, $127k of a modified adjusted gross income as a single person; the traditional limit depends on whether you or a spouse are covered by a retirement plan at work).

You could use this IRA account for your REIT and TIPS.
sscritic
 
Posts: 19604
Joined: 6 Sep 2007

Re: Help a 22 y/o invest an inheritance

Postby retiredjg » Sun Feb 03, 2013 3:00 pm

AmatureInvestor wrote:I'm in the low tax bracket my income is around 20k a year. Good to know about the TIP and REIT, no particular ETF's stood out to me but I've just started researching. I like your recommendations, If I were to invest hypothetically in VTSMX, VGTSX, VBMFX would that be a diverse enough portfolio?

That would be perfect. Eventually, when your tax bracket is higher, you won't want the Total Bond Market (VBMFX) in your taxable account because it is not tax-efficient. You can learn about that later - it's not real important now.

If you have some income, you could put $5k in a Roth IRA for 2012 (if you have the money in hand by April 15) and $5.5k in Roth IRA for 2013. This would not change your investments - just the container in which some of your money is located and I'd put the bonds in that container. And for money located in Roth IRA, the earnings are never taxed (under current tax law).

But be sure your income qualifies as "earned income". Occasionally, we hear about a stipend or something that does not qualify.
retiredjg
 
Posts: 16291
Joined: 10 Jan 2008

Re: Help a 22 y/o invest an inheritance

Postby stan1 » Sun Feb 03, 2013 3:32 pm

I'd plan on using some (most, or all) of it on education, especially since you are a science major in a field where advanced degrees are a requirement for many jobs. Being able to graduate with an advanced degree and no student loan debt will put you years ahead of your peers, and will set up in a job with a good salary that you hopefully enjoy and will support you and your future family for decades. I'm sure your deceased relative would be very proud of the role the inheritance played in your life.

Also, I would spend 3-12 months travelling in Europe, Asia, and emerging market countries.
stan1
 
Posts: 3147
Joined: 8 Oct 2007

Re: Help a 22 y/o invest an inheritance

Postby rfburns » Sun Feb 03, 2013 3:44 pm

AmatureInvestor wrote:Thanks for all the suggestions everyone :mrgreen:

rfburns wrote:Put the rest away in a 1 or 2 year CD for now and continue to concentrate on school. In your spare time read here, read books, ask questions and develop a personal plan you can live with for the long run. Just don't get in a hurry.


CD's seem like a poor investment in the current market unless I'm misinterpreting things?

My advice was not for the long term. CD's offer low rates yes, but more important they are insured and offer immunity from loss.
If you don't like the idea of locking your money in a CD then park the remainder in an online savings account. More liquid, immune from loss, interest rate similar to CD.
The idea is to take your time and learn before diving in to stocks and bonds.
rfburns
 
Posts: 438
Joined: 18 Oct 2009

Re: Help a 22 y/o invest an inheritance

Postby momar » Sun Feb 03, 2013 3:50 pm

stan1 wrote:I'd plan on using some (most, or all) of it on education, especially since you are a science major in a field where advanced degrees are a requirement for many jobs. Being able to graduate with an advanced degree and no student loan debt will put you years ahead of your peers, and will set up in a job with a good salary that you hopefully enjoy and will support you and your future family for decades. I'm sure your deceased relative would be very proud of the role the inheritance played in your life.

Also, I would spend 3-12 months travelling in Europe, Asia, and emerging market countries.

If he is a STEM major, he should not be paying anything for an advanced degree. He should get paid to do it.

And speaking as someone whose wife has a PhD in biology, and who also therefore knows a fair number of other early career bio PhDs, I wouldn't be so sure about getting an advanced degree in biology. The job market is horrible; nearly all of them are stuck in academic postdocs and don't have much hope for a real job anytime soon. A few that made it out are teaching at community colleges and the like. I know some with good paying jobs, too, but it's kind of sickening to me that so many have put in so much time in something they were told to do and are still earning very little. Science has become a huge pyramid scheme to the benefit of current faculty.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
User avatar
momar
 
Posts: 1359
Joined: 13 Nov 2011

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Sun Feb 03, 2013 4:28 pm

sscritic wrote:If this is earned, you could start saving for retirement by putting money into an IRA.

Then keep repeating every year you are eligible. There is an income limit for taking a tax deduction for a contribution to a traditional IRA and an income limit for even making a contribution to a Roth IRA, but you are far below that limit today.

You could use this IRA account for your REIT and TIPS.


IRA's concern me, I can't touch that money without penalty until I'm 70.5 right?

retiredjg wrote:That would be perfect. Eventually, when your tax bracket is higher, you won't want the Total Bond Market (VBMFX) in your taxable account because it is not tax-efficient. You can learn about that later - it's not real important now.

If you have some income, you could put $5k in a Roth IRA for 2012 (if you have the money in hand by April 15) and $5.5k in Roth IRA for 2013. This would not change your investments - just the container in which some of your money is located and I'd put the bonds in that container. And for money located in Roth IRA, the earnings are never taxed (under current tax law).

But be sure your income qualifies as "earned income". Occasionally, we hear about a stipend or something that does not qualify.


Could you explain the different between mutual funds and ETF's? VTI,VXUS, and BND seem to make up a similar portfolio. My income should qualify as I regularly get taxed out of my paycheck. I have the money to start an IRA I'm just concerned about the penalties associated.

momar wrote:If he is a STEM major, he should not be paying anything for an advanced degree. He should get paid to do it.


I'm paid for my undergrad studies as of now, I might go to grad school but not for a PHD. Tuition for any education is not a concern I have family members that would pay if need be.
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby NYBoglehead » Sun Feb 03, 2013 4:37 pm

^IRAs cannot be drawn on until 59.5, you have to take required minimum withdrawals at 70.5.

The best advice right now is to take a breath and not be in a rush to do anything. You have to educate yourself first before making major decisions about money.

I'd look to max out Roth IRAs every single year going forward and to completely max out any 401k once you start working after college. Even if your income isn't that great you should max out the tax-advantaged space and if necessary use some of the cash from this inheritance for expenses. Doing this will gradually shift your inherited dollars into tax-advantaged space and will be more beneficial in the long run.
NYBoglehead
 
Posts: 1578
Joined: 25 May 2012

Re: Help a 22 y/o invest an inheritance

Postby retiredjg » Sun Feb 03, 2013 4:53 pm

At Vanguard, they have both mutual funds and ETFs of the same thing - same stuff, different package. Other companies do things a little differently. These links may help you decide if you prefer one over the other.

http://www.doughroller.net/investing/ri ... ual-funds/

Wiki article link: ETFs vs Mutual Funds

Money put into a traditional IRA is generally not available before age 59.5. But if you need it, there is often a work-around. But don't put money into a tIRA that you actually plan to use for something other than retirement.

Contributions (not earnings) put into a Roth IRA are available any time for any reason. There is really no downside of putting money into Roth IRA.
retiredjg
 
Posts: 16291
Joined: 10 Jan 2008

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Mon Feb 04, 2013 12:29 pm

NYBoglehead wrote:I'd look to max out Roth IRAs every single year going forward and to completely max out any 401k once you start working after college. Even if your income isn't that great you should max out the tax-advantaged space and if necessary use some of the cash from this inheritance for expenses. Doing this will gradually shift your inherited dollars into tax-advantaged space and will be more beneficial in the long run.


Basically I want to buy bonds through the IRA/401k correct? Then leave stock and international investments for taxes?

retiredjg wrote:At Vanguard, they have both mutual funds and ETFs of the same thing - same stuff, different package. Other companies do things a little differently. These links may help you decide if you prefer one over the other. Contributions (not earnings) put into a Roth IRA are available any time for any reason. There is really no downside of putting money into Roth IRA.


I still can't distinguish a fiscal difference between Index funds and ETFs. Their expense rates seem identical, maybe they're taxed differently?
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby barnaclebob » Mon Feb 04, 2013 12:42 pm

I still can't distinguish a fiscal difference between Index funds and ETFs. Their expense rates seem identical, maybe they're taxed differently?


The main difference is that you can trade ETF's like stocks and buy or sell them at intraday prices. Mutual funds can only be sold once a day at whatever price it ends with that day.


ETF's might not have as high of a minimum balance requirement?
barnaclebob
 
Posts: 306
Joined: 9 Aug 2012

Re: Help a 22 y/o invest an inheritance

Postby NYBoglehead » Mon Feb 04, 2013 12:56 pm

^ETFs do not have any minimum requirements but in the OP's case this is a moot point. I prefer mutual funds myself, but to each their own.

Bonds should be held in tax-advantaged accounts. Holding your international equities in taxable you'll get the Foreign Tax Credit. While you want to avoid holding bonds in taxable accounts when possible, it does not mean that equities shouldn't be in tax-advantaged accounts either. There should be a mix of stocks and bonds in tax-advantaged space.

You are in a very unique situation. Being so young with that much money means that you do not have to take as much risk as the overwhelming majority of us. Earning just 5% on that 150k over 30 years will give you well over $1,000,000 and that is without contributing a single dime more. Obviously that $1 million won't be worth what it is today 30 years from now but my point is to carefully evaluate what AA you really need.
NYBoglehead
 
Posts: 1578
Joined: 25 May 2012

Re: Help a 22 y/o invest an inheritance

Postby Watty » Mon Feb 04, 2013 1:00 pm

I agree with taking your time before you do anything.

One of the main things to do while you are learning more is to decide what you will likely use the money for since that will determine the appropriate way to invest it.

Now that you have some assets one thing to do that has not been mentioned is to take a look at your car insurance coverage and increase it to be at least a couple of hundred thousand dollars if it isn't already that high.
User avatar
Watty
 
Posts: 4161
Joined: 10 Oct 2007

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Mon Feb 04, 2013 3:02 pm

NYBoglehead wrote:You are in a very unique situation. Being so young with that much money means that you do not have to take as much risk as the overwhelming majority of us. Earning just 5% on that 150k over 30 years will give you well over $1,000,000 and that is without contributing a single dime more. Obviously that $1 million won't be worth what it is today 30 years from now but my point is to carefully evaluate what AA you really need.


Since I don't have to take as much risk what percentage of my portfolio should be bonds? Earning 5% is something I would be very pleased with in the long run. I hope to just throw the 100k in a few index funds or ETFs and forget about it the next 30-40 years. I read Joe Bogle's The Little Book of Common Sense last night and was amazed with his numbers over the past 40 years.

Watty wrote:Now that you have some assets one thing to do that has not been mentioned is to take a look at your car insurance coverage and increase it to be at least a couple of hundred thousand dollars if it isn't already that high.


I'm definitely going to have to look into new insurance I have the absolute minimum right now.
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby NYBoglehead » Mon Feb 04, 2013 3:14 pm

^That's going to be up to you to decide. The Balanced Index Fund at Vanguard is 60/40 Stocks:Bonds at has an ER of only 10 bps for Admiral Shares. Again, I really don't have the answer on this one since it's up to you, but a common theme around here is "why keep playing when you've already won the game?" While 150k doesn't make you a Rockefeller or mean that you can retire at 40, at 22 years old it means that some things that would be of concern to most will not apply to you.

If stocks return 6-7% annually for the next 30 years and bonds get 2-3% annually for the next 30 years you should achieve a nominal return of between 4.4% and 5.4%. Of course there will be periods when stocks return well above that and over the course of the next 30 years we assume bond yields will rise, so I think assuming a nominal return of 5%/yr with the Balanced Fund is reasonable.
NYBoglehead
 
Posts: 1578
Joined: 25 May 2012

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Wed Feb 06, 2013 4:30 pm

I've been doing some research and I think I'm going to set up a simple vanguard three fund portfolio. Would investing all funds into one LifeStrategy fund be more beneficial then three separate(TSM,TBM,TIS) Admiral accounts? The Admiral accounts seem to have a lower expense rates and I want to save money anywhere possible.
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby NYBoglehead » Wed Feb 06, 2013 5:11 pm

AmatureInvestor wrote:I've been doing some research and I think I'm going to set up a simple vanguard three fund portfolio. Would investing all funds into one LifeStrategy fund be more beneficial then three separate(TSM,TBM,TIS) Admiral accounts? The Admiral accounts seem to have a lower expense rates and I want to save money anywhere possible.


I like the 3-fund portfolio with Admiral Shares option. The savings from the lower ER on such a large portfolio over an extended period of time should be significant by most people's standards.
NYBoglehead
 
Posts: 1578
Joined: 25 May 2012

Re: Help a 22 y/o invest an inheritance

Postby Meg77 » Wed Feb 06, 2013 6:10 pm

Congrats on your inheritance and on seeking to optimize it. Definitely definitely start maxing out a Roth IRA as soon as you're eligible. You will never regret it! I started maxing one out when I was 18 and got my first job, and now I'm 29 and am sooo glad I did. It feels good to know that no matter what else is going on in my financial life I have always put my retirement savings first and am so far ahead of most people my age in that category. All that money is sheltered from income taxes now and when I withdraw it in retirement. That is a HUGE benefit that cannot be understated, especially when you are looking at a 40+ year time horizen. There's no reason to be worried about tying your money up. First of all you can only put in $5,500 a year ($5,000 for 2012) so it'll be a small chunck of your total assets. Plus you can take your contributions back out of a Roth IRA any time without penalty or taxes because the contributions are made after taxes (you can't take out the earnings though until your 59.5). A traditional IRA is different - in that case you'd pay taxes and penalties on any withdrawal once you put the money in.

As for what to invest in ETFs charge a commission every time you buy or sell, whereas index funds and mutual funds do not. For that reason I invest in Vanguard index funds rather than ETFs. Fees are the same, holdings are the same, but trading costs can add up on ETFs over time. Plus who cares about being able to trade during the day IMO. None of us are here to promote day-trading stocks last time I checked.

So if I were you I'd open up a Vanguard fund taxable account (as opposed to brokerage account) and fund it with the $100K. Then open up a Roth IRA within that account and move in $10,500 to start ($5000 for 2012 and $5500 for 2013). I'd buy an Admiral bond index fund with the $10,500 in the Roth IRA (since it throws off more income which would be tax sheltered), and invest the $89,500 in the taxable account in stock index funds (international and domestic). That would give you a 90/10 AA which is fine for your age (plus buying bonds now isn't the best idea ever; see other threads on this). Then every year simply transfer another $5500 into the Roth from the taxable account so you are sheltering more and more money from income taxes.

Good luck!
"An investment in knowledge pays the best interest." - Benjamin Franklin
User avatar
Meg77
 
Posts: 508
Joined: 22 May 2009

Re: Help a 22 y/o invest an inheritance

Postby zmcpherson » Wed Feb 06, 2013 7:13 pm

+1 to Meg77

I Agree with every word of it.

89.5/10.5 would give you a perfectly fine ratio for this year, then next year you can move to 84/16 by simply adding another $5500 to the IRA account come Jan 1st.
zmcpherson
 
Posts: 39
Joined: 17 Apr 2012

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Wed Feb 06, 2013 9:01 pm

Meg77 wrote: So if I were you I'd open up a Vanguard fund taxable account (as opposed to brokerage account) and fund it with the $100K. Then open up a Roth IRA within that account and move in $10,500 to start ($5000 for 2012 and $5500 for 2013). I'd buy an Admiral bond index fund with the $10,500 in the Roth IRA (since it throws off more income which would be tax sheltered), and invest the $89,500 in the taxable account in stock index funds (international and domestic). That would give you a 90/10 AA which is fine for your age (plus buying bonds now isn't the best idea ever; see other threads on this). Then every year simply transfer another $5500 into the Roth from the taxable account so you are sheltering more and more money from income taxes.

Good luck!


Thanks for the advice Meg. I plan on opening a Roth IRA in the next couple of weeks, I have a savings account that can cover the 10,500 for the bonds. Should I invest the 100k in exclusively stock index funds or should I buy some more bonds? 90/10 seems like quite an aggressive AA although I don't mind taking risks with my time frame. Could you lead me to some threads regarding why buying bonds isn't the best idea right now?
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby miller2640 » Wed Feb 06, 2013 10:46 pm

Congratulations on your inheritance. You are much further along than most of us at 22 years of age and you are asking good questions. You're wise beyond your years.

Before you start investing on your own, though, ask yourself three questions:

First, are you willing to spend a lot of time educating yourself on investing? You came to a good source of information. This forum hosts many smart, motivated investors willing to share their experiences and insights. Like all sources, though, there is a bias here. Not a bad one, mind you, but a bias nonetheless: Bogleheads are passionate about investing and enjoy putting their free time into learning, considering and arguing the merits of different investing methods. They WANT to manage their money. Is that where you want to put a lot your free time? For the next 45 years? If so, great! If not, consider a different course.

Second, do you have the temperament to manage you own money well? Most people do not. You started this thread expressing and aversion to risk and the question of risk has come up a few times. At 22 years of age, risk is your friend. It is what allows you to retire a millionaire in today's dollars (after inflation). You can change your attitude towards risk by educating yourself, and you probably started doing so with the reading you've already done. But that's an intellectual pursuit. What about your gut? Emotions matter. Ask yourself, what would you have done if you invested $100k in the Fall of 2008 and watched your investment decline 40% to 60% by March 2009? If you can honestly say you would have looked for more money to invest and cursed your luck because you couldn't put more in the markets, you have the right temperament. But, if you would have decided 50% was too much to lose and bailed out, you shouldn't be managing your own money. This is the hardest part of investing and the most important. Be sure you are emotionally equipped.

Third, can you maintain focus and stick with your plan? For the rest of your life? There will be lots of distractions. Hot stocks, hot money managers, new investing philosophies. You'll need to ignore all those and stick with the low-cost index fund approach championed in this forum for a long time to succeed. Can you do that?

Obviously, I don't know you. You're clearly smart enough to manage your money and you may have the aptitude and temperament to succeed as well, but the odds are you don't. If that's the case, you'll be much better off investing in a Vanguard lifecycle fund. There are better investments, but you will reap the rewards only if you put in the effort, maintain a cool head in the face of apparent disaster and stick to your plan no matter what. For 45 years.

I wish someone had told me this when I was your age. I could have avoided many mistakes!
miller2640
 
Posts: 1
Joined: 6 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Thu Feb 07, 2013 10:18 am

miller2640 wrote:First, are you willing to spend a lot of time educating yourself on investing? Like all sources, though, there is a bias here. Not a bad one, mind you, but a bias nonetheless: Bogleheads are passionate about investing and enjoy putting their free time into learning, considering and arguing the merits of different investing methods. They WANT to manage their money. Is that where you want to put a lot your free time? For the next 45 years? If so, great! If not, consider a different course.


I have no problem diverting time to educate myself on investing. I've recognized the bias on this site as well as Jack Bogles bias through his books. The problem I have is finding anyone to make a productive argument against index funds. If you could lead me to some of this literature it would be appreciated.

miller2640 wrote:Second, do you have the temperament to manage you own money well? What about your gut? Emotions matter. Ask yourself, what would you have done if you invested $100k in the Fall of 2008 and watched your investment decline 40% to 60% by March 2009? Be sure you are emotionally equipped.


I have a very baseline temperament, I rarely make decisions with my emotions. From my research thus far watching my investment decline wouldn't bother me since I have multiple decades to fall back on. I plan to continuously invest in my funds regardless of what the market is doing.

miller2640 wrote:Third, can you maintain focus and stick with your plan? For the rest of your life? There will be lots of distractions. Hot stocks, hot money managers, new investing philosophies. You'll need to ignore all those and stick with the low-cost index fund approach championed in this forum for a long time to succeed. Can you do that?


It would be difficult to divert my plan with distractions. Hot stocks or money managers don't interest me. Individual stocks are dependent on factors I can't predict or control, I would rather bet on the whole market. As for managers I have too many trust issues to let someone deal with my money. All financial decisions will be made by myself so I know who to blame if everything falls apart :mrgreen:
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby retiredjg » Thu Feb 07, 2013 11:00 am

Since some of your money will be in Roth and some in a taxable account, I'd suggest just using the 3 separate funds instead of LifeStrategy. It could look like this:

Taxable $89,500
$56,000 Vanguard Total Stock Index
$24,000 Vanguard Total International Stock Index
$9500 Vanguard Tax-Exempt Intermediate Bond <--sell and use for Roth contributions in 2014 and 2015

Roth IRA (2012 and 2013 contributions)
$10,500 Total Bond Market

This still leaves $50k in savings for the expenses you mentioned. This idea sets you up in a tax-efficient manner (even though that is not particularly important for you right now) and gets you headed in the right direction. Each year, just sell something in your taxable account to fund your contribution in your Roth IRA account. I'd sell the bonds first, and then most of the Total Stock Market Index. Leave the Total International there till last so that you can get the benefit of the foreign tax credit (see the Wiki).

Something to watch for: get familiar with the concept of "wash sale". Short story is this - if you sell Total Stock Market in taxable at a loss you should not buy Total Stock Market in your Roth IRA for at least 30 days. Instead, buy something else that is not "substantially identical" - 500 Index, Target Retirement 2050, REIT, whatever. After the 30 days, you can exchange that substitute into Total Stock Market if you want and go along your merry way. At tax time, remember to take the loss off your taxes.

If you sell Total Stock Market in taxable at a gain, there is no possibility of a wash sale, so just buy whatever you want.

As you get familiar with wash sales, you'll run into endless discussions on what "substantially identical" is. Nobody really knows because the IRS never defined it. Just pick a different fund from what you sold and ignore all the hoorah.
retiredjg
 
Posts: 16291
Joined: 10 Jan 2008

Re: Help a 22 y/o invest an inheritance

Postby Meg77 » Thu Feb 07, 2013 12:55 pm

AmatureInvestor wrote:
Meg77 wrote: So if I were you I'd open up a Vanguard fund taxable account (as opposed to brokerage account) and fund it with the $100K. Then open up a Roth IRA within that account and move in $10,500 to start ($5000 for 2012 and $5500 for 2013). I'd buy an Admiral bond index fund with the $10,500 in the Roth IRA (since it throws off more income which would be tax sheltered), and invest the $89,500 in the taxable account in stock index funds (international and domestic). That would give you a 90/10 AA which is fine for your age (plus buying bonds now isn't the best idea ever; see other threads on this). Then every year simply transfer another $5500 into the Roth from the taxable account so you are sheltering more and more money from income taxes.

Good luck!


Thanks for the advice Meg. I plan on opening a Roth IRA in the next couple of weeks, I have a savings account that can cover the 10,500 for the bonds. Should I invest the 100k in exclusively stock index funds or should I buy some more bonds? 90/10 seems like quite an aggressive AA although I don't mind taking risks with my time frame. Could you lead me to some threads regarding why buying bonds isn't the best idea right now?


First of all if you include your cash in the picture you've got a much more conservative mix than you're giving yourself credit for - a 60/40 mix to be precise with $60K in cash bonds and $90K in stocks. As you spend the cash on edcuation/travel/whatever then you can buy more bonds if you intend to maintain a conservative asset mix, though I would personally shoot for no less aggressvie than a 75/25 target AA. I know Bogleheads are all against market timing, but bonds have been on a tear for 30 years, and no bull market lasts forever. I would start with the $10K in bonds (since that's the most that you can put in your IRA and bonds are best held in IRAs over time so you don't owe taxes on the income distributions). Then dollar cost into bond funds over 5 years or more to get to your target rather than doing so all at once.

Interest rates are at all time lows and are set to begin to rise in the coming years; the Fed has signaled 2015, but some think it could start as early as this year. The relationship between bonds values and interest rates is inverse, so when rates rise the values of bonds will automatically fall. That's a simplistic summary, and I'm not saying there is a bubble like many others are, but I'm just saying that interest rates are likely to rise over the next 5 years so I'd ease into my bond holdings over time, especially since you're going to have plenty of cash on the sidelines. Besides, cash is earning about what bonds are if not more in some places (my local bank is offering 4% on savings accounts up to $25K).

Here are a few simpler articles on the subject.

http://money.cnn.com/2013/01/03/investi ... index.html
http://www.usatoday.com/story/money/col ... h/1818603/
http://www.washingtonpost.com/blogs/won ... nd-bubble/
"An investment in knowledge pays the best interest." - Benjamin Franklin
User avatar
Meg77
 
Posts: 508
Joined: 22 May 2009

Re: Help a 22 y/o invest an inheritance

Postby Grt2bOutdoors » Thu Feb 07, 2013 1:08 pm

Hold your AAA or AA investment grade bonds to maturity and there is very little principal risk.
Instead of the sky is falling, it's "rates will rise" - I've been hearing that now for the last 5 years, anyone who sold out of long bonds then gave up tremendous price appreciation and yield. :oops: Now the federal government is looking into issuing floating rate notes - is that because they believe rates will rise or they will fall. My bet is they believe rates will continue to fall - that's what happens in a deflationary enviornment. There is too much cash out there looking for a safe home - equities are not it when the margins start shrinking.

Interesting thing about savings accounts at banks - the bank reserves the right to reprice the rate at "anytime". That means 4% today, 3% tomorrow. I find it suspect a bank would be advertising a 4% rate unless it desperately needed deposits that it couldn't buy or find for a cheaper rate anyplace else. In other words, the safer bank wouldn't need to offer such a rate - liquidity flocks to the safe haven.
"Luck is not a strategy" Asking Portfolio Questions
Grt2bOutdoors
 
Posts: 9137
Joined: 5 Apr 2007
Location: New York

Re: Help a 22 y/o invest an inheritance

Postby AmatureInvestor » Fri Feb 08, 2013 1:06 am

retiredjg wrote:Since some of your money will be in Roth and some in a taxable account, I'd suggest just using the 3 separate funds instead of LifeStrategy. It could look like this:

Taxable $89,500
$56,000 Vanguard Total Stock Index
$24,000 Vanguard Total International Stock Index
$9500 Vanguard Tax-Exempt Intermediate Bond <--sell and use for Roth contributions in 2014 and 2015

Roth IRA (2012 and 2013 contributions)
$10,500 Total Bond Market

This still leaves $50k in savings for the expenses you mentioned. This idea sets you up in a tax-efficient manner (even though that is not particularly important for you right now) and gets you headed in the right direction. Each year, just sell something in your taxable account to fund your contribution in your Roth IRA account. I'd sell the bonds first, and then most of the Total Stock Market Index. Leave the Total International there till last so that you can get the benefit of the foreign tax credit (see the Wiki).

Something to watch for: get familiar with the concept of "wash sale".


Thanks for the allocation advise and the heads up on the wash sale. I'll definitely be getting separate funds to take advantage of admiral shares. Is there a 5k limit on the Roth IRA indefinitely or just until I make more income? What do you think about this bond fund VFLTX? I'm guessing the fund is designed for retirees but since I live in Florida I might as well take advantage if its any good.

Meg77 wrote:First of all if you include your cash in the picture you've got a much more conservative mix than you're giving yourself credit for - a 60/40 mix to be precise with $60K in cash bonds and $90K in stocks. As you spend the cash on edcuation/travel/whatever then you can buy more bonds if you intend to maintain a conservative asset mix, though I would personally shoot for no less aggressvie than a 75/25 target AA. I know Bogleheads are all against market timing, but bonds have been on a tear for 30 years, and no bull market lasts forever. I would start with the $10K in bonds (since that's the most that you can put in your IRA and bonds are best held in IRAs over time so you don't owe taxes on the income distributions). Then dollar cost into bond funds over 5 years or more to get to your target rather than doing so all at once.

Interest rates are at all time lows and are set to begin to rise in the coming years; the Fed has signaled 2015, but some think it could start as early as this year. The relationship between bonds values and interest rates is inverse, so when rates rise the values of bonds will automatically fall. That's a simplistic summary, and I'm not saying there is a bubble like many others are, but I'm just saying that interest rates are likely to rise over the next 5 years so I'd ease into my bond holdings over time, especially since you're going to have plenty of cash on the sidelines. Besides, cash is earning about what bonds are if not more in some places (my local bank is offering 4% on savings accounts up to $25K).


I also have more cash set aside for a new vehicle if I can ever break my current one. I like to keep a substantial amount of liquid around to cover myself if shit ever hits the fan. I think I'll just buy bonds for my Roth and keep liquid around for conservative portion of my allocation. 4% on your savings account is epic! I've been hard pressed to find 1% :oops:

Grt2bOutdoors wrote:Hold your AAA or AA investment grade bonds to maturity and there is very little principal risk.
Instead of the sky is falling, it's "rates will rise" - I've been hearing that now for the last 5 years, anyone who sold out of long bonds then gave up tremendous price appreciation and yield. :oops: Now the federal government is looking into issuing floating rate notes.


I don't plan on selling any of the index funds I purchase until I retire. Could you explain these floating rate notes or lead me to literature that does?
AmatureInvestor
 
Posts: 9
Joined: 3 Feb 2013

Re: Help a 22 y/o invest an inheritance

Postby retiredjg » Fri Feb 08, 2013 10:34 am

Is there a 5k limit on the Roth IRA indefinitely or just until I make more income?

The limit for 2012 was 5k. The limit for 2013 is $5.5k. But it does not go up each year. It will go up (in 500 chunks) with inflation. Might be next year. Might be 4 or 5 years.


What do you think about this bond fund VFLTX? I'm guessing the fund is designed for retirees but since I live in Florida I might as well take advantage if its any good.

VFLTX is the Florida Focused Long Term Tax Exempt Bond fund. I doubt that it is "designed for retirees". It would be a fund of municipal bonds that originate in the state of Florida. Say, a city wants to build a stadium or something.

I don't have an opinion on using that fund instead, at least in theory. I don't recall seeing this discussed before. It is paying well, but that almost certainly means it is carrying more risk. Your risk should be in the stock side of your portfolio, not the bond side. Whether this is too much risk for a bond fund, I don't know.

You might want to open a new thread to ask just that question if you don't get more discussion on it here.


Just a note: If you speak in ticker, people don't know what you are saying and have to look things up because you didn't want to type out the name. You'll get fewer answers that way and there will eventually be a mistake because either you or someone else will have a typo and you'll be talking about different funds. Please use the Ticker and the fund name together at least once in your posts.
retiredjg
 
Posts: 16291
Joined: 10 Jan 2008


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: inspector00, JohnnyB, maverick02, MikeRes and 49 guests