Brand New to Investing- Lost

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Brand New to Investing- Lost

Postby Pondo33 » Sun Mar 10, 2013 10:54 pm

Hello. I am totally new to investing. For the last few years I have been paying off debt. I have finally done that. I have no student loans, no consumer debt, no vehicle debt and no mortgage on a home I now own. I paid the last of it in January. My wife was just laid off from work and has $175k in a 401 K. Since paying off the house in January I have saved 35K in a money market account and I keep $4k in my savings account. I have another liquid asset worth about $40k. We only have to pay property tax and what it takes to live (food, utilities, etc.).

I want to start making my money work for me. Now I can save almost everything I earn. However, I don't have any idea where to begin. Based on the situation I described above, should I even start investing or should I save more? If investing is the way to go, should I go see an financial adviser or go to a bank and talk to them? Or do I find something online? I literally do not know where to begin.

I would sure appreciate any direction you all could provide.

Thank you.
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Re: Brand New to Investing- Lost

Postby WHL » Mon Mar 11, 2013 9:35 am

I'm not sure if others get tired of reading it, but all I can suggest is read the wiki, completely, a few times. When I first came here it that was the first suggestion for me. I read part of it, then tried to ask questions. Once I read the entire wiki a few times, I started to understand things a bit better.
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Re: Brand New to Investing- Lost

Postby livesoft » Mon Mar 11, 2013 9:38 am

I think books are the way to go. There is a reading list around here of some books to read. You can get them from your local library. The Bogleheads wiki is a great resource, but you gotta kinda hafta know what you are looking for and spend some time looking, so it is not very beginner friendly.

I like to go to the library and browse the bookshelf where the personal finance and investing books are. That way, I find something that fits me. I suggest you try to do something similar.

Good luck!
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Brand New to Investing- Lost

Postby letsgobobby » Mon Mar 11, 2013 10:24 am

Post in the format stickied at the top of this forum.
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Re: Brand New to Investing- Lost

Postby Twins Fan » Mon Mar 11, 2013 12:39 pm

Well, you came to the right place. No real need to go to a financial advisor or bank to let them tell you how you should handle your money. I.E... they will do what's best for them.

Great job having no debt!! As others have said, start doing some reading and change your post to the format suggested on the site. Just reading through threads in this website can give you lots of information also. Go to the bottom, arrange the different sections by number of replies (decending order), and start reading.

Do you have a retirement plan available through your work?
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Re: Brand New to Investing- Lost

Postby Peter Foley » Mon Mar 11, 2013 12:57 pm

First - welcome to the forum. With a little basic information about investing you are likely to be able to do-it-yourself. You already possess some of the prerequisites, the habit of living below one's means, keeping debt low, and setting money aside.

While there are a lot of investing books, I would suggest starting with one which is very readable for beginners: The Bogleheads Guide to Investing.
As already mentioned, one of the key ways to invest for retirement is through deferred accounts offered by one's employer(401k,403b,etc). Within such a plan, choosing a low cost index mutual fund for stock and another for bonds is a simple approach. Target retirement funds (if low cost) are an attractive all-in-one option.
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Re: Brand New to Investing- Lost

Postby Watty » Mon Mar 11, 2013 1:37 pm

Peter Foley wrote:While there are a lot of investing books, I would suggest starting with one which is very readable for beginners: The Bogleheads Guide to Investing.


+1 on that being a good book to start out with.

http://www.amazon.com/s/?search-alias=a ... Bogleheads

I think you may need to do one of the very hardest things that there is to do in investing which is to do nothing for the next six months or so.

This will allow you to learn the basics of investing, and even more importantly what the most common mistakes are, like hiring the wrong type of financial advisor.

Whatever your wife's 401K was invested in was not a problem a month ago so it can likely wait six months to be put into something better. If you are really concerned about the 401K money then it likely that the 401k has a Targeted retirement fund option, like a 2030 fund, that is based on when you plan to retire and you could move the money in the 401K into that if you wanted a reasonable one size fits all choice that would be a good place to park your retirement money in while you learn more.

Your money will still be in the money market account just fine in six months too.

Don't be intimidated about investing there are really only three things you can control in investing and they are easy to learn;
1) How much you save or spend each year.
2) Your asset allocation (What percent to put into stocks and bonds in different account types)
3) How to keep your investing costs low. This is more critical than many people realize.
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Re: Brand New to Investing- Lost

Postby Austintatious » Mon Mar 11, 2013 4:21 pm

Hi, Pondo33.

Congratulations on that debt free status. I think the advice given above by watty and others re about undergoing some serious study is the best advice you could get. Chances are that it'll give you the knowledge and confidence to manage your investments yourself.

In addition to time spent on this forum, consider these free and/or inexpensive study options:

- spend some time on the http://www.longtermreturns.com website, for easy to understand and very good investment insight and advice, plus it's another place where you might get some free, personalized advice

-also, see the http://www.obliviousinvestor.com website, for more free and easy to understand investment education

- same with the http://www.rickferri.com website. Rick is an investment advisor and longtime Boglehead, and his web site is a very good learning source.

- read Dan Solin's books on investing, starting with his The Smartest Investment Book You'll Ever Read. It's easy to understand and, I believe, offers simple and excellent investment advice well suited to the beginning investor.

- someone already mentioned The Bogleheads' Guide To Investing. It's another very good book for beginning investors.

Good luck!
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Re: Brand New to Investing- Lost

Postby trudy » Mon Mar 11, 2013 4:34 pm

How old are you?
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Re: Brand New to Investing- Lost

Postby Toons » Mon Mar 11, 2013 4:41 pm

Vanguard link about investing should be of interest. Give them a call and ask questions,they are there to help :happy

https://investor.vanguard.com/what-we-o ... Link=facet
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Brand New to Investing- Lost

Postby retiredjg » Mon Mar 11, 2013 5:45 pm

I like the suggestions to read a book or two. And the specific links provided for you look good as well. But I think the best place to start is Getting Started . From there you can go as far into depth as you want. Or not.

When you feel like you know enough to ask what to do with your portfolio, try Asking Portfolio Questions .
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Re: Brand New to Investing- Lost

Postby Pondo33 » Mon Mar 11, 2013 9:04 pm

Awesome information- thank you all.

I am 39. I am brand new- I did not read the wiki before posting (I didn't even know it was there or what it was- I'm sorry some of you have to keep reading posts like mine).

I was not really looking for specific investment advice, which I now see is posted on the wiki - thing. I was interested in information on how to even get started. The recommendations made were very good and helpful. I went to my library tonight and ordered the Boglehead Guide to Investing from intra-library loan.

In the meantime, I will get started on the web sites recommended. Fortunately, waiting a little while to learn what I am doing as suggested is no challenge to me. I am just trying to learn right now. I am not itching to dump money into stuff until I learn how it's done.

Thank you again for the recommendations.
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Re: Brand New to Investing- Lost

Postby Pondo33 » Mon Apr 29, 2013 9:04 pm

Okay- I'm back!

I read the Wiki thing as suggested. That was not very helpful. However, I did read the book suggested- Bogleheads Guide to Investing. That was tremendously helpful- SUPER helpful. But, now, armed with a little knowledge, I only have more questions. However, the good news is that they are really specific questions rather than the one in my original post.

I really want some help. Should I post each question separately or should I put them all in one post, should I put them here, or should I do something else entirely.

Thanks again for the suggestions.
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Re: Brand New to Investing- Lost

Postby livesoft » Mon Apr 29, 2013 9:09 pm

My advice would be to put them here, but maybe 2 or 3 questions at a time until you get answers. Then, after you get answers you understand, post the next 2 or 3 questions. And so on.

The reason is that if folks see more questions than that at one time, their eyes tend to glaze over and they don't give answers. Something about Miller's Law (there are several different Millers).
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Brand New to Investing- Lost

Postby Pondo33 » Tue Apr 30, 2013 10:51 pm

Okay, then- I will just post one question at a time since I am still reading and researching. Perhaps I can answer some of my own questions through further study.

However, here is one big question I have: What is a non-taxable vs. taxable account? I understand the implications of each and the purposes. I understand why I might put various types of investments in one over another. However, I don't understand what it actually is. Do I go to a bank and say, "hello. I would like to open a non-taxable account?" Where does the thing exist and how do I indicate it as a taxable or non taxable account? And then, once I get it up and running (however or wherever that occurs), how do I "put" investments in there? Do I just purchase X shares of ABC company and then direct the seller to put them in some account for me? For example, if I buy $3000 worth of Vanguard Total Stock Market Index funds, how do I get them into a taxable or non taxable account?

Where does it exist and how do I put stuff in there?


Thanks for any information. I am sorry if this seems too basic. The problem is that on all the websites and in other material I am reading it is discussed as if I already understand this basic principle, which I do not.
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Re: Brand New to Investing- Lost

Postby Twins Fan » Tue Apr 30, 2013 11:13 pm

Well, there are no "non-taxable" accounts. We wish!! :D

Think of it like tax advantaged accounts and taxable accounts.

So, tax advantaged would be like 401k, 403, 457, etc. typically accounts through employment where you put in pre-tax money, but later pay taxes when withdrawn. Or, a Roth IRA where you put post-tax money in there, but don't pay taxes later on withdrawl (there's different parts to that about contribution withdrawls, but that's the basics). Or, a Traditional IRA where you put post-tax money in, but you can deduct that on your yearly taxes (I'm not real familiar with traditional IRA). And, then any other tax advantaged accounts.

Then, a taxable account would be, for example, your $35K in a MM account, which is actually considered a taxable account since you pay taxes on the earned interest (it's done for you, so you don't see it). You would take that money and open up an investing account, pick your funds, and buy your shares. You're putting post-tax money in there and then paying taxes on the capital gains, and selling shares, and such. I'm not real familiar with taxable either since I don't do any taxable investing.

I'm no expert here, but also new to this and that's how I think of the tax advantaged vs. taxable thing.
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Re: Brand New to Investing- Lost

Postby nimo956 » Tue Apr 30, 2013 11:15 pm

First you go to an online brokerage website like:

https://investor.vanguard.com/home/
https://www.fidelity.com/
https://www.schwab.com/

You need to register and create and username and password. Then you can choose to open various types of accounts (taxable, traditional IRA, Roth IRA). Once you do this you can link your bank account to a money market fund at the brokerage. This allows you to transfer money there. Then when you go to buy shares of Vanguard Total Stock Market, for example, you will see your available balance.

I'd call the customer service at whichever brokerage you choose to help you get started if you are having trouble.
25% S&P 500/ 25% 30 year US Treasury Bond/ 25% Gold/ 25% Cash
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Re: Brand New to Investing- Lost

Postby Jeff7 » Tue Apr 30, 2013 11:23 pm

401k and IRAs are tax-advantaged - there are still taxes to be paid, it's just a matter of when it gets paid, and what gets taxed.

These accounts are just "holding areas," like financial suitcases, where investments (mutual funds, stocks, bonds, money market funds) can then be placed.

Standard 401k: The money goes into the account before it's taxed, so it also saves you some money on your federal income tax. When you take money out of it when you're of sufficient age, it is then taxed as income. You are not taxed directly on dividends or interest payments (from bonds) made on holdings within that account.

Traditional IRA: I think this works similarly...contributions to the tIRA can be deducted from your income. Not 100% sure on that one...

Roth IRA: You pay taxes on your income like normal, then you can put money into the Roth IRA. The funds within the IRA then grow without taxation, and in addition to that, you pay no taxes on disbursements from the account.

So you've got the "pay taxes now" and "pay taxes later" options. I commonly see it suggested to first contribute to the 401k account to max out the employer match, if any, and then push money into a Roth IRA. However, I also see that this is typically recommended if a 401k plan has poor investment options available; even then, an employer match usually represents an instant return of 50%-100%, depending on how much they match, and that kind of return is darn difficult to find anywhere else. :)

Taxable account: A regular investment account. You pay taxes on capital gains or interest from bonds. This is typically saved until the tax-advantaged space is full.

Opening a Roth IRA: I thought it was pretty simple to open. I've got mine through Vanguard. Open a New Account, and then it'll take you through prompts about what kind of account you want to open. Once the account is created, you then have the option there to buy funds. You may buy directly from Vanguard, or your company of choice, or create a brokerage account there and buy other funds, though there may be a fee for the latter option. Vanguard's Investor-level funds start at either $1000 or $3000 minimums.
From there, you can set up automatic contributions. Just stay under the limits - $5500/yr for IRAs (total, so if you've got a Roth and a tIRA, the total IRA contributions can't go above that), and $17500 for a 401k. Some special conditions do exist for 401k's; I'm not too familiar with them right now though, as those conditions have not applied to me yet. (High-income earners, or people over 50.)

I thought it was a fairly painless process for the sign-up and contributions. Just as recently as last November or so, I was where you were. While I'm certainly not about to call myself an "expert," I'm getting the idea that investing in low-cost mutual funds puts me in about as good a position as I can expect to be in. (And who knows, maybe there's still value in hearing from another newcomer to this.)
I'm invested in the Total Stock Market and Total Bond Market index funds in the Roth IRA, and then some higher-cost American Funds mutual funds in my 401k (I've got to settle with the "least-bad" options there, as they've all got expense ratios of >1.3%). I contributed there to get the employer match (50% for up to 4% of salary, so effectively a 2% pay raise put away for the future), then filled the IRA, and now I'm pumping up the 401k some more.

If you don't use up those bits of tax-advantaged space each year ($5500 for the IRA, and $17500 for the 401k), it's gone for good - no rollovers on the unfilled portions.
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Re: Brand New to Investing- Lost

Postby Saving$ » Tue Apr 30, 2013 11:38 pm

Pondo33 wrote:Perhaps I can answer some of my own questions through further study.

However, here is one big question I have: What is a non-taxable vs. taxable account? .....


Non Taxable accounts are accounts in which the earnings are not taxed.
Taxable accounts are accounts in which the earnings are taxed.

Non Taxable accounts come in two basic forms: Individual, and those connected to your employment.
Individual: Traditional IRA (abbreviated TIRA around here) and Roth IRA. IRA = Individual Retirement Account.
Connected to your employment: 401k, 403b, 401a, TSP (for government workers), Keogh

Think about the type of account (taxable vs. non taxable) as the type of envelope. Generally, the envelopes can have the same thing in them, so you could theoretically, for example, have xyz stock in any envelope -ie in any of the types of taxable or non-taxable accounts I listed.

Yes, you can walk into a bank and say you want to open an IRA, or a Roth IRA, but at most banks you will just be saving money in these accounts. They will open an account for you that is just like a savings account, CD, etc, except in an IRA or Roth IRA, so the earnings are not taxable.

You can also walk into a Fidelity office, or call or logonto the Vanguard website and open an IRA or Roth IRA. When you do this, you have the opportunity to invest money in the market, instead of just saving money. You can buy shares of a mutual fund.

You did not ask, but there are four other basic caveats in the taxable vs non-taxable, which you can learn more about in the wiki. The following are generalizations:
1. Some non-taxable accounts, such as 401k and IRA, also provide a tax benefit on the funds you place in the account each year. If you put $5k in your 401k at work, you don't pay income tax on that $5k in the year you invest it. You will however pay taxes on the $5k you invested plus it's earnings over the years when you withdraw during retirement.
2. Other non-taxable accounts, known as Roths, do not provide an immediate tax benefit on your initial investment, but in addition to earnings not being taxed throughout your saving years, during retirement you can make withdrawals without paying taxes on any of the earnings.
3. There are generally penalties involved in withdrawing money from your non-taxable retirement accounts before you are retired.
4. Non-taxable accounts of varying types have varying limits on how much money you are allowed to put into each every calendar year. This is often known as your "non taxable space"

Hope this helps.
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Re: Brand New to Investing- Lost

Postby Splais » Wed May 01, 2013 12:07 am

Pondo33, I am in pretty much the same situation you are. I read BG to I which was very good, and the Elements of Investing by Ellis. But the one that really helped was The Only Guide You'll Ever Need for the Right Financial Plan by Swedroe. It explained a lot of the different areas of investing I had questions about and has a huge glossary of terms. It was a great followup to BG to I.

Steve
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Re: Brand New to Investing- Lost

Postby Pondo33 » Wed May 01, 2013 12:07 am

I understand the tax part and I guess I don't have the lingo down yet. I guess I was using the wrong words when I said "non taxable account"

This was real helpful to me:

"These accounts are just "holding areas," like financial suitcases, where investments (mutual funds, stocks, bonds, money market funds) can then be placed"

and

"Opening a Roth IRA: I thought it was pretty simple to open. I've got mine through Vanguard. Open a New Account, and then it'll take you through prompts about what kind of account you want to open. Once the account is created, you then have the option there to buy funds. You may buy directly from Vanguard, or your company of choice, or create a brokerage account there and buy other funds, though there may be a fee for the latter option."

Saving$' explanation, which is similar, is also very helpful.

I think I understand a little better. I will check out vanguard's website and see if I can figure it out.

However, that brings up two related questions:

1) If my annual limit is $5500 in an IRA, and I want to do allocate (for example) 10% - Bond Index, 30% - International Stock Index and 60% - Stock Index, but vanguard's minimum investment is $1000 or $3000, do I just try to achieve approximately the balance to the extent I can do so with the purchase minimums of buying through vanguard and the annual limits placed on the IRA?

2) My wife has $173,000 in a 401k. I have been told I should move that to an IRA. What happens when I do that? If I transfer the money from the John Hancock 401k and put it in an IRA, what happens to the money? What is it doing?

Thanks again for all the help. I can't find help like this anywhere else.
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Re: Brand New to Investing- Lost

Postby citromike » Wed May 01, 2013 1:11 am

1. Try to think "broad picture" and see your entire family portfolio as one. So you don't have to split your $5500, you can visualize it as a small part of the whole, with the $175k as a big part

2. If your wife's employment has ended, you should take that money and transfer it to an IRA so it's under her (your) control. This is called a rollover. You should not just withdraw the money as you could end up with a penalty.

I think the best way is to call Vanguard, explain what you want to do, and they will help you - the process goes like this:

1. Open an account (empty) so you can get an account number.
2. Decide what kind of fund you want the money in ( let's say 500 Index Fund ) VFIAX Fund 0540
3. Fill out the instructions to Vanguard with account number and fund number(s)
4. Contact the employer 401(k) manager and request a rollover of her money. Ignore requests to keep the money there.
5. They will send you a check made out to Vanguard FBO (for benefit of) Your Wife's Name, with account and fund numbers
6. You send the check directly to Vanguard
7. In a few days, you've got an IRA
8. Forget about it and let time be your best friend

After you research all the options, say in 90-180 days, divide up your single chunk into the three proportional chunks of stock, bond, international, etc.
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Re: Brand New to Investing- Lost

Postby Duckie » Wed May 01, 2013 1:30 am

Pondo33 wrote:If my annual limit is $5500 in an IRA, and I want to do allocate (for example) 10% - Bond Index, 30% - International Stock Index and 60% - Stock Index, but vanguard's minimum investment is $1000 or $3000, do I just try to achieve approximately the balance to the extent I can do so with the purchase minimums of buying through vanguard and the annual limits placed on the IRA?

You could put the entire amount into one fund, a Target Retirement fund (which gets more conservative over time) or a LifeStrategy fund (which doesn't). TR funds have a $1K minimum. LS funds have a $3K minimum. If for example you wanted an AA of 80% stocks, 20% bonds, with 30% of stocks in international (which breaks down to 56/24/20) then you could buy either (VTHRX) Vanguard Target Retirement 2030 Fund (0.17%) or (VASGX) Vanguard LifeStrategy Growth Fund (0.17%). Of course, your next question changes that.

My wife has $173,000 in a 401k. I have been told I should move that to an IRA. What happens when I do that? If I transfer the money from the John Hancock 401k and put it in an IRA, what happens to the money? What is it doing?

If your wife is no longer working at the job then she can roll the old 401k over to an IRA. What that does is move the money from her ex-employer's control to her control. In a 401k she is limited to her ex-employer's choices and expenses. In an IRA she chooses. The 401k is a bucket. The IRA is a bucket. She would be moving her tax-sheltered money from one bucket to another, from one custodian to another.

The reason I wrote above about the "next question" changing things is that if your wife has $173K in a retirement plan, then the $5.5K in the IRA is just a part of the retirement portfolio. You consider the entire portfolio when deciding what goes where. So you need to add things up. $173K soon to be in Her Rollover IRA, $5.5K soon to be in His IRA (Roth or Traditional), possibly another $5.5K in Her IRA. Is the $40K liquid asset for retirement? If so is it taxable or tax-sheltered? Do you have a retirement plan at work (401k, 403b, 457)? With all the money in her old 401k His IRA doesn't need a balanced fund like TR or LS. It can be in an individual fund like Total Stock or Total Bond.
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Re: Brand New to Investing- Lost

Postby RobInCT » Wed May 01, 2013 1:35 am

If you are just opening your own account and do not have enough to reach the minimums on a bunch of different funds, Vanguard Target Retirement Funds are a good way to start off. The funds have a mix of stocks, bonds, international adjusted based on your anticipated retirement year but take a minimum of only $1000 to open. They are a good way to hold a mix until your balance gets high enough to make it possible to separate things out.

I am not too much younger than you are, and I personally held Target Retirement 2040 in my IRA until my balance got to $50k. Then I broke it down to $5k bonds, $30k Total Stock Market, $15k Total International. That was my preferred mix. You may have a different one.
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Re: Brand New to Investing- Lost

Postby dyeusdi » Wed May 01, 2013 7:31 am

re: tax-advantaged
I wouldn't stress too much about the differences in tax-advantaged spaces. For simplicity, if you assume your tax bracket will be the same in retirement, then money in a 401k and money in a Roth are exactly the same. They grow at the same rate if you give them the same allocation, and the post-tax value is identical. The "advantage" part comes from the fact that in both cases the growth and compounding is tax free. My only recommendation is that when comparing them, mentally pay the taxes on the 401k/tIRA and only treat the remainder as "yours" as it would be if you'd invested taxable; it prevents attachement to the part you are custodian of, not the owner.

I also recommend the Bogleheads book. It got me started and led me here. Most of my other learning has been from reading around here, picking out posts that are topics I am not familiar with. Am also reading the update of Jane Bryant Quinn's book, Making the Most of your Money Now. It is not easy to read straight through, but the content is great and I wish someone had given it to me as a go-to guide in my 20s.

I'll let others speak more but the pay formula I see around here is:

- Emergency fund
- High interest rate debt (CCs)
- 401k until match
-Roth IRA till full
- 401k till full
- Taxable or low rate debt (good mortgages, student loans)

There will be variances based on your circumstance You'll need to consider things like your Roth eligibility. Traditional IRAs may be appropriate instead if you are at the lower or higher ends of the income spectrum. People here tende to prefer Roth because it's a larger tax-advantaged bucket, once you take into account you're paying post-tax. The reason 401ks are ranked second is they often have worse expense ratios, but that's the only reason as far as I know. Also it will mix up a bit if you have kids to fund through college, in which you'll have to prioritize vs retirement needs. The Boglehead and JQB books will also encourage insurance appropriate to your situation, which I keep meaning to make manifest in my own life.

Sounds like you're doing great, though. I'm envious of your situation and foresight!
Dyeusdi - mostly lurking - Boston, MA
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Re: Brand New to Investing- Lost

Postby retiredjg » Wed May 01, 2013 4:18 pm

Pondo33 wrote:2) My wife has $173,000 in a 401k. I have been told I should move that to an IRA. What happens when I do that? If I transfer the money from the John Hancock 401k and put it in an IRA, what happens to the money? What is it doing?

There are 3 possibilities.

    1) Leave it where it is. This is a good option if there are good low cost choices in the old 401k.

    2) Roll it into an IRA. This is a good option because it gives her full control of how that money is invested. And the money stays in a tax-deferred state until withdrawn. The downside is it will interfere if she wants to do back door contributions to Roth IRA (because your modified AGI is too high to make direct contributions to Roth IRA).

    3) Roll it into her new 401k/403b if she has one. This is usually possible and is a good idea if there are very good choices in the new 401k. Not a good idea if the new 401k sucks.
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Re: Brand New to Investing- Lost

Postby roymeo » Wed May 01, 2013 4:39 pm

retiredjg wrote:1) Leave it where it is. This is a good option if there are good low cost choices in the old 401k.


He did say the 401k was with John Hancock, #1 is not a very good option, IMHO.
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Re: Brand New to Investing- Lost

Postby retiredjg » Wed May 01, 2013 4:55 pm

roymeo wrote:
retiredjg wrote:1) Leave it where it is. This is a good option if there are good low cost choices in the old 401k.

He did say the 401k was with John Hancock, #1 is not a very good option, IMHO.

Agreed. Since the old 401k is at John Hancock, leaving it there is probably not the best of the 3 choices.
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Re: Brand New to Investing- Lost

Postby Pondo33 » Thu May 02, 2013 10:54 pm

I am beginning to understand a little better: I was thinking that I would have to essentially set up a diversified portfolio in a tax deferred account and another portfolio in a taxable account. However, from the responses, I understand that I just think of the whole- not separate parts.

It is also apparent that I should move the 401k over to an IRA. I am thinking a traditional IRA for two reasons: first, I expect that at retirement I will be making less money and therefore taxed less than I am right now. Secondly, on a typical year we bring in too much to contribute to a Roth IRA- right now my wife is not working, but as soon as she goes back, we will be over the limit.

So, I have to decide what to do with the 401k. I assume that once it is rolled over I have to invest it in something. It seems to me that I should invest heavily in bonds or bond funds since the dividend yield is taxed as income. I am thinking then that it would be better then to have this in a tax deferred account. I understand that stocks get their return from appreciation in price- and will not be taxed until sold. If I hold my stocks or stock funds for a long time, or until my tax rate is lower, I am better off. As where with bond income, it would be taxed now if in a taxable account. Is this all correct? And then I was thinking I should hold stocks (preferably tax managed index funds) and international stocks in a non taxable account. Is that accurate thinking?

These are still just general ideas, but please tell me what you think.

Thanks a lot. This is all incredibly helpful for me. It is great to get advice from knowledgeable people who are not selling me anything and have no financial interest in the advice they give me. I appreciate this.
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Re: Brand New to Investing- Lost

Postby retiredjg » Fri May 03, 2013 11:53 am

Pondo33 wrote:It is also apparent that I should move the 401k over to an IRA. I am thinking a traditional IRA for two reasons: first, I expect that at retirement I will be making less money and therefore taxed less than I am right now. Secondly, on a typical year we bring in too much to contribute to a Roth IRA- right now my wife is not working, but as soon as she goes back, we will be over the limit.

Your first reason is valid. The second reason doesn't really apply. Annual limits don't apply to rollovers.


So, I have to decide what to do with the 401k. I assume that once it is rolled over I have to invest it in something. It seems to me that I should invest heavily in bonds or bond funds since the dividend yield is taxed as income. I am thinking then that it would be better then to have this in a tax deferred account.

It is correct that we usually recommend putting your bonds in IRA or 401k. This does not mean that stocks should not go into IRA or 401k too.


I understand that stocks get their return from appreciation in price- and will not be taxed until sold. If I hold my stocks or stock funds for a long time, or until my tax rate is lower, I am better off.

Not really unless you are in the highest tax bracket while working or fall into one of the very low brackets when you retire.

You do pay taxes on the capital gains (how much the price has appreciated) when the stocks are sold. But the capital gains tax is the same (15%) for all of the middle tax brackets. The lowest 2 tax brackets have a lower rate right now (0% on long term gains) and the highest bracket has a higher rate right now (20%), but for most folks - all the people in the middle 4 brackets, it is 15% on long term capital gains.


And then I was thinking I should hold stocks (preferably tax managed index funds) and international stocks in a non taxable account. Is that accurate thinking?

No, you have this part mixed up.

1) Tax managed funds are not the same as index funds. Index funds don't really need tax-management because they are tax-efficient on their own (because they don't do a lot of internal buying and selling). A tax managed fund is something different - an actively managed fund where the internal buying and selling is controlled in such a way as to prevent taxable distributions (dividends and internal capital gains).

2) I think you are still confused about "non-taxable account" There really is no such thing. There are taxable accounts (these are your ordinary accounts that have no tax advantages) and there are tax-advantaged accounts that have some type of advantage when it comes to taxes (there are your IRAs, 401ks, 403bs etc.) So forget "non-taxable" and think in terms of "taxable" and "tax-advantaged". In general, whatever happens in a taxable account can trigger taxes each year; whatever happens in a tax-advantaged account does not trigger taxes each year - the taxes are paid when you pull out the money.


But let's back up because you are a little ahead of yourself. For now forget where to put the different types of investments - that's not the first decision. First, you need to consider which type of accounts to fill and in which order. In general, it is best for most people to fill up their tax-advantaged accounts first (401k, 403b, traditional and Roth IRA, etc.) before saving money for retirement in a taxable account.

Once you are making and saving enough money to fill the tax-advantaged accounts, then you can consider putting retirement money into a taxable account. It is at that point you decide which funds should go into tax-advantaged accounts and which funds should go into taxable accounts.

I think you are about ready to start putting together a plan. To get help with that, post all of your information in the format listed in the link at the bottom of this message. Then people can help you figure out the approach best for your situation. It would be best to start a new thread to do this.
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Re: Brand New to Investing- Lost

Postby roymeo » Fri May 03, 2013 3:33 pm

I think you're also missing that when you buy any fund (stock, bond, mixed) in a tax-advantaged account, you either pay taxes at the end (IRA, 401(k)) or before the money goes in (Roth) but you do not pay taxes on dividends as they happen. Almost everyone just has any of those interim earnings reinvested, with no tax consequences. If this were sitting in a regular taxable account, you'd have to worry about whether they're dividends, short- or long-term capital gains, etc. but not when it's in a tax-advantaged account.

And by "pay taxes at the end" I mean when the money is taken out of the account to fund your retirement, etc. not rolling over still within the tax-advantaged structures.

----

edit to add encouragement: And please continue to read and learn and ask questions. You don't need to move on this immediately; you're learning for a lifetime so give yourself adequate time.
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
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Re: Brand New to Investing- Lost

Postby Pondo33 » Sun May 12, 2013 9:19 pm

Okay, so I am beginning to understand some things better based on what I have read so far. However, I am becoming more confused about some other things.

Here is where I am at generally: I will try to follow the suggested format, as suggested by retiredjg.

Right now I have about $55,00 in a checking account. A chunk of that could be considered an emergency fund. The balance of what I am not calling an emergency fund is available for investing. I own a house outright worth about $180,000. I own three cars (168,000 mile 2005 Acura TL- mine, and a 2009 Toyota Prius with 50,000 miles- hers, and a 1990 Mazda Miata with 28,000 miles, which is only for weekend joyrides during the summer). The $40k "liquid asset" I referenced is an airplane- a piper cub (I know, I know- huge waste of money). I spend between $500-1000 a month flying.

We have no debt at all.

We file our tax returns jointly and our marginal tax rate is 28%. We live in Illinois and I believe our state tax rate is 5%. We have no children. I just turned forty last week and my wife is 36 years old.

I am thinking that I would like to own about 60% stocks and the balance in bonds (though I have no other justification for that other than than I read I should own my age in bonds). Of my stocks, I would like 15 or 20% in international stocks. (Though again, I don't really desire this, I've just read it is a good number).

As I said, my wife left her job in December and has about $175,000 in a 401 through John Hancock. We have been fortunate enough to earn good salaries. Last year we earned $265,000. This year we will make less since she is not working. I generally make around $165,000. It has been consistent in the past, but as a business owner, I always feel that it can change at any moment. She will get a new job this year, but will likely make less than in the past.

I want to start investing in something not too complicated that is reliable and fairly conservative. I like the idea of index funds through vanguard. I also like the idea of bond funds. I am thinking that my first step is to fully fund IRA accounts ($11,000 per year?) I am also considering setting up a 401K at work. If so, I suppose I should contribute to that as much as possible. I should still have a lot left over for saving. Since we paid off all our debt, our expenses are low (though we still pay $7500 in annual property tax- around $600 per month). I can put most of the remaining balance in a taxable investment account.

I would love to move into a semi-retirement job after the next five years- that is one that I can do full time, but that I enjoy- regardless of income, but assuming it will pay at least a fair wage.

I will definitely look at the Vanguard Target Retirement 2030 Fund and the Vanguard LifeStrategy Growth Fund, as suggested.

What do you suggest would be a good, simple portfolio based on the foregoing?
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Re: Brand New to Investing- Lost

Postby ogd » Sun May 12, 2013 10:02 pm

Hi Pondo33,

Considering your variable job situation, I would recommend keeping all of the $55K as an emergency fund. You airplane may seem like a "liquid asset" now, but if the economy crashes who knows how many buyers there will be and how much they'll be willing to pay. Or, god forbid, something might happen to it. So I wouldn't count on it until it's money in the hand. You can find a place with a good yield, like Barclays online or a credit union for most of it. That's not going to be much less than bond yields, these days, so it's not entirely wasted opportunities.

That seems to leave you with the 401k . (By the way, did I miss something?). Your first priority should actually be to get it out of Hancock's grubby little hands no doubt expensive plan and into a traditional IRA somewhere cheap like Vanguard or Fidelity:

From there, there are a couple of ways to go. You asked for the simplest, which is something like:
1) Put the entire IRA into Vanguard LifeStrategy Moderate Growth Fund, VSMGX. This all-in-one fund is cheap, diversified and it has your desired allocation: 40% bonds, 60% stocks, of which 18% international.
2) New investments: you haven't told us what these might be. Definitely fund the IRA to the maximum 11K/yr; if you have money after that you can begin to build up a VSMGX in a taxable account.
3) If you can start a cheap 401(k) at work and have more than $11K to invest, definitely do that. Another $17K/year of tax-advantaged contribution is nothing to sneeze at.
4) Later on, if the taxable position gets large and you're paying too many taxes on VSMGX's bond portion, you can come back here and discuss breaking up part or all of VSMGX into components. By then, you'll have more experience with how this works, your investor behaviour, etc.

I feel that a balanced fund is best if you're mostly tax-advantaged. It's simple, relatively low volatility, and it will most likely keep you on track.

Hope this helps!
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Re: Brand New to Investing- Lost

Postby retiredjg » Mon May 13, 2013 12:14 pm

Pondo, this is how things look right now. I'm summarizing it so that we don't have to read several posts and narratives to find information.

Married Filing Jointly - 28% federal, 5% state (Illinois)

Age - 39

Desired Asset Allocation - 60% stocks/40% bonds, with 15% or 20% in international

Current retirement savings:

    Taxable ready for investing
    we don't know - you have $55k, but how much of that is your emergency fund? And maybe all or most of it should be in your emergency fund?

    Her 401k $175k (ready to roll to an IRA at Vanguard)

    His 401k $0

    His Roth IRA $0

    Her Roth IRA $0

We need to know how much you think you can save each year (starting with this year when there is only one salary - and also a guestimate of what it might be when there are two salaries.

The next thing you need to do is set up some kind of tax-deferred plan at work. I'd suggest an Individual 401k (sometimes called Solo 401k) at either Vanguard or Fidelity (you said self-employed, so I'm assuming that means no employees?) Here's the Vanguard website so you can start figuring out what type of plan is best. I don't suggest a SEP or SIMPLE IRA even though those plans may be simpler or lower cost. https://investor.vanguard.com/what-we-o ... s/overview I'm sure Fidelity has similar information available.

The reason I don't suggest a SEP or SIMPLE IRA is because you might need to do what is called back door contributions to your Roth IRAs. Even though you make too much money to contribute directly to Roth IRA, there is a way to get money into Roth IRA through a back door. Having money in a SEP or SIMPLE IRA would interfere with that. For that reason, I'm suggesting you use 401k instead. However, it that is too onerous, choose SEP or SIMPLE instead and don't do the back door. Your wife could still do the back door though.

http://thefinancebuff.com/the-backdoor- ... ow-to.html


Neither the Target Retirement 2030 not the LifeStrategy Growth Fund is appropriate if you wish to have a 60% stock/40% bond allocation. They both are at about 80/20. However, the Target Retirement 2020 is close and the LifeStrategy Moderate Growth Fund is right at 60/40.

Picking funds is the last thing to do in this process. We need to cover how much you save first. If you save enough to save for retirement in a taxable account, neither fund you mentioned is appropriate for that location. It might be better to break it down to the individual funds that you find within the Target and LifeStrategy funds and then divvy those out to the right locations. We'll get to that part when you supply more information.

If you want, you can go ahead and start the move of the 401k to traditional IRA at Vanguard. Just invest it in the LifeStrategy Moderate Growth fund for the present. It can be adjusted later (no cost, no tax) if needed.

Once you know what kind of retirement plan you set up at work and where it will be, we can go on from there.
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Re: Brand New to Investing- Lost

Postby Pondo33 » Mon May 27, 2013 6:25 pm

I've been gone a little while because I was out of town. However, I've been reading the responses, which are very helpful.

Here are my thoughts based on what I've read:

1). First, I really like the Vanguard LifeStrategy Moderate Growth Fund. It is simple and matches my desired allocation. I've also learned that I should get my wife's money away from John Hancock. I intend to move it into a vanguard account. However, once there, should I invest it ALL in VSMGX? VSMGX is $22.14 right now- we will roll over $171,000. Do I just buy $7723 shares?

2). Also, with respect to the employment situation- let me clarify a few points since based on prior posts, they seem relevant.

I said that I am self employed and that I tend to feel generally tentative about my business. I own a law firm with a partner. We have two other attorneys. It is a small office with about seven employees. We have been in business for 9 years. We have been profitable every single month of our existence. I already indicated my earnings.

My wife is also an attorney who just left her last job where she was making $103,000 plus bonuses. She is unemployed but will likely accept a new job making $70,000 plus bonuses.

I bring this up in response to prior comments and to clarify a couple points: First, I didn't mean to suggest that my income situation is precarious. The fact is that I tend to worry about my continued income, but looking at it rationally, every indication is that it will continue as long as I continue to work hard. Secondly, my company is looking at setting up a 401K through PAI.

3). Does this change anything? Does anyone have any strong feelings about PAI? How much should I leave in my emergency fund? I am at around $55,000 cash right now. I think I can generally save a minimum of $3000 per month. Once my wife becomes employed I will be able to increase that number. Also, frequently I am able to take a bonus of between $3,000 and 10,000. That, of course, is also available for investing.

4). Excluding the 401k money, it seems to me I should max out my 401k and IRA. Should I just use those to continue buying VSMGX? Should I consider any other tax efficient funds in addition/instead such as VTMFX? Should I consider anything else in addition/instead?
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Re: Brand New to Investing- Lost

Postby retiredjg » Tue May 28, 2013 10:37 am

Pondo33 wrote:1). First, I really like the Vanguard LifeStrategy Moderate Growth Fund. It is simple and matches my desired allocation. I've also learned that I should get my wife's money away from John Hancock. I intend to move it into a vanguard account. However, once there, should I invest it ALL in VSMGX? VSMGX is $22.14 right now- we will roll over $171,000. Do I just buy $7723 shares?

Yes, just invest it all in the LS Moderate Growth Fund. Don't worry about what a share costs or the number of shares - that part takes care of itself.

2). Secondly, my company is looking at setting up a 401K through PAI.

I'm not familiar with this company. Be sure to compare what you can get there with what you can get at both Vanguard and Fidelity. Costs matter a lot and you don't want to end up in a high cost plan. You also need to compare the investment choices you will have available in each plan. I know you probably don't know the difference yet, but look for index funds. If you can't tell which plan is better, start a new thread and ask the group.

3) How much should I leave in my emergency fund? I am at around $55,000 cash right now.

I'd leave all of this in your emergency fund, invested in cash, CDs, money market, maybe some short term bonds and I Bonds (your money is not available for the first year).



4). Excluding the 401k money, it seems to me I should max out my 401k and IRA. Should I just use those to continue buying VSMGX? Should I consider any other tax efficient funds in addition/instead such as VTMFX? Should I consider anything else in addition/instead?

The reason to use the LifeStrategy fund is so that you can have everything you need in one fund. There is no need for anything else. So yes, just continue buying it. But that is a fund that is NOT likely to be available in your 401k. If not, adjustments will have to be made. We can't help with that until you decide on a 401k plan and we see the choices available.

You are still a little confused about how tax efficiency fits in. Until you start saving money for retirement in your taxable account, tax-efficiency is irrelevant. Once you start saving in taxable, you want to choose tax-efficient funds to hold there. At that point, you may need to shift out of the LifeStrategy fund into the separate building blocks of the fund (total stock, total international, and total bond) and place those in the most tax-efficient manner. That will mean putting all your bonds in the 401k/IRAs and filling everything else with the stock funds.
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Re: Brand New to Investing- Lost

Postby Pondo33 » Thu Jun 06, 2013 11:07 pm

I have an update based on what I have learned in the foregoing posts.

First, and most importantly, I have done what was required to move the 401K money from John Hancock to a Vanguard IRA. Once there I will put it all in VSMGX.

As recommended, I am going to leave $50k in my emergency fund. That emergency fund has grown to $66k since my last post. Therefore, my wife and I are going to make our $11K contribution in an IRA and then buy more VSMGX.

I understand that if I put the money in a traditional IRA I can deduct the amount of the contribution from my taxable income, and I believe this tax deduction does not phase out for high-income earners. I further understand that I will be taxed at whatever future tax rate I am at once I withdraw it and I must do that by 70.

I also believe that in a Roth IRA I cannot take a tax deduction now, but I also will not be taxed on my earnings withdrawal when I am old enough to make it, but that I can always use the principal from the Roth even prior to retirement.

I have read that the general rule is that if I am in a higher tax bracket now than I expect to be in the future, I should go with a traditional IRA. And the reverse situation applies to a Roth.

Right now I am at a higher tax rate than I expect to be in the future. That would suggest I should open a traditional IRA. However, I feel like since my income is good right now, I can absorb the pain of taxes now more than I might be able to in the future. Further, a portion of the money in a Roth is accessible prior to 59 1/2 in a way that money in a traditional IRA is not. That makes me believe I should backdoor the contribution to a Roth. Is this a logical way to look at things? I am trying to decide what kind of IRA to open.

Thanks again.
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Re: Brand New to Investing- Lost

Postby retiredjg » Thu Jun 06, 2013 11:20 pm

In general, if you have too much income to make direct contributions to Roth IRA (making the back door necessary), then you make too much money to deduct contributions to traditional IRA.

Also, in the 28% federal tax bracket, it is unlikely (but I don't think impossible) that you can deduct contributions to tIRA. Why don't you check that part out?
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