23 year old noob investor

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23 year old noob investor

Postby gjgarcia41 » Thu May 02, 2013 2:17 am

Hi everyone,

I just finished reading Personal Finance for Dummies and the Bogleheads Guide to Investing. Now I'd like to adjust a portfolio I rushed into before I finished the Bogleheads book. I have no big purchases pending and would like to invest as much money as I can while I'm single. I have $30k in a bank CD that is about to mature. I plan on investing all of this into 4-5 vanguard funds. I like simplicity.

Emergency funds: 5 months expenses (this is sitting in my BoA savings account getting a measly 0.01% return.)
Debt: I recently inherited a house with $65,135.76 left on the mortgage at 5.625%. No other debt.
Tax Filing Status: Single
Tax Rate: 15% Federal, 6% State (I believe this is correct, I make about 30k/year)
State of Residence: California
Age: 23
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25-30% of stocks

No detailed breakdown yet. Maybe when I have a better understanding. I'm a fan of total market index funds.

Current retirement assets:
Vanguard Target Retirement 2055 Fund (VFFVX) - Traditional IRA. I will be converting this to a Roth because I rushed in like an idiot. I opened the $1,000 minimum and plan on contributing the max every year.
My employer does not offer any retirement benefits. I just got this job and don't really know what lies ahead with the firm.

Taxable assets:
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) - I opened the $3,000 minimum a few weeks ago.


Questions:
1. Any recommendations for a money market index fund at Vanguard for my Emergency funds to sit in? Or should I just leave it in the bank?

2. I think I made a mistake of rushing into opening these accounts, but I got excited while reading Eric Tyson's For Dummies literature. The Target Retirement IRA attracted me because it provides a balance between stocks and bonds. Should I keep it or do you guys recommend other funds for an IRA?

3. Any recommendations on a Bond index fund and an international index fund? I'd like to keep my portfolio simple but diverse with no more than 4-5 funds for now.

4. How should I allocate the remaining 30K? Automatic investing sounds more attractive than investing it all at once. I have a mild-high risk tolerance. I'm pretty lazy, and only check my balances once a week. I'm not sure if I following the correct formatting, but please let me know if you need more information! I will check back early tomorrow.
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Re: 23 year old noob investor

Postby Grt2bOutdoors » Thu May 02, 2013 12:16 pm

gjgarcia41 wrote:Hi everyone,

I just finished reading Personal Finance for Dummies and the Bogleheads Guide to Investing. Now I'd like to adjust a portfolio I rushed into before I finished the Bogleheads book. I have no big purchases pending and would like to invest as much money as I can while I'm single. I have $30k in a bank CD that is about to mature. I plan on investing all of this into 4-5 vanguard funds. I like simplicity.

Emergency funds: 5 months expenses (this is sitting in my BoA savings account getting a measly 0.01% return.)
Debt: I recently inherited a house with $65,135.76 left on the mortgage at 5.625%. No other debt.
Tax Filing Status: Single
Tax Rate: 15% Federal, 6% State (I believe this is correct, I make about 30k/year)
State of Residence: California
Age: 23
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25-30% of stocks

No detailed breakdown yet. Maybe when I have a better understanding. I'm a fan of total market index funds.

Current retirement assets:
Vanguard Target Retirement 2055 Fund (VFFVX) - Traditional IRA. I will be converting this to a Roth because I rushed in like an idiot. I opened the $1,000 minimum and plan on contributing the max every year.
My employer does not offer any retirement benefits. I just got this job and don't really know what lies ahead with the firm.

Taxable assets:
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) - I opened the $3,000 minimum a few weeks ago.


Questions:
1. Any recommendations for a money market index fund at Vanguard for my Emergency funds to sit in? Or should I just leave it in the bank?

2. I think I made a mistake of rushing into opening these accounts, but I got excited while reading Eric Tyson's For Dummies literature. The Target Retirement IRA attracted me because it provides a balance between stocks and bonds. Should I keep it or do you guys recommend other funds for an IRA?

3. Any recommendations on a Bond index fund and an international index fund? I'd like to keep my portfolio simple but diverse with no more than 4-5 funds for now.

4. How should I allocate the remaining 30K? Automatic investing sounds more attractive than investing it all at once. I have a mild-high risk tolerance. I'm pretty lazy, and only check my balances once a week. I'm not sure if I following the correct formatting, but please let me know if you need more information! I will check back early tomorrow.


Hello and welcome to the forum!
Great job on saving.

Use an FDIC insured savings account for your e-fund. Currently, money market mutual funds yield nearly zero, you'll make more interest with a bank account and have immediate access to the funds (same day).

Recommend a 3 fund portfolio: Total Stk Mkt Index, Total International Index and Total Bond Index.
An 80/20 mix would be something like this: 56% Total Stk Mkt Index, 24% Total International Stk (totals 80%) and 20% Total Bond Market Index.
Keep it simple, you don't need 4-5 funds to have a diversified portfolio, after you've been investing a while you can then explore the concept of tilting, right now you should focus on simplification and continued investing.

At least you won't be checking your balance every day. :wink:

For retirement: we recommend the Target Retirement fund that best accomodates the level of risk you are willing to assume, and a minimum of 20% fixed income. I know they offer some with 10% bonds, but IMO that is just too light on the bond side.

Finally, the home you just inherited. You can not assume a mortgage - usually you have to obtain your own - that rate of 5.625% is quite high for a balance that low. Have you looked into refinancing the rate?
"Luck is not a strategy" Asking Portfolio Questions
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Re: 23 year old noob investor

Postby DiscoBunny1979 » Thu May 02, 2013 1:06 pm

gjgarcia41 wrote:Debt: I recently inherited a house with $65,135.76 left on the mortgage at 5.625%. No other debt.

--------

Where is this house, how much is it worth, what are the yearly property taxes, what are the insurance costs, can you assume the loan, will you sell the house?

In my opinion, before advice can be given on where to invest money, the disposition of the house should be known. As you're probably aware, maintenance of a house can be costly. Therefore, while the OP has an emergency fund, that should be separate from a housing budget for repairs. If the OP decides to keep the house, there should be Thousands set aside for either improvements, landscape maintenance, appliances if and when they need replacing, roof issues, etc. In my opinion a good 10K-20K set aside is a good start depending upon neighborhood, quality of home, etc.
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Re: 23 year old noob investor

Postby ruralavalon » Thu May 02, 2013 1:31 pm

Welcome to the forum :) .

Its great that you're starting young, and have no consumer debt. Your initial choices for reading were very good. I don't think you did any damage by your rushed choices. You are doing a good job saving. You are wise to be a fan of total market type funds.

The first thing that jumps out is -- investigate refinancing the mortgage, you should be able to get a significantly better interest rate. (Thats if you plan on keeping the house.)

Age: 23
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25-30% of stocks

In my opinion your desired asset allocation is within the range of what is reasonable.

When that $30k CD matures -- add $3-4k more to your emergency fund, max out the IRA ($5.5k/yr) and put the rest in the taxable account.

Your portfolio could be something like this:

Taxable account @ Vanguard (80%; $26k)
60%, $19.5k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), er = 0.05%
20%, $6.5k, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%

IRA @ Vanguard (20%; $6.5k)
20%, Vanguard Total Bond Market Index Fund Investor Shares (VBMFX), er = 0.20%

The bond fund goes in the IRA because that is more tax-efficient, Wiki article link: Principles of Tax-Efficient Fund Placement .

The Total International fund is suggested because it is the most comprehensive, it covers developed markets including Canada, it covers emerging markets, and it includes int'l mid caps and small caps.

I suggest keeping it simple, with just a 3 fund portfolio to start -- Wiki article link: Three-fund portfolio ; and discussion viewtopic.php?f=10&t=88005&newpost=1506953 .

For the emergency fund look at an insured savings account at a local credit union, for ease of access and a little better rate.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: 23 year old noob investor

Postby gjgarcia41 » Fri May 03, 2013 1:51 am

Thanks for all the advice so far. I'm really liking the three fund portfolio. The thing is...can I keep my target retirement account as my tax-deferred account and then have the three taxable accounts funds?

My Target Retirement account is composed as follows:
Vanguard Total Stock Market Index Fund Investor Shares 63.1%
Vanguard Total International Stock Index Fund Investor Shares 26.9%
Vanguard Total Bond Market II Index Fund Investor Shares† 10.0%

I'd like to contribute the max to this every year and just not worry about it. If possible, I'd like to invest whatever cash I have left to maintain a 80% stock (20% international), and 20% bonds portfolio using three core funds that you guys mentioned. Does that make any sense?

I am the successor trustee of my dad's estate after he past away last year so I've assumed the house/mortgage. Unfortunately, my living situation is a mess right now. Since my dad left 100% of his estate to me, my stepmom and stepsister have been refusing to pay for the house while living in it. I'm currently in the process of filing an unlawful detainer complaint in court, so once that is resolved I'll have the energy to go through a refinance. The house is in great shape though, roofing and floor were redone 2 years ago, plumbing is fine. Appliances are still ok. I fully intend on keeping it and renting out a room once I sort out all the legal stuff. Its in Monterey Park, California, one block away from a huge shopping center and community college; 2 blocks away from a main freeway and metro station. The last refinance was done 7 years ago: 15 year fixed iao $120,000 at 5.625%. I've got a PB of $65,135.00 left =(

Any ideas on refinancing?
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Re: 23 year old noob investor

Postby ruralavalon » Fri May 03, 2013 8:28 am

Sorry to hear of the problems with the step relatives.

gjgarcia41 wrote:Thanks for all the advice so far. I'm really liking the three fund portfolio. The thing is...can I keep my target retirement account as my tax-deferred account and then have the three taxable accounts funds?

Its really best to have bond funds in the IRA, not the taxable account, to save on tax liability.

Its not that hard to keep your desired allocation (a 80% stock [20% international], and 20% bonds). Start with just bonds in the IRA, Just add some TSM and/or some TISM as needed in the IRA in future years and adjust the asset allocation inside the IRA.

Taxable account @ Vanguard (80%; $26k)
60%, $19.5k, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), er = 0.05%
20%, $6.5k, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%

IRA @ Vanguard (20%; $6.5k; add $5.5k/yr)
20%, Vanguard Total Bond Market Index Fund Investor Shares (VBMFX), er = 0.20%
00%, $00k, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), er = 0.05%, <= add in future as needed to keep desired allocation
00%, $00k, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%, <= add in future as needed to keep desired allocation
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: 23 year old noob investor

Postby gjgarcia41 » Thu Oct 31, 2013 12:31 am

Hello again everyone! I've made a few moves since my original post. I'd like some advice on my portfolio.

Emergency funds: 4 months of expenses
Debt: 60k mortgage at 2.75% (5/5 Penfed ARM) This will be paid off in roughly 5 years.
Tax Filing Status: Single
Tax Rate: 15% Federal, 6% State; Income 35k/year.
State of Residence: CA
Age: 24
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks


Current retirement assets

Taxable
50% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.05%)
25% Vanguard Total International Stock Index Fund Investor Shares (VGTSX) (0.22)

His Traditional IRA at Vanguard
20% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) (0.20)
5% Vanguard Target Retirement 2055 Fund (VFFVX) (0.18)

I know I have too much in the international fund and .plan on pumping cash into the Total stock and bond funds. I also plan on exchanging the target retirement fund and go with a 3 fund portfolio. I like simplicity. I also have 45K in a money market savings that will be for a downpayment on a second home. I will be renting out my current place sometime next year.

My employer is introducing a Profit Sharing 401k plan. Its based on a safe harbor contribution formula, where my employer contributes 3% of total compensation, including 401k deferrals. This is a guaranteed company contribution, which is accounted for separately and is referred to as my guaranteed company contribution account...I don't fully understand the difference between this and matching contributions. I also don't know what funds are available yet. Anyway, my questions are:

Questions:
1. What should I do with my traditional Vanguard IRA? If I elect to make Roth contributions in the 401K, can I still contribute the yearly 5500 into the Vanguard IRA? How much can I contribute to the 401K if I contribute the max to my Vanguard IRA?

2. If so, should I make 401K roth contributions and also convert my traditional IRA into a Roth IRA? Does it make sense to have both designated as Roth? Does it make any sense to have a Roth and a traditional?

3. Any advice on the taxable account?

Thanks!!
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