Help with Getting started investing

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Help with Getting started investing

Postby kathanto » Mon Jul 01, 2013 4:16 pm

Hello new forum friends!

I've been thinking about posting for a while now, but was trying to do my homework a bit before asking for help. The "Asking Portfolio Questions" page was a whole lot of "whut?" Anyway, I've read Your Money or Your LIfeand A Random Walk Down Wallstreet. So I think I'm ready.

I currently have $17k in cash (a trust from my gramdma that just got to me) that I am trying to figure out what to do with.

Emergency Funds: nothing currently allocated, I could probably get by with $4000 for 6 months unemployed.
Debt: $5k in student loan (In about 10 days this will be payed off through an Americorps award)
Tax Filing Status: Single
Tax Rate: 25% Federal, 4.75% State (It's going to be close, but this year I think my AGI will be above 35k because of my new job)
State of Residence: MD
Age: 25
Desired Asset allocation: 75% stocks/ 25%
Desired International allocation: 33% of stocks

Debt: None! As soon as my Americorps award clears.

Current retirement assets

403b - $3.5k
60% Guaranteed Interest Account
5% EQ/AllianceBerstein Sm Cp Gr (.99%)
10% EQ/BlackRock Basic Value EQty (.95%)
10% EQ/T.Rowe Price Growth Stock (1.1%)
5% EQ/MFS International Growth (1.23%)
10% EQ/Morgan Stanley Mid Cap Gr (1.09%)
No company match. I also couldn't find Ticker symbols.
These are not the only options. In the fall before I had done any research about this I met with the account representative and set up a "conservative" account.

DCPS Retirement account.
8% PRE Teacher Medicare D/F
It is mandatory that 8% of my earnings go pre-tax into this account to fund my pension. It has about $3k in it. I don't have control over where the funds go. If I leave DCPS before 5 years, I will receive a lump sum payout.

Contributions
$5k will go into 403b this year (10%)
$4k will go into DCPS retirement account (8%)

Available funds
Cash: 2k in Schwab investor checking (.1% interest)
15k in Ally savings account (.84%)
Funds available in 403(b): See above

Goals:
Buy a house in 5-10 years.
Have enough money so I can travel in the summers


Questions:
1. What should I do with all my cash? Ally has close to the best rates out there, and it is quite low. I'm probably going to buy a house in 5-10 years, so I want to be earning interest but still be able to access it.

2. Why should I buy any bonds when bond interest rates are below inflation? I read the posts discussing Malkiel's alternatives, but I didn't really understand them.

3. Is there a way I can invest that will get my AGI below 35k? My base pay is 50k and my Americorps award (5k) counts as income so that starts me with 55k. Minus the 6.1k standard deduction and the 9k into retirement accounts / pension fund, I'm still at 40k. I've also spent about 4k paying down my student loans this year.

Thanks for reading!
Toby
kathanto
 
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Joined: 17 Jun 2013

Re: Help with Getting started investing

Postby Phineas J. Whoopee » Tue Jul 02, 2013 4:34 pm

Hi Toby,

Welcome to the forum!

I'll work from the end toward the beginning.
kathanto wrote:3. Is there a way I can invest that will get my AGI below 35k?

Yes! Increase the amount you contribute to retirement accounts and make up the difference by drawing from your cash. Better still, live yet further below your means so you don't have to make up all of the difference from your cash.
kathanto wrote:2. Why should I buy any bonds when bond interest rates are below inflation? I read the posts discussing Malkiel's alternatives, but I didn't really understand them.

Well, Toby, you're 25. I don't mean that as any sort of minimization of you, just that (probably) your whole investing life has been in a low-interest-rate environment. The reason to hold bonds is to provide stability to your portfolio. People say the word "safe." I've been doing that myself, but recently have come to realize all too many forum readers interpret "safe" to mean "like a savings account." If you have many decades in front of you (say you live to be just 85: that's 60 years) there is nothing to fear from presently low interest rates. Bonds are riskier than your savings and checking accounts, but less risky than stocks. Just because you contribute some of your salary now to an intermediate-term fund with, say, a 5-year average duration, doesn't mean you're doomed. Even if interest rates go up (and nobody can predict interest rates with any time-bound accuracy, regardless of how loudly they try to sell you a Ford F-150) you'll wind up better off than you would have been had they not.
kathanto wrote:1. What should I do with all my cash? Ally has close to the best rates out there, and it is quite low. I'm probably going to buy a house in 5-10 years, so I want to be earning interest but still be able to access it.

Besides my earlier suggestion, if you need it in 5 - 10 years don't put it in stocks. You've already indicated a reluctance to put it into bonds given their present relationship to inflation. I'd say use part of it to enable you to target your taxable income as you want, part of it to buy Series I Savings Bonds, and keep the rest in your savings account.

PJW
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Re: Help with Getting started investing

Postby kathanto » Tue Jul 02, 2013 7:31 pm

Thanks for the response, PJW!

I will definitely look more closely at what I would need to do to get my AGI below 35k by upping my 403(b) contribution. I don't think it should be too hard, since I already live pretty far below my means as is.

Is the reason not to invest funds I want to use in 5-10 years to avoid the risk? I will research series I savings bonds.

Does anyone have recommendations about my 403(b)? There are some lower expense ratio total market funds that I could buy, but I'm still a little hesitant to just do it.
kathanto
 
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Joined: 17 Jun 2013

Re: Help with Getting started investing

Postby Phineas J. Whoopee » Tue Jul 02, 2013 8:17 pm

kathanto wrote:Thanks for the response, PJW!

You're welcome.

kathanto wrote:I will definitely look more closely at what I would need to do to get my AGI below 35k by upping my 403(b) contribution. I don't think it should be too hard, since I already live pretty far below my means as is.

Is the reason not to invest funds I want to use in 5-10 years to avoid the risk? I will research series I savings bonds.

If one has capital not necessary for current living expenses one is always invested. The only question is, invested in what? Stacks of $100 bills count [climbing into an asbestos suit because today's flames from pedants will be worse than mesothelioma decades from now]. Yes, if you're only looking at a few years stocks are entirely inappropriate; and I was trying to keep my comments within your stated comfort zone.
kathanto wrote:Does anyone have recommendations about my 403(b)? There are some lower expense ratio total market funds that I could buy, but I'm still a little hesitant to just do it.

To get any meaningful responses you will have to list your other choices. It would be best to edit your original post. That's the standard for asking portfolio questions around here.

PJW
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Re: Help with Getting started investing

Postby kathanto » Tue Jul 02, 2013 8:59 pm

There are a lot of options, but I will go through and update with the indexes tomorrow.

I did the math, and I can save 5.6k in taxes by upping my 403(b) contribution from 10% to 48%. Looking at my spending history on Mint, I should be able to fund this without changing my spending even that much. That just means I won't be putting any more money into my savings account

Yes, if you're only looking at a few years stocks are entirely inappropriate; and I was trying to keep my comments within your stated comfort zone


Then I wasn't clear enough about my comfort zone. I have two conflicting thoughts that I need to get sorted out. On the one hand, I want my money making me money, and I want to figure out a tax advantaged way to do it.

However, on the other hand, I'm planning on moving to Iowa to be closer to my girlfriend next summer, without a real plan for a job right now. My teaching certificate will not transfer. I think if I put aside 6k, I should be fine. My spending will go down because I won't be flying to Iowa every month and my rent will go down too. This seems like an even better reason to have the rest of my money making me money.

Thanks again!
kathanto
 
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Joined: 17 Jun 2013

Re: Help with Getting started investing

Postby Phineas J. Whoopee » Tue Jul 02, 2013 10:33 pm

kathanto wrote:...
Then I wasn't clear enough about my comfort zone. ...

Then learn. Do not put money you need within ten years into stocks. Fixed income is appropriate. My comments had to do with suggesting I Bonds rather than other non-savings-account fixed income. Others no doubt will suggest CDs, and they have very good points to make, but they will not be able to overcome your non-inflation-beating objection to interest-bearing accounts; those with stable principal values or otherwise.

If you think you might need to use your assets in less than a decade it is a very bad idea to invest them in equities.

Getting Started

PJW
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