24 year old new to investing

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24 year old new to investing

Postby Kevin1989 » Fri Jul 12, 2013 5:07 pm

Hello! I have little experience actually investing, but now that I have some funds available, I have been doing a lot of reading on the subject lately. So after recently getting started I’d like to see if I find myself on a good initial path.

Age: 24
Annual Salary: $73,000
Debt: Fortunately none!
Non-cash/investment assets: Very little. I do not own a car and do not anticipate buying one for at least 2 years (live in a big city). I also do not have a mortgage and don’t anticipate getting one for at least 2 years (single, reasonable rent with roommates, eventually want to settle down in a different state)
Health: Above Average, I tend to view this as a type of investment account too!
Current Emergency Savings (savings account): $25,000
Current Investment Savings: $12,000

Index Allocation Strategy for next few years is…
Small Cap Value 25% (Expense Ratio: 0.24) – Roth IRA
Total International 25% (Expense Ratio: 0.10) – Company Roth 401k
Large Cap Value 15% (Expense Ratio: 0.08) – Company Roth 401k
Small Cap Index 20% (Expense Ratio: 0.06) – Company Roth 401k
Large Growth 5% (Expense Ratio: 0.08) – Company Roth 401k
REIT 10% (Expense Ratio: 0.08) – Company Roth 401k

My thoughts: Since I am young I have 100% of my investments in stocks, with a lean toward small cap and value indexes. I want good asset allocation in the stock index funds I choose. My goal is to invest $20,000 (after company match) each year into my Roth IRA & 401k, which may be difficult but I can travel cheap (favorite leisure activity) from miles/points I accumulate on my occasional work trips. I also think that I can keep my emergency savings pretty static at 25k, pushing it up if I feel a large purchase like a house mortgage appears to be in the < 4-month future. I like the very low Roth-401k expense ratios I have access to through my employer (a large company). My Roth-401k doesn’t offer a good Small Cap Value fund, so I have that in my Roth IRA and will purchase $5,000 throughout the year. The remaining $15,000 will be split between my Roth 401k holdings.

Any advice? The only thing I am currently thinking about changing is moving some of the emergency savings in my savings account into short-term Bonds/CDs offered by my bank. Also, I don’t see an issue with all my holdings in my IRA and 401k being Roth, but am I missing anything?

Thanks in advance!
-Kevin
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Re: 24 year old new to investing

Postby Spades » Fri Jul 12, 2013 9:05 pm

Kevin1989 wrote:Index Allocation Strategy for next few years is…
Small Cap Value 25% (Expense Ratio: 0.24) – Roth IRA
Total International 25% (Expense Ratio: 0.10) – Company Roth 401k
Large Cap Value 15% (Expense Ratio: 0.08) – Company Roth 401k
Small Cap Index 20% (Expense Ratio: 0.06) – Company Roth 401k
Large Growth 5% (Expense Ratio: 0.08) – Company Roth 401k
REIT 10% (Expense Ratio: 0.08) – Company Roth 401k


Howdy Kevin,

So why no bonds? You're missing out on a lot of diversity in investments without them and it will possibly help stabilize your portfolio. Also, with a rising rate environment, you should be wanting to capture all of those wonderful gains in yield.

I recommend looking to simplify your portfolio by removing the large cap and large growth and replacing it with a total stock market index. It looks like you want to tilt REITs and Small Cap Value, so stick with those tilts and hold total stock to lock in your tilts instead of tilting everywhere.

What Bogle Head books have you read? I'm just curious.

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Re: 24 year old new to investing

Postby ruralavalon » Fri Jul 12, 2013 9:24 pm

Welcome to the forum :) .

Its great that you have no debt, and are starting with a high savings rate. Very wise. Those are really nice low expense ratios.

Kevin1989 wrote:
My thoughts: Since I am young I have 100% of my investments in stocks, with a lean toward small cap and value indexes. I want good asset allocation in the stock index funds I choose. My goal is to invest $20,000 (after company match) each year into my Roth IRA & 401k, . . . . I like the very low Roth-401k expense ratios I have access to through my employer (a large company). My Roth-401k doesn’t offer a good Small Cap Value fund, so I have that in my Roth IRA and will purchase $5,000 throughout the year. The remaining $15,000 will be split between my Roth 401k holdings.

Any advice? The only thing I am currently thinking about changing is moving some of the emergency savings in my savings account into short-term Bonds/CDs offered by my bank. Also, I don’t see an issue with all my holdings in my IRA and 401k being Roth, but am I missing anything?


Even for someone 22 and feeling aggressive, I definitely suggest some bond investment, Chart, An Efficient Frontier, The Power of Diversification ; and Forum Discussion, on why use bonds?, say 20% of the total portfolio. Short term bonds/CDs could be a part of that, but include some intermediate term bond fund.

You really need more large cap, 20% of equity in domestic large cap is truly tiny. International is within reason. REIT is within reason. I would skip growth funds, if you don't want blend go to the value side. Use Small value alone, don't also use small. These are the changes I would suggest for the equity side of the portfolio, if you really are determined to start out so complex:

Small Cap Value 25% (Expense Ratio: 0.24) – Roth IRA
Total International 25% (Expense Ratio: 0.10) – Company Roth 401k
Large Cap Value 40% 15% (Expense Ratio: 0.08) – Company Roth 401k
Small Cap Index 20% (Expense Ratio: 0.06) – Company Roth 401k
Large Growth 5% (Expense Ratio: 0.08) – Company Roth 401k
REIT 10% (Expense Ratio: 0.08) – Company Roth 401k

Even if you make these changes, that still gives a very strong small and value tilt.

Can't really say if there could be better fund choices, since you don't say what else is offered.

In my opinion a better approach for a 22 year old is total market type investing. Investing in Total Markets .

Read these carefully, and you may want a different approach than what you are trying.
Wiki article link: Slice and Dice
Wiki article link: Value Tilting - Stock



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: 24 year old new to investing

Postby gvsucavie03 » Fri Jul 12, 2013 10:41 pm

I was with you... I wanted to be ultra-aggressive and have a 100% equity portfolio. I've since gone to an "Age in Bonds minus 10" approach, which I feel is appropriate for the various stages of my life. Bonds aren't a drag on your gains... they add stability and can catch gains where your equities are holding steady or declining. The 30-40 year net result may be a percentage point lower, but with MUCH less volatility and risk. Think about it, what if there were another major market melt-down in 10 years that cuts your investment assets in half? Bonds, although not 100% inverse to stocks, will bring the water level up in the pool so you don't slam your head on the bottom cause the water completely drained out. Then the larger equity portion of your portfolio will catch the next upswing and you'll be in a much better position than if you never held any bonds.

4 or 5 funds, with tilts towards REIT and Small caps if you like, but owning all US and International stocks plus all US bonds at the lowest possible cost is one of the surest ways to portfolio success. You should read Jack Bogle's book The Little Book of Common Sense Investing.
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Re: 24 year old new to investing

Postby tainted-meat » Sat Jul 13, 2013 3:58 pm

I'm not a fan of bonds either for someone your age and size of portfolio. I'd only use them when you want to start 'taking some off the table' so to speak.

Just don't freak out and sell on a downturn.
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Re: 24 year old new to investing

Postby Kevin1989 » Mon Jul 15, 2013 10:12 pm

Thanks everyone! I'll definitely take a look at those links. So far the most Boglehead book I've read was The Only Guide to a Winning Investment Strategy You'll Ever Need by Larry Swedroe. It just seemed to make a lot of sense to me.

I like that breakdown ruralavalon. I will probably plan that as my target asset allocation for the next few years, and then adjust to add 10-15% in bonds.

For International I was thinking about including some Emerging Markets. So something like:
15% Vanguard Total International (VTPSX) ER: 0.10
10% Vanguard Emerging Markets (VEMRX) ER: 0.10
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Re: 24 year old new to investing

Postby Spades » Tue Jul 16, 2013 7:43 am

Kevin,

Sounds great. If you're looking at emerging markets here are two recent articles by Larry Swedroe you might want to read.

http://www.cbsnews.com/8301-505123_162- ... g-markets/
http://seekingalpha.com/article/1081411 ... -for-yield

The VEMRX might be a good choice, by Swedroe specifically suggests VEIEX. I didn't compare the two, because I get lazy....., and they might be fairly similar.

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Re: 24 year old new to investing

Postby Bob's not my name » Tue Jul 16, 2013 9:31 am

Contribute $5,500 to your Roth IRA and max out your traditional 401k. You don't say what state you're in, but at a minimum you are paying 25% federal tax on your Roth contributions, so $15,000 of Roth 401k contributions are taxed $5,000. There are many reasons why going all post-tax (Roth) is not a good idea. Start here:

http://thefinancebuff.com/case-against-roth-401k.html
http://thefinancebuff.com/your-traditio ... -fund.html
http://thefinancebuff.com/how-to-build- ... art-1.html
http://thefinancebuff.com/how-to-build- ... art-2.html

If you can really afford to put half your gross earnings* into retirement accounts, you are in the "saturated case," which means if you go with a lot of pre-tax savings you'll have extra money to invest in taxable space. But make sure you can really save that much before assuming that case for comparison.

*Example: Half your $73,000 salary is $36,500. If you have, say, a 6% state tax, the net after federal and state income taxes and payroll taxes is about $22,250, which is less than the maximum $23,000 you can stuff into a Roth 401k and Roth IRA, so maxing both requires more than half your gross salary.
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Re: 24 year old new to investing

Postby ruralavalon » Tue Jul 16, 2013 9:50 am

Kevin1989 wrote:For International I was thinking about including some Emerging Markets. So something like:
15% Vanguard Total International (VTPSX) ER: 0.10
10% Vanguard Emerging Markets (VEMRX) ER: 0.10

Mr. Swedroe's book was a good choice for learning the basics.

In my opinion your proposed allocation to Emerging Markets is way too high. Remember that Total Int'l is already 16% Emerging Markets, VTIAX, on Morningstar , (15 X .16 = 2.4), so adding that the amount of Emerging Mkts fund you propose (10%) gives you a total of about 50% of your international in emerging markets (2.4 + 10 = 12.4 emerging mkts; 12.4/25 = 49.6% of int'l in emerging mkts). This is much more than Mr. Swedroe suggests in his Model Portfolios (16% of int'l, p.166) or in his Sample Portfolios (33% of int'l, Appendix I).
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Re: 24 year old new to investing

Postby Spades » Tue Jul 16, 2013 4:37 pm

ruralavalon wrote:
In my opinion your proposed allocation to Emerging Markets is way too high. Remember that Total Int'l is already 16% Emerging Markets, VTIAX, on Morningstar , (15 X .16 = 2.4), so adding that the amount of Emerging Mkts fund you propose (10%) gives you a total of about 50% of your international in emerging markets (2.4 + 10 = 12.4 emerging mkts; 12.4/25 = 49.6% of int'l in emerging mkts). This is much more than Mr. Swedroe suggests in his Model Portfolios (16% of int'l, p.166) or in his Sample Portfolios (33% of int'l, Appendix I).


Nice recommendation. I guess I need to buy a Swedroe book.....

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Re: 24 year old new to investing

Postby Kevin1989 » Tue Jul 16, 2013 10:37 pm

Wow, good replies! I live in Chicago, Illinois.

I do like the suggestion of using the traditional 401k now that I think about it. I graduated in May 2012 and did not start working full-time until June 2012, so Iast year my earnings were about half of what they will be this year (plus I got a nice education tax credit last year). So at the time I thought the ROTH made much more sense since I paid comparatively little in taxes.

Now to read up on some of these links you've all posted, and research how much Emerging Markets is included within the International fund my 401k plan has. :D
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Re: 24 year old new to investing

Postby Spades » Thu Jul 18, 2013 7:51 am

Kevin1989 wrote:Wow, good replies! I live in Chicago, Illinois.

Now to read up on some of these links you've all posted, and research how much Emerging Markets is included within the International fund my 401k plan has. :D


Sorry to hear you live surrounded by cubs, Go Cardinals! :twisted:

If you have any problems with looking up how much Emerging Markets, let us know and we can help. Since, I'm with Fidelity I look at the quarterly holdings reports.
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