25-Year Old (New Investor) - Please Help!

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artvandelay7
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25-Year Old (New Investor) - Please Help!

Post by artvandelay7 »

I just finished reading the four pillars of investing and am really interested in setting up an investment portfolio. I am 25 years old, so I obviously have a lot of time to invest and am not too adverse to risk. I have a lot of questions so thank you for your help and patients.


Retirement - I have a 401K through work which I invest the max to get the match. I also am contributing the max to a Roth IRA (so I think I am good with retirement for now).

Short-term - I have 20K in checking/savings for short term emergencies. This is definitely enough for at least 6 months of income. (I think I am good here)


Mid - long term investments - here is where I am really struggling. I can't seem to find a lot of information online about mid to long term investments that are not meant for retirement and are therefore not tax advantaged. I am leaning toward the Vanguard Life Strategy Growth Fund (VASGX) as this gets me into Index investments with Vanguard and diversifies me across domestic, international and bond funds (I cannot afford to put 3K in each) so I would rather just have this one fund that combines them together. The fund is 80% stocks 20% bonds. Is this a good idea? - what are the implications of this investment being taxable. Other sources say to max the retirement contribution first and then invest in taxable investments but I disagree with this - I have about 15% of my income going into retirement (I could do more) but I would rather have a shorter term investment (5 - 20 years) if I needed it.

My goal is to put an initial 3K into the Vanguard fund and invest about 5K per year.

Upcoming expesnes - I will probably want to buy a house in 5 years - so I don't know if the Vanguard Growth fund is my best choice - should I have more in bonds? But I also want to have an investment for like 20 years away so I'm confused if I should choose the Growth Fund (80/20) or like a 60/40 split between stocks and bonds.

Are bonds even a good idea right now since interest rates are so low and will most likely go up?

Lastly - if I were to start off with the Vanguard Growth Fund (which does the total stock market index, total international index, and total bond index)- would this be a good long-term strategy or would I need to diverse further). I loved the four pillars book and I am definitely committed to index funds - it just seems that I have so many questions.

________________________________________________________________________________

I tried to update the post and put it in the desired format (see below). I kept the original post as well as it shows the questions and circumstances I have. The information below is just a summary in an easier to read format.




Emergency funds = 3-6 months of expenses (I have this)

Debt: (None)
Tax Filing Status: (Single)

Tax Rate: 25% Federal 4% Maryland (Overall b/w federal, state, FICA I pay 25% of my salary to taxes)

Age: 25

Desired Asset allocation: (80% Stock/20% bonds)?

Intl allocation: 30% of stocks?


Current portfolio (please provide a hint as to the size of the total portfolio like 4 figures, 5 figures, 7 figures, etc.). What might be appropriate for a very large portfolio might not be appropriate for a new investor.

401K - Company 401K Regular
5% Save Company 4 % Match = 9% Salary

Roth IRA
T. Rowe Price 2050 Retirement fund (5K/year) = 6% Salary

Total Salary into Retirement = 15%

Taxable - This is where I have my question (I am unsure how to allocate this)

I want to have a portfolio that will have some cash available for a house downpayment in 5 years as well as future money for other expenses that could be further away like 20 years but that I do not want to use specifically for retirement.

Taxable Portfolio (Potential Idea)

5K cash/year
Vanguard Life Strategy Growth Fund (VASGX)

(55% Total Market/25% International/20% bonds)
Thank you for all of your help
Last edited by artvandelay7 on Sun May 20, 2012 8:58 pm, edited 1 time in total.
chudder
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Re: 25-Year Old (New Investor) - Please Help!

Post by chudder »

Are you saving separately for a down payment on a house in 5 years?
Elbowman
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Re: 25-Year Old (New Investor) - Please Help!

Post by Elbowman »

Here is a preview of what the smart people will expound upon when they show up.

Someone will ask you to follow the portfolio question format outlined here http://www.bogleheads.org/forum/viewtop ... f=1&t=6212 . Related to this point, someone will ask what specifically you are investing in in your 401(k).

People will says that LifeStrategy Growth is too risky for a five year time frame. Stocks in general may be too risky for that time frame. Investing for five years and investing for twenty years is quite different, so you may want to think of those separately.
abs9986 wrote:The fund is 80% stocks 20% bonds. Is this a good idea? - what are the implications of this investment being taxable.
Someone will recommend reading http://www.bogleheads.org/wiki/Principl ... _Placement .
abs9986 wrote:But I also want to have an investment for like 20 years away
People might wonder if you have an idea of what these twenty year needs might be? Placing money in taxable when you still have space in your 401(k) is inefficient, so if you are going to put your investments at a disadvantage it might be good to have a clear idea why you are doing it.
abs9986 wrote:Are bonds even a good idea right now since interest rates are so low and will most likely go up?
People will say that acting on this information amounts to market timing, and that the fact that interest rates are low is already accounted for in bond prices.
abs9986 wrote:Lastly - if I were to start off with the Vanguard Growth Fund (which does the total stock market index, total international index, and total bond index)- would this be a good long-term strategy or would I need to diverse further)
People will say this is all the diversification you need. Not all the diversification that is possible, but all that you need.

Some people may disagree with the above points, but I'm trying to parrot what appears to be the majority opinion on this site.
pkcrafter
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Re: 25-Year Old (New Investor) - Please Help!

Post by pkcrafter »

I have to say that elbowman is pretty new, but he demonstrates how quickly one can pick up the basics. Four Pillars is an excellent book, and there are a lot more on the recommended reading list.

abs wrote:
I am 25 years old, so I obviously have a lot of time to invest and am not too adverse to risk.
I'm older and have been investing for a lot of time and I have developed a respect for the power of risk. :happy

OK, first thing--slow down. You need to develop a plan for long term savings beginning with proper asset allocation. Shorter term goals like a home or other nearer term needs require their own asset allocation. You certainly do not want an 80/20 AA for a purchase in short to intermediate term. One other trick is to look at all accounts as one for your retirement portfolio, that way you can optimize choices and control taxes. You can combine shorter term goals by doing a mental accounting or holding separate taxable accounts or possibly use the Roth. Please present information in the format suggested by elbowman and then take a look at the start up kit here:

http://www.bogleheads.org/wiki/Getting_Started

Try the video linked on the page, it's very good.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
artvandelay7
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Re: 25-Year Old (New Investor) - Please Help!

Post by artvandelay7 »

I updated my original post to format it in the recommended way (I kept the original post above as well)

The issue is:

I'm putting about 15% of my income into retirement. Yes, I could put more - but don't I want to have investments for other things before retirement (house, vacations, cars, other big expenses). Right now I cannot afford to both max my 401K and have taxable (shorter-term) investments.

It seems that I have 2 major classes of non-retirement expenses:

1. Downpayment for a house in ~ 5years
2. Other longer term expenses

Based on that - I thought the Vanguard fund would be a good option. I still have a high yield savings account that I contribute to - I'm already pretty close to affording the downpayment.


Taxable account implications - I know that index funds are good for taxes since they do not turn over as much as regular mutual funds. My question is - all things equal is this Vanguard fund reasonable for a taxable account or would other index funds be better? Again I am considering this vanguard fund because it allows me to diversify in Vanguard funds without having to invest 3K into each.


Overall Summary:

I have 15% of my salary going into retirement

I am covered short-term

What do people tend to do for medium - long term investments that are not necessarily meant for retirement?

Thank you so much for your help.
bdpb
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Re: 25-Year Old (New Investor) - Please Help!

Post by bdpb »

abs9986 wrote: I'm putting about 15% of my income into retirement. Yes, I could put more - but don't I want to have investments for other things before retirement (house, vacations, cars, other big expenses). Right now I cannot afford to both max my 401K and have taxable (shorter-term) investments.

It seems that I have 2 major classes of non-retirement expenses:

1. Downpayment for a house in ~ 5years
2. Other longer term expenses
I would reconsider investing in a taxable account for a 20 year time frame instead of maxing out your 401k.
20 years is a long time. I would put the 17k max in the 401k today and not bother saving today for some unknown
expense 20 years away. In 15 years, when you are only 5 years away from needing the money I would cram save
for the expense. You can lower your 401k contributions at that time. You'll save a lot of taxes along the way.
Elbowman
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Re: 25-Year Old (New Investor) - Please Help!

Post by Elbowman »

Can't help it, I'm posting again. *** Disclaimer *** This is diverging a from a mere parroting of this forum, and is now my opinion, which admittedly is only an amalgamation of Andrew Tobias's "The Only Investment Guide You'll Ever Need", Rick Ferri's "All About Asset Allocation", and the posts on this forum (+ the wiki), as processed by me.

Instead of dividing your "retirement" investments between your 401(k) and Roth IRA, how about you put ALL of the new retirement contributions in your 401(k), and use the Roth IRA (as pkcrafter mentioned) for your medium to long term goals? You can do this because the principle of your Roth IRA contributions can be withdrawn without penalty. Not withdrawing the returns wouldn't really be a problem, since the returns on something safe enough for a five year goal won't be that big anyway.

Specifically, here is what I would do:
*** Another Disclaimer *** I'm only 27, and only started investing in the last two years (read: post 2008-2009). This means, when it comes to risk, I only have book learnin', knowing "the power of risk" as another monster in the tales of yore.

OK, so if you have enough space, increase your 401(k) contribution to include all the money you have earmarked for retirement. For this goal the LifeStrategy Growth is great, so you can use that or as low cost an approximation as you can come up with using your available 401(k) funds. But you should remember, risk tolerance is defined by more than your time frame. I believe Ferri used another definition I liked, approximately "the amount of loss you can tolerate before you make an emotional decision". This rang true for me, because I've played enough poker to experience making emotional decisions that I knew to be technically incorrect. We are untested, and these old-timers wouldn't make such a big deal of capitulation if it wasn't, in fact, a big deal.

For your medium term goals, you say you plan to invest about $5k a year. How convenient! That happens to be the amount you can contribute to a Roth IRA! So I would put that $5k in your Roth IRA all as Total Bond Market (*Refer to disclaimer two. I believe I've seen some people say TBM is too risky when saving for a down payment (I've also seen some people say, on this forum, that the bond market is a tool of the federal government to perpetuate financial oppression. That's why I think its a good idea to feel out the average opinion, and not put too much weight on the outliers)). First I'd just be saving for your house, and once you've withdrawn the principle to make the down payment, you can save there for your longer term goals. Perhaps for those you can use LifeStrategy Growth as well, or perhaps Moderate, or Conservative Growth. No reason to set that in stone right now, its years away, and if you keep reading this forum you will know what to do when the time comes. What is important is that now, everything you are saving is in tax advantaged space.
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artvandelay7
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Re: 25-Year Old (New Investor) - Please Help!

Post by artvandelay7 »

What are the other books in the reccomended reading list by the way?
pkcrafter
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Re: 25-Year Old (New Investor) - Please Help!

Post by pkcrafter »

abs9986 wrote:What are the other books in the reccomended reading list by the way?
Here you go....

http://www.bogleheads.org/wiki/Books:_R ... nd_Reviews

Also do a Wiki search for Taylor's Gems. Taylor has extracted valuable excerpts from many books. Good way to get a quick review.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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artvandelay7
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Re: 25-Year Old (New Investor) - Please Help!

Post by artvandelay7 »

Thank you for the quick replies!

I was wondering - there must be other people on this forum with similar age, expenses and goals as me. In my case 25-year old, no debt, just starting out and wanting to invest in index funds. Is there a post or guide that speaks specifically to someone in my situation.

I'm still really confused about asset allocation because on the one hand I am supposed to invest relatively aggressively considering my time horizon, but I also want to save for some shorter-term things like a house downpayment.

Also, the advice to max out 401K and use the roth for the house payment. Problem is - I have no control of the 401K so i can't set it up like recommended - where you put the bond funds there - mostly stocks in the taxable and other investments in the roth. Also this strategy seems to contradict what was stated above where I would put the bonds in the roth ira to use short-term

Any additional help is much appreciated.

Thanks,
Elbowman
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Re: 25-Year Old (New Investor) - Please Help!

Post by Elbowman »

abs9986 wrote:Also, the advice to max out 401K and use the roth for the house payment. Problem is - I have no control of the 401K so i can't set it up like recommended - where you put the bond funds there - mostly stocks in the taxable and other investments in the roth. Also this strategy seems to contradict what was stated above where I would put the bonds in the roth ira to use short-term
Sorry if I'm going over something you already know, but there may be a misconception here that I have seen people have before. You don't want stocks in taxable. You don't want anything in taxable if you don't have to. Stocks are just the least worst thing to put in taxable. It appears that you have enough space in your 401(k) + Roth IRA for all your current contributions, and ideally you should try to use all of it.

Now you are correct that, all other things being equal, you would prefer your stocks to be in a tax free account (Roth) rather than a tax deferred account (401(k)). But you still prefer tax deferred to taxable. I was trying to come up with a suggestion that would maximize your use of tax efficient space, while still placing a safe investment in a location you can access without penalty (to meet your non-retirement goals).

However, this may all be of no help to you if you have no control over your 401(k). And this is why I'd hoped some more experienced people would comment. Most of what I know about 401(k) options has come from reading these boards, and while I've seen people post about having bad options, I've never seen someone post about having NO options. Do you have any idea what your 401(k) is invested in?

HELLOOOOO! Experienced folks! Is there anyone who could please tell me a little about where these no option plans occur, and tell abs9986 what he might do about it? Thanks so much!
Warrent
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Re: 25-Year Old (New Investor) - Please Help!

Post by Warrent »

Hey abs.. I'm T.C and i'm 25 as well. I'm a soldier in the military who wants to start is portfolio as well. I have no debt and will have 40000 dollars saved income after this deployment, maybe we can help each other out. I'm brand new and hoping to learn more. Just wanted to let you know your not the only one out there. Maybe we could talk sometime.

T.C

P.S. or you can contact me at [_____. E-mail address removed by admin alex. It's not a good idea to post you have 40k to invest and give your e-mail. Forum members can contact each other via private message by clicking the little icon that says "PM" under the user's name.]
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Re: 25-Year Old (New Investor) - Please Help!

Post by LadyGeek »

Welcome! The wiki can explain why assets need to be put in certain taxable or tax-deferred accounts: Principles of Tax-Efficient Fund Placement Don't be deterred, there's a lot of detail here. Just follow the pictures. Since you pay taxes in a Roth IRA now, using bonds is not tax efficient.

The main thing to consider is your time horizon - when you need the money. It seems that you need to fund two "buckets" here. One for your needs in a few years, one for living in retirement.

Sorry, I don't have the background to make further recommendations except that I think your Emergency fund should have a little more reserve.
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Re: 25-Year Old (New Investor) - Please Help!

Post by LadyGeek »

Warrent wrote:Hey abs.. I'm T.C and i'm 25 as well. I'm a soldier in the military who wants to start is portfolio as well. I have no debt and will have xxxxx dollars saved income after this deployment, maybe we can help each other out. I'm brand new and hoping to learn more. Just wanted to let you know your not the only one out there. Maybe we could talk sometime.
Hi T.C., and welcome to the forum! I'm sure it's a matter of time until the OP has his answers, you can see I added one to help. For you, let's go in a different path.

US military personnel have different investing options than civilians. You've come to the right place, as this forum has a number of members who can set you straight. First, take a look at the wiki: Getting Started, be sure to watch the videos.

Next on the list is: Military finances, this is for you. Be sure to read the referenced forum thread: Military Investing, you are welcome to ask questions there. You can also start a new thread in this format: Asking Portfolio Questions.

Take your time, do some reading, then start a new thread and ask away!

Canadian military personnel are encouraged to get expert advice from our sister Canadian site: Financial Webring Forum
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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Re: 25-Year Old (New Investor) - Please Help!

Post by Kevin M »

Hi abs9866,

Here are my recommendations for saving for shorter-term goals: http://www.bogleheads.org/forum/viewtop ... 4#p1346764.

As you'll read in the Wiki articles, you can own stock funds in taxable accounts and fixed income in tax-advantaged accounts even if the taxable accounts are intended for shorter-term goals. However, an important caveat is that I wouldn't do this unless I planned on having twice as much in taxable as I needed when I planned on spending it. This allows for a 50% drop in stocks in your taxable account.

Otherwise, I would stick with the above recommendations for taxable accounts intended for goals with a five year time frame (CDs, I Bonds, reward checking account, high-yield savings account, and maybe shorter-term tax-exempt bond funds). These fixed-income investments provide a better risk/return trade off than comparable bond funds, but if simplicity is more important to you, then one of the short- or intermediate-term Vanguard bond funds is fine. A general rule of thumb is for the duration of the bond fund not to exceed your investment horizon, although this still is riskier than a CD with a maturity that matches your investment horizon.

For a twenty year time frame I think most here would agree that a fairly high allocation to stocks is OK--maybe up to 80%. You could do this with a LifeStrategy fund, but it would be more tax efficient to hold the fixed income portion in a tax-advantaged account. However, at today's low rates, tax efficiency is less of a concern. We had a long discussion about this here.

As others have mentioned, you could use your Roth IRA for unexpected shorter-term needs, but I understand that you want to save and invest more than you already are contributing to your Roth and 401k.

You can manage the portfolio for each goal separately, but for tax-efficiency, you may want to manage it all as one portfolio. An example would be holding stocks in taxable and fixed income in tax-advantaged, as mentioned above, but mentally consider part of the fixed income as intended for the short-term goal. When goal time arrives, sell stocks in taxable, then adjust your AA by increasing the portion of stocks in your tax-advantaged accounts.

If you use a single portfolio for multiple goals, compute the blended asset allocation. For example, if you have $5K intended for a short-term goal that you want 100% in fixed income, and $10K intended for retirement that you want 80/20 stocks/fixed income, you would hold ($5K + $2K)/$15K = about 47% in fixed income; maybe just round to 50/50. It comes out the same whether you manage your assets as a separate portfolio for each goal or one portfolio; it's just an accounting issue.

If you can you tell us about your 401k choices you are likely to get better advice for an integrated investment plan.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: 25-Year Old (New Investor) - Please Help!

Post by sometimesinvestor »

T . Row price offers a Maryland short term tax free and a longer term Maryland tax free fund. Its expense ration is higher than vanguard funds (which don't offer maryland tax free ) but might be worth looking at.On a slightly perhaps more risky (I am not sure it is ) since you are willing to spend 5k per year you might look at a short term (say 5 year) Maryland General Obligation Bond that you will hold till it matures.You will have to open a brokerage account but Vanguard, Fidelity and T.Rowe Price all offer reasonable accounts, Full disclosure I did not check current rates for such bonds but that is quite easy to do on line. I think clicking would be most simple on fidelity .com (I have searched there ) but it might be as easy on other sites

http://individual.troweprice.com/gcFiles/pdf/trmdm.pdf is a prospectus on the T.Rowe Price funds
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