17 year old in need of advice!

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baseballcb95
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Joined: Mon Dec 03, 2012 5:12 pm

17 year old in need of advice!

Post by baseballcb95 »

Hey everyone!

I'm new here. I am familiar with investing, more so than just about any one my age at least... but I know I have a lot to learn and that i can learn a lot from you guys.

So I am 17, steady job, college fund set up, and 9,000 in my checking account. I have no debt. I want to begin investing and decided I wanted to invest in an IRA because I might not have a significant source of income again until I am 22. I am going to invest $4,000 (I have earned enough this year to invest about 4,500) in a Vanguard Roth IRA, I am just unsure which funds I would like to invest in within the IRA. Most of the funds have a minimum starting balance of 3,000 but a few have a beginning balance of 1,000. So basically I could have one of each or just put 4,000 into one fund. I know about their target retirement funds but I am soooo far off from retirement that I want to take on a little more risk..

Any advice is appreciated!

thanks!
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pennstater2005
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Re: 17 year old in need of advice!

Post by pennstater2005 »

Vanguards Target retirement funds have an array of stock/bond allocations. If you choose one with a later date such as the 2055 fund it will contain 90% stocks and 10% bonds. And you won't have to do any rebalancing yourself, yet. It could be a good way to start investing your money while you spend some time reading some good books and reading the wiki here, as it is full of useful information. Congratulations on starting investing at such a young age. Once again find a good investing book, many of which are listed in Taylors Investment Gems, and start educating yourself. Good luck.
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livesoft
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Re: 17 year old in need of advice!

Post by livesoft »

baseballcb95 wrote:I know about their target retirement funds but I am soooo far off from retirement that I want to take on a little more risk..
There is a whole thread going on now about how many folks consider target retirement funds as too risky, so I found your statement quite positive.

I recommend a target retirement fund for your Roth at the moment. It's easy and low cost. You can even forget about it for a while. And I don't think it would be too risky, but it will still have a quite a bit of risk (more than a little more). You could lose half your investment, but it would probably recover, too.
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baseballcb95
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Re: 17 year old in need of advice!

Post by baseballcb95 »

1. If target funds are so diversified why are they still considered risky? I mean 10% bonds and 90% in tons of different u.s. and international stocks doesnt sound all that risky to me..?

2. If in fact target funds are risky investments, why have their returns been lower than a small cap value fund for example

Idk, it just feels like with target funds I am going to get a boring 4-5% return for a while, just to end up splitting it up myself later on. But that may be a good thing?

Still torn, more advice would be appreciated!
livesoft
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Re: 17 year old in need of advice!

Post by livesoft »

More advice? Read some books? <- These are questions to test how serious you are about all this.
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RyeWhiskey
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Re: 17 year old in need of advice!

Post by RyeWhiskey »

baseballcb95 wrote:1. If target funds are so diversified why are they still considered risky? I mean 10% bonds and 90% in tons of different u.s. and international stocks doesnt sound all that risky to me..?
The point that was being made above was that a 90/10 allocation is a risky investment because it is predominantly equities which have a long history of being very volatile. Furthermore, diversification helps reduce a certain kind of risk (sector risk) but does not do away with the inherent risk of any investment. It would probably be wise to freshen up on why all equities and fixed-income investments carry risk.
baseballcb95 wrote:2. If in fact target funds are risky investments, why have their returns been lower than a small cap value fund for example
Their returns have been lower because:
a) the include more than just small cap value stocks which may have outperformed these other assets
b) they include fixed-income investments which, over the course of time, tend to underperform stocks on the whole
c) they are properly diversified which means that should the market at large lag behind small cap value, your diversified investment will underperform that particular market segment
baseballcb95 wrote:Idk, it just feels like with target funds I am going to get a boring 4-5% return for a while, just to end up splitting it up myself later on. But that may be a good thing?
In my opinion, one fund with 4k is worth more than four funds with 1k. Once you have somewhere around 15k or so in a Roth, then it might be the time to split the funds up, maybe. But for a young investor who is still early in the accumulation phase it makes more sense to simply dump everything in a low-cost, well diversified, basket of index funds. Once you have educated yourself on the risk of these investments, only then will you be able to adequately assess what your risk tolerance is.

Just for comparison's sake, I'm 26 and rather well versed in investments, etc... and I carry a 70/30 allocation. I don't believe in holding less than 25% in either stocks or bonds as no one can predict the future. Also, always remember that past performance does not predict future results.
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pennstater2005
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Re: 17 year old in need of advice!

Post by pennstater2005 »

baseballcb95 wrote:1. If target funds are so diversified why are they still considered risky? I mean 10% bonds and 90% in tons of different u.s. and international stocks doesnt sound all that risky to me..?

2. If in fact target funds are risky investments, why have their returns been lower than a small cap value fund for example

Idk, it just feels like with target funds I am going to get a boring 4-5% return for a while, just to end up splitting it up myself later on. But that may be a good thing?

Still torn, more advice would be appreciated!

I am in the Vanguard Target Retirement 2035 fund. It has YTD returned approximately 13%. That is much more than the 4-5% you call boring. And I would take a steady 5% return for the next 30 years any day. Being able to take risk is only something you know if you can or cannot do. At age 17 I imagine you could take a fair amount of risk if you are investing for the long term as you won't need the money for quite some time. I'll leave the small cap question for someone with more experience and knowledge than myself. Please read an investing book for your own benefit. It's the best thing I ever did. I started with William Bernstein's "The Investor's Manifesto".
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roymeo
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Re: 17 year old in need of advice!

Post by roymeo »

They're "risky" when compared to similar funds with more (boring) bonds in them. They're less risky than owning a fund like small-value index because they are much more diversified. They're much less risky than owning a single stock. Though you might get lucky and invest in something that acts like Apple has, the risk is that it instead acts like Kodak.

A Target Retirement fund is appropriate for you, IMHO. It may just get "boring" returns if you're lucky, but since it would have quite a bit of stock in it you'll definitely feel ride of the overall market. This is a good test to see if you can 'set it and forget it' instead of trying to chase whatever is hot this month or running in terror if the market drops a bit.

I also agree with others that this is great for starting out (or maybe forever) as you build up your investment. Don't worry about trying to split it up til you have 30K.

I sure wish I'd gotten advice like you're getting here when I was 17 (and 27) instead of playing fund-picking games in my 401(k), etc.

The hardest part of doing this is probably realizing that it's OK to "stop bravely at the surface". There's so many people who'll try to make this whole thing more complicated (especially if they get a cut).

roymeo
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sjb19
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Re: 17 year old in need of advice!

Post by sjb19 »

I agree with the responses so far.

1. Invest in a Target Retirement fund for now.
2. Read enough until you realize why this is an incredibly optimistic statement for some people and and an incredibly pessimistic one for others...
baseballcb95 wrote:Idk, it just feels like with target funds I am going to get a boring 4-5% return for a while
3. Read even more until you realize how little you actually know about investing and eventually how simple it can be.
4. Realize how awesome you are for starting investing at such a young age.
Topic Author
baseballcb95
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Re: 17 year old in need of advice!

Post by baseballcb95 »

Ok, you guys have convinced me a target retirement fund is right for me..

I know as the years go up (target retirement 2020 vs 2050) there is more money allocated toward stocks, but in general does each fund carry similar/exact same stocks? For example, both the 2050 and 2055 dates have ~90% stocks, ~10% bonds. Shouldnt their performance be nearly identical or are some funds set up with better stocks?

Last question, say in 5 years my roth has ~40K. Is it both easy and cost free to split that up into other funds? Like withdrawl my money from the target fund and split it up myself (or with help) if i chose to do so?
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JupiterJones
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Re: 17 year old in need of advice!

Post by JupiterJones »

baseballcb95 wrote: For example, both the 2050 and 2055 dates have ~90% stocks, ~10% bonds. Shouldnt their performance be nearly identical or are some funds set up with better stocks?
Yes, they have the same funds. In fact, if you go to Vanguard's website, look up each Target fund, and click on the "Performance & Management" tab, you can see exactly which funds (and in what percentages) are in there for yourself:

TR 2050

TR 2055

Which means they'll have the same performance for the next several years. The only difference is in how they change their asset allocation over time. According to the current plan, TR 2050 will start to automatically increase its bond percentage (decreasing its equity percentage) starting around the year 2025. With TR 2055, that will happen five years later, in 2030.
Is it both easy and cost free to split that up into other funds?
Yup. As long as it's all within your IRA (and you move the money into no-load funds), there should be no costs or taxes. Easy as pie.

JJ


P.S. Another option to think about are Vanguard's LifeStrategy funds. They similar to the Target Retirement funds in that they're really a collection of a few different mutual funds that are automatically rebalanced for you to maintain a certain asset allocation. The only difference is that the allocations are fixed (instead of eventually becoming more conservative over time like the TR funds). That said, the most aggressive one they have is 20% bonds, which wouldn't work for you if you're really dead-set on having 10% bonds.
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NYBoglehead
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Re: 17 year old in need of advice!

Post by NYBoglehead »

17 and opening up a Roth! You are a rockstar. As others have alluded a Target Date Fund is a pretty good start, or since your time horizon is so long I would be comfortable with putting 100% into the Total Stock Market Index Fund. You can add the other components of the 3-fund portfolio as you age, gradually becoming more conservative. I don't think there is anything wrong with that at all.

I know you said you might not be putting any more in until age 22, when you're done with college. Keep in mind that you contribute as much as you make up to $5500 for 2013. So even if you only have $500 in earnings each year while in school, you can contribute that much each year to the Roth from your savings (but don't forget to enjoy life either, you're already off to an awesome start).

I recommend reading some of the books others have suggested and remember that investing is for the long-term. Don't look at your balances and get too excited when they go up or get too down when they decline. That is the toughest part.
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Abe
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Re: 17 year old in need of advice!

Post by Abe »

baseballcb95 wrote:1. If target funds are so diversified why are they still considered risky? I mean 10% bonds and 90% in tons of different u.s. and international stocks doesnt sound all that risky to me..?
It is true that a lot of risk can be mitigated with diversification. However, there is one kind of risk that cannot be diversified away. That is systematic risk, which is just a fancy word for market risk. When the entire market goes down, as is does during economic downturns, a 90% stock allocation could lose 50% or more of its value. Can you lose half the value of your stock allocation without panicking and selling out. If not then you need to lower your stock allocation.
Last edited by Abe on Sun Dec 09, 2012 9:36 am, edited 1 time in total.
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BillyG
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Re: 17 year old in need of advice!

Post by BillyG »

You are very smart for doing this at 17 and doubly smart for coming here for advice. You'll be rewarded for your long-term planning.

As someone else mentioned, the Wiki has a ton of information here http://www.bogleheads.org/wiki/Main_Page

Happy reading, and come back with any questions.

Billy
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dratkinson
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Re: 17 year old in need of advice!

Post by dratkinson »

I would lean toward a target retirement fund with 30% bonds... just to be a little more conservative (possible 35% worst case loss based on 70% stocks). This should run on autopilot until you know more, are working, and want to make a change.
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StophJS
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Re: 17 year old in need of advice!

Post by StophJS »

Congratulations on taking the initiative so young. I'm 24 and just getting started.. I'd give anything to go back and get that extra 7 years.

This page might be of interest to you.

http://www.obliviousinvestor.com/8-lazy-etf-portfolios/
Topic Author
baseballcb95
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Re: 17 year old in need of advice!

Post by baseballcb95 »

Thanks guys! Officially one month into my IRA!

Quick question.. How often does the Vanguard TR 2055 payout dividends? I got a dividend payment at the end of December but I am not sure if that is quarterly or yearly..

Also, what is the next step in investing? Aside from continuing to contribute to my IRA and staying debt free..
LiamLC
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Re: 17 year old in need of advice!

Post by LiamLC »

Well I was in the same boat as you, I am 18 and I started researching this when I was 17 (still haven't invested because all my savings has gone into my business, but I am going to start once this contract goes through next month :D ) and honestly the best thing you can do is read a book about it. I recommend Boglehead Guide to Investing. It is a very easy read and really interesting. It will give you an idea of what your plan should be. I personally don't like target date funds because I don't like their stock allocation. I like to have more control over my investments. But of course that is just personal preference and you can't really know what you like without reading about all the options and the theory behind everything.

I agree with taking risks, at this young age we can afford it! But also don't go to crazy. I personally am going to have a strong international presence in my portfolio. Time is on our side! Whatever you choose, (even investments with "low returns") starting this early will ensure a good retirement as long as you stay the course.
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nirvines88
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Re: 17 year old in need of advice!

Post by nirvines88 »

baseballcb95 wrote:Thanks guys! Officially one month into my IRA!

Quick question.. How often does the Vanguard TR 2055 payout dividends? I got a dividend payment at the end of December but I am not sure if that is quarterly or yearly..

Also, what is the next step in investing? Aside from continuing to contribute to my IRA and staying debt free..
Yearly.
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