My friend wants to invest money; please review my advice for her

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dontrunaway
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My friend wants to invest money; please review my advice for her

Post by dontrunaway »

My friend told me she wants to invest $40,000 she has saved up, and she sought the counsel of my rudimentary investment knowledge. She wants to invest for general savings.

She's 30, earns around $20,000 a year, lives in Oregon, has no other financial assets to speak of apart from a few thousand in a checking account. I would recommend she do the following with the $40,000:

$24,500 in VTSAX (Vanguard total stock-market index)
$10,000 in VBILX (Vanguard intermediate-term bond fund)
$5,500 in a Roth IRA account consisting of VTSAX

I'm assuming a Roth IRA is the best choice for her because her income is so low now and hence subject to little tax.

Does this look like solid advice? Anything big that I'm overlooking?
barnaclebob
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Re: My friend wants to invest money; please review my advice for her

Post by barnaclebob »

That seems too risky given her income and amount of assets. I'd go 50/50 stocks bonds at most. In reality investing wont help her much at all, earning more money will trump investment returns big time. Although if she has a super low cost of living then maybe it will...
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njboater74
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Re: My friend wants to invest money; please review my advice for her

Post by njboater74 »

Pretty impressive she has 40k saved up on a 20k salary and she's only 30. Did she get a windfall of some sort? Or did this just come from her socking this away?

What are her monthly expenses? What is the goal of her investing? Is she saving up for a house? Retirement? Trip to Europe?

The first thing she should keep is an emergency fund with 3-6 months of expenses in the bank or in a money market. Then after that, she can invest the rest based on what her goals are.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
alex_686
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Re: My friend wants to invest money; please review my advice for her

Post by alex_686 »

You can't answer her question until you know:

Her goals, which will inform you on the required return she needs.

Special considerations. What is her need for a emergency fund? Is she on any welfare programs that limit asserts or savings a person has?

Her risk tolerance. Risk tolerance can be divided by ability and willingness. 20k a year suggests a limited ability to do so.
Is this her first major investment into the stock market? If this is a windfall, like a inheritance, would also suggest limited ability.

My gut is telling me this is way to risky.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
miles monroe
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Re: My friend wants to invest money; please review my advice for her

Post by miles monroe »

savings and investing are 2 different things.

for the investing portion - which we don't know yet - i always recommend target retirement fund for novice investors. its what i put my sons in.
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ruralavalon
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Re: My friend wants to invest money; please review my advice for her

Post by ruralavalon »

dontrunaway wrote:My friend told me she wants to invest $40,000 she has saved up, and she sought the counsel of my rudimentary investment knowledge. She wants to invest for general savings.

She's 30, earns around $20,000 a year, lives in Oregon, has no other financial assets to speak of apart from a few thousand in a checking account. I would recommend she do the following with the $40,000:

$24,500 in VTSAX (Vanguard total stock-market index)
$10,000 in VBILX (Vanguard intermediate-term bond fund)
$5,500 in a Roth IRA account consisting of VTSAX

That's excellent that she was able to save $40k on just $20k/yr in earnings.

At age 30 I would suggest more in bonds, say 20% or more.

Instead of just $5.5k in the IRA, she could do that amount now and another $5.5k next January, for a total of $11k in the IRA.
dontrunawaay wrote:I'm assuming a Roth IRA is the best choice for her because her income is so low now and hence subject to little tax.

Does this look like solid advice? Anything big that I'm overlooking?
Yes a Roth IRA is likely appropriate for her.

Is there a 401k or similar plan offered where she works? If so how is she using that account?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
billfromct
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Re: My friend wants to invest money; please review my advice for her

Post by billfromct »

Don't forget that she would qualify for the Federal "Saver's credit" for her contribution to a Roth IRA. With her adjusted gross income (AGI) of $20k, the Saver's credit would be 20% of the first $2k retirement contribution or $400.

If her AGI was $20,001, the Saver's credit would be 10% of the first $2k of her retirement contribution.

Check "the Google".

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Re: My friend wants to invest money; please review my advice for her

Post by Fallible »

dontrunaway wrote:My friend told me she wants to invest $40,000 she has saved up, and she sought the counsel of my rudimentary investment knowledge. She wants to invest for general savings.

She's 30, earns around $20,000 a year, lives in Oregon, has no other financial assets to speak of apart from a few thousand in a checking account. I would recommend she do the following with the $40,000:

$24,500 in VTSAX (Vanguard total stock-market index)
$10,000 in VBILX (Vanguard intermediate-term bond fund)
$5,500 in a Roth IRA account consisting of VTSAX

I'm assuming a Roth IRA is the best choice for her because her income is so low now and hence subject to little tax.

Does this look like solid advice? Anything big that I'm overlooking?
What made her decide to invest and how well does she understand investing, especially the risk of losing money? Has she, or is she willing to learn on her own by reading, say, The Bogleheads' Guide to Investing, or William Bernstein's e-book If You Can, or "Getting Started" in the wiki? I also agree with others here who say more information is needed about her finances, goals, etc.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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BL
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Re: My friend wants to invest money; please review my advice for her

Post by BL »

Saver's credit is non-refundable, so it can only reduce tax to $0.
Dicast
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Re: My friend wants to invest money; please review my advice for her

Post by Dicast »

I agree with the others above. I think the goal for why she is investing needs to be investigated more. Is this to bump up the savings to buy a house, buy a car or long term retirement planning?

I think at a salary of $20k per year, spending that $40k on an educational/certificate/job training pursuit would probably be a better long term investment than the stock market. It is much easier to double that income in 2-4 years than it is to double the savings in the stock market.

If this is just a part time job along with having a family and a working spouse then it may be a totally different situation.
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Rowan Oak
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Re: My friend wants to invest money; please review my advice for her

Post by Rowan Oak »

Here's great advice to read before giving your own, "What Experts Say About Investing":
https://www.bogleheads.org/wiki/What_th ... _investing

Another very helpful resource is Rick Ferri's "All About Asset Allocation".

That said, VTI is a great choice for broad stock market diversification -quite possibly the best choice. For bonds, the Vanguard Total Bond Market ETF (BND) would provide more diversification and lower cost albeit at a slightly lower yield.

Simplicity will be key especially if this won't be an ongoing advising relationship.
Last edited by Rowan Oak on Tue Jan 16, 2018 5:36 pm, edited 1 time in total.
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dontrunaway
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Re: My friend wants to invest money; please review my advice for her

Post by dontrunaway »

Thanks for all the responses. I'll clarify that she has exceptionally low expenses, so she's able to save nearly all of the $20,000 she earns a year. As for the goals, there's nothing concrete. I suppose it's retirement savings; she would probably also use some of it to travel every few years. She found herself with money accruing in her bank account, and she realized it was probably not the smartest thing to just let so much money sit in a bank earning essentially nothing, so she asked me for advice on a better place to allocate it. The few thousand she still has in the bank seems an ample emergency fund.

The 25–75 bonds–stocks asset ratio I chose is fairly arbitrary, and any attempts to elicit her risk tolerance have been met with "I don't know; what should it be?" type of responses. She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me, and if I don't offer her a plan, she'll just ask her dad, or a friend, who I fear may give worse advice. And so that's more of the circumstances for this thread. Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
Elbowman
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Re: My friend wants to invest money; please review my advice for her

Post by Elbowman »

Fallible wrote:is she willing to learn on her own by reading ... William Bernstein's e-book If You Can
+1 to this, including reading all the books he suggests in that paper. Tell her that doing the right thing in the beginning is the easy part of investing. The hard part is not doing the wrong thing for the next 50 years, especially in times when her friends, family, co-workers, and people on TV are saying the sky is falling. She needs to understand and believe in what she is doing. 100 hours reading finance books may seem boring to her, but she should think of it as an investment that will let her confidently control her finances for the rest of her life.
gwrvmd
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Re: My friend wants to invest money; please review my advice for her

Post by gwrvmd »

I think your 75/25 stocks to bond ratio is appropriate. She is 30yo and single. She will never get ahead with 50% bonds at 30 years old. She either got some help or is a helleva saver........Gordon
Disciple of John Neff
epictetus
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Re: My friend wants to invest money; please review my advice for her

Post by epictetus »

is she going to be ok with this plan when the stock part drops by 50%?
if not it isn't a good plan for her
Focus on what you can control
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Re: My friend wants to invest money; please review my advice for her

Post by junior »

epictetus wrote:is she going to be ok with this plan when the stock part drops by 50%?
if not it isn't a good plan for her
Seconded. That's exactly what happened in 2008:

Image

Your friend should read some books to pick up the basic principles of investment so she knows what she is getting into.
gwrvmd
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Re: My friend wants to invest money; please review my advice for her

Post by gwrvmd »

So what does that chart say to you? It says to me "Invest in stocks and stay the course"
I have been mostly in stocks all my 45 year investing career. My portfolio graph looks just like the above graph and I am very happy.......Gordon
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gbru316
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Re: My friend wants to invest money; please review my advice for her

Post by gbru316 »

Fallible wrote:
dontrunaway wrote: William Bernstein's e-book If You Can, or "Getting Started" in the wiki?
I just directed a young (24ish) coworker to these sources today. She was very, very grateful. In her words "Everyone says "save, save, save" but no one ever tells you how you should do it.

She was putting 5% into her 401(k). By the end of the day, she increased her contribution to 10% in a LifeStrategy fund, getting the max company match of 5%. Coupled with the company's yearly 4% lump sum contribution based on last year's W-2 income, she's increased her savings rate from 7.5% to 19%. It was a good day for both of us.




But back on topic, those two sources are excellent for the new investor.
MN Finance
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Re: My friend wants to invest money; please review my advice for her

Post by MN Finance »

I would probably not offer too much advice so you're not dealing with it if something goes wrong.

Second, she has no idea how she will feel if she losses half a year's income if the market tanks. Unless she's sure she won't bail, she should be cautious.

Third, she doesn't just need to up and invest her life savings. There's a really long list of things that she might need the money for, most of which neither of you can anticipate. She should fund a Roth each year with a target date fund, then put another 10 or 15 into a similar taxable fund, leaving 20 in cash. After a market cycle of watching that stuff rise and fall, she can figure out how much more to invest. Definitely keep 20 in cash.
Nowizard
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Re: My friend wants to invest money; please review my advice for her

Post by Nowizard »

Let her read this thread and the various comments. Basically, she gets kudos for the amount she has accumulated. She is now ready for the next step which is educating herself on how to determine her goals and risk tolerance. Only then is she ready to pick the specific funds in which to invest.

Tim
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Re: My friend wants to invest money; please review my advice for her

Post by Fallible »

dontrunaway wrote:Thanks for all the responses. I'll clarify that she has exceptionally low expenses, so she's able to save nearly all of the $20,000 she earns a year. As for the goals, there's nothing concrete. I suppose it's retirement savings; she would probably also use some of it to travel every few years. She found herself with money accruing in her bank account, and she realized it was probably not the smartest thing to just let so much money sit in a bank earning essentially nothing, so she asked me for advice on a better place to allocate it. The few thousand she still has in the bank seems an ample emergency fund.

The 25–75 bonds–stocks asset ratio I chose is fairly arbitrary, and any attempts to elicit her risk tolerance have been met with "I don't know; what should it be?" type of responses. She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me, and if I don't offer her a plan, she'll just ask her dad, or a friend, who I fear may give worse advice. And so that's more of the circumstances for this thread. Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
When she asks you what her risk tolerance should be, that's the right question. If she reads the "Getting Started" page in the wiki, she'll learn about how much she should have in savings (at least six months of living expenses), whether she is ready to invest, the importance of understanding how much she can afford to lose, both financially and emotionally, and how those critical areas will determine an asset allocation that is right for her.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
protagonist
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Re: My friend wants to invest money; please review my advice for her

Post by protagonist »

If she is making only $20K, at this stage of her life, I would suggest that the other side of the equation is perhaps more important than investing.

That is, how to stay out of debt.

Especially credit card debt, if that is an issue with her.

And help her become a wise consumer. Alternatives to cable TV, MVNOs, possibly credit card promos for travel if she is able to pay her card off every month, stuff like that. Things that will help her live well without overspending.

In other words, good financial discipline.

Then again, if she has already saved $40K while making 20K/year, she may well already have good financial discipline.
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BL
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Re: My friend wants to invest money; please review my advice for her

Post by BL »

Fallible wrote:
What made her decide to invest and how well does she understand investing, especially the risk of losing money? Has she, or is she willing to learn on her own by reading, say, The Bogleheads' Guide to Investing, or William Bernstein's e-book If You Can, or "Getting Started" in the wiki? I also agree with others here who say more information is needed about her finances, goals, etc.
Agree that she needs to read a bit. The If You Can booklet, see link, has a lot of good advice in a few pages and is written for young new investors. Bernstein splits the US, Int, bond into thirds, which is not bad for someone with no clue:
https://www.etf.com/docs/IfYouCan.pdf
alex_686
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Re: My friend wants to invest money; please review my advice for her

Post by alex_686 »

dontrunaway wrote:The 25–75 bonds–stocks asset ratio I chose is fairly arbitrary, and any attempts to elicit her risk tolerance have been met with "I don't know; what should it be?" type of responses. She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me, and if I don't offer her a plan, she'll just ask her dad, or a friend, who I fear may give worse advice. And so that's more of the circumstances for this thread. Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
This, to me, suggests low knowledge which would suggest low willingness to take risks. We don't know how she will react emotionally to a big downturn. As I have said in a prior post, she seems to have a low capacity to take risks.

Figure out what her emergency fund should be. That should be an easy goal to figure out. From there I would go with intermediate bonds and target date funds.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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ruralavalon
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Re: My friend wants to invest money; please review my advice for her

Post by ruralavalon »

dontrunaway wrote:The 25–75 bonds–stocks asset ratio I chose is fairly arbitrary, and any attempts to elicit her risk tolerance have been met with "I don't know; what should it be?" type of responses. She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me, and if I don't offer her a plan, she'll just ask her dad, or a friend, who I fear may give worse advice. And so that's more of the circumstances for this thread. Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
An asset allocation of 75/25 stocks/bonds seem reasonable time.

Suggest the Bernstein book "If You Can" to her, it's short and simple. BL linked a pdf copy.

My suggestion for the $40k might be --

Roth IRA, 28%, $11k
25%, Vanguard Total Bond Market Index Fund Admiral (VBTLX)
13%, Vanguard Total Stock Market Index Fund Investor (VTSMX)

Taxable account, 72%, $29k
57%, Vanguard Total Stock Market Index Fund Admiral (VTSAX)
15%, Vanguard Total International Stock Market Index Fund Investor (VGTSX)
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
t3chiman
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Re: My friend wants to invest money; please review my advice for her

Post by t3chiman »

dontrunaway wrote:My friend ... wants to invest for general savings.

...Anything big that I'm overlooking?
30 with $40k lying around? Time to have some fun, I'd say. A month in the South Island of New Zealand would be my prime recommendation. Probably swing it for $4k if she waited on cheap air fares. Memories for a lifetime, formed at a time in life during which she can really enjoy it. If she is truly mountain-sceneried out, then take the same dollar amount and do a couple of weeks in Shanghai. Pick up some Chinese language skills beforehand to smooth the transition. Then enjoy one of the world's great cities. World's largest rapid transit system (with 5 more lines planned by 2020). Prime hub of the amazing high-speed rail system--180mph, clean, quiet, staffed by attractive 20-something Chinese women. And of course, delicious food available 24/7. It's a letdown to return to the States, in some ways. (But she surely will appreciate that clean Oregon air.)

Oh, yes, investments. Vanguard Energy, Vanguard Health, Vanguard Consumer Staples, 30/30/40. She has plenty of time for the market to work its magic. (And if she doesn't, she'll savor the travel experiences all the more.).
HTH
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Taco Knight
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Re: My friend wants to invest money; please review my advice for her

Post by Taco Knight »

I'd recommend she dip her toes in. $5500 in a Roth IRA of course, everything else in an online savings account while she learns some of the ropes of what investing entails.

She learns and watches what happens to that $5500 between now and January 2017 and meanwhile her $35K earns 1% interest instead of .05% or whatever in the brick and mortar. Then in 2017 she can add another $5500 how she feels.

Consider the first deposit a test drive. Practical risk tolerance rather than make up a theoretical risk tolerance a priori which might be inaccurate.

By no means should a novice investor just plunk down all of their money, twice their income, in one fell swoop. Easy way to lose a friend in a week if they don't understand how the market fluctuates and money isn't "lost" when it goes away.
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Re: My friend wants to invest money; please review my advice for her

Post by midareff »

Six months expenses in a money market first, then $5500 in a Roth. I'd split the Roth 80/20 or 70/30 and what's left 60/40 or 50/50 into Total US Market and Total Bond Market, most likely 50/50 while she gets her feet wet with daily/weekly/monthly volatility. After that she can always increase the AA as desired.

Does she have access to an IRA?
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Re: My friend wants to invest money; please review my advice for her

Post by BolderBoy »

dontrunaway wrote:Does this look like solid advice? Anything big that I'm overlooking?
#1, emergency fund: 6-12 months of expenses safely tucked away - safely!
#2, properly insured?
#3, retirement savings/investing: workplace retirement plan? Roth IRA?
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goingup
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Re: My friend wants to invest money; please review my advice for her

Post by goingup »

dontrunaway wrote:Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
I vehemently object to your suggestion. :shock:

That 40K sounds to be all her worldly money, which has been socked away in a dark safe place for a long time, never subjected to vagaries of the Market. Now you suggest a 75/25 AA based on what, exactly?

My first impulse would be high yield savings, CD, or very conservative balanced fund.
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Re: My friend wants to invest money; please review my advice for her

Post by Pharmacist »

goingup wrote:
dontrunaway wrote:Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
I vehemently object to your suggestion. :shock:

That 40K sounds to be all her worldly money, which has been socked away in a dark safe place for a long time, never subjected to vagaries of the Market. Now you suggest a 75/25 AA based on what, exactly?

My first impulse would be high yield savings, CD, or very conservative balanced fund.
Putting your life savings in CDs and high yeild savings at age 30? That's what you would recommend? Are you joking? The whole point of fixed income is to reduce volatility and protect your money when you are nearing retirement. At age 30 I'm pretty sure she can ride out any volatility...

Now if she is going to flip out when the stock market drops 10% and assume you are an idiot then you might want to take a more defensive/conservative position but to do that based solely on her income doesn't make sense. I personally would be hesitant to give her any advice until she understands volatility and that she could sit on a loss for months/years.
Last edited by Pharmacist on Wed May 18, 2016 1:39 pm, edited 2 times in total.
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Re: My friend wants to invest money; please review my advice for her

Post by jharkin »

I'm surprised that I'm the first to suggest this, but at that age making barely over minimum wage I would "invest" the 40k toward a college education or trade school to get into a better profession/career.

The return, in both financial terms and life satisfaction, will be far better than any stock portfolio can provide.
Pharmacist
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Re: My friend wants to invest money; please review my advice for her

Post by Pharmacist »

jharkin wrote:I'm surprised that I'm the first to suggest this, but at that age making barely over minimum wage I would "invest" the 40k toward a college education or trade school to get into a better profession/career.

The return, in both financial terms and life satisfaction, will be far better than any stock portfolio can provide.
Dicast wrote:I think at a salary of $20k per year, spending that $40k on an educational/certificate/job training pursuit would probably be a better long term investment than the stock market. It is much easier to double that income in 2-4 years than it is to double the savings in the stock market.
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Re: My friend wants to invest money; please review my advice for her

Post by jharkin »

I missed that! :oops:
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goingup
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Re: My friend wants to invest money; please review my advice for her

Post by goingup »

Pharmacist wrote:
goingup wrote:
dontrunaway wrote:Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
I vehemently object to your suggestion. :shock:

That 40K sounds to be all her worldly money, which has been socked away in a dark safe place for a long time, never subjected to vagaries of the Market. Now you suggest a 75/25 AA based on what, exactly?

My first impulse would be high yield savings, CD, or very conservative balanced fund.
Putting your life savings in CDs and high yeild savings at age 30? That's what you would recommend? Are you joking? The whole point of fixed income is to reduce volatility and protect your money when you are nearing retirement. At age 30 I'm pretty sure she can ride out any volatility...

Now if she is going to flip out when the stock market drops 10% and assume you are an idiot then you might want to take a more defensive/conservative position but to do that based solely on her income doesn't make sense. I personally would be hesitant to give her any advice until she understands volatility and that she could sit on a loss for months/years.
No, I'm not joking. Neither is Bill Berstein when he cautions that young people who have never been invested in a bear market would do well to be conservative in their allocations otherwise they may bolt from the market at when trouble hits. http://www.morningstar.com/cover/videoc ... ?id=670230

Perhaps the situation is different for you, Pharmacist. Perhaps you are an experienced investor with lots of human capital. A low-wage earner with no investing experience should be advised that with a 75% stock allocation it's possible to lose 1/3 of your investment.
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Re: My friend wants to invest money; please review my advice for her

Post by pkcrafter »

She wants to invest for general savings.
This does not provide a good picture of what her goals are. It doesn't sound like she is trying to save for retirement. Ask what she has in mind.
She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me,
Everyone has the responsibility to manage their money. You are being helpful, but if she decides to turn over everything to an advisor her lack of knowledge and reliance on someone else could prove to be a disaster. Without some basics, she will have no idea if what she is being told/sold is reasonable, ethical, or in her best interest.
Thanks for all the responses. I'll clarify that she has exceptionally low expenses, so she's able to save nearly all of the $20,000 she earns a year. As for the goals, there's nothing concrete.
This might mean she lives with parents, or relatives, or another provider, but if the arrangements are stable, she does have a lot of ability to take risk, if long term investing is actually what she's asking about. However, with no knowledge of how markets work, I would not suggest a high allocation to stocks.

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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Re: My friend wants to invest money; please review my advice for her

Post by Fallible »

pkcrafter wrote:
She wants to invest for general savings.
This does not provide a good picture of what her goals are. It doesn't sound like she is trying to save for retirement. Ask what she has in mind. ...
Paul
I think it's becoming clear from this thread that this is one of two key questions to ask her. The other question is does she know she can lose money and how would she deal with that. Goals and risk tolerance, along with age and financial capacity, are among the basics of asset allocation.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: My friend wants to invest money; please review my advice for her

Post by alex_686 »

Pharmacist wrote:Putting your life savings in CDs and high yeild savings at age 30? That's what you would recommend? Are you joking? The whole point of fixed income is to reduce volatility and protect your money when you are nearing retirement. At age 30 I'm pretty sure she can ride out any volatility...

Now if she is going to flip out when the stock market drops 10% and assume you are an idiot then you might want to take a more defensive/conservative position but to do that based solely on her income doesn't make sense. I personally would be hesitant to give her any advice until she understands volatility and that she could sit on a loss for months/years.
I too strongly disagree with the 70 equity / 30 bond. The issue with your analysis is that you assume that the friend is a generic 30 year old and thus start with a couple of biases. From what I am reading she is atypical. What one should do is start with goals, risk tolerance, expected returns. Only after that do you build a asset allocation.

You say she can ride out any volatility. Can she? Her goals are "nothing concrete", maybe retirement. What if her goals are more immediate? Emergency expenditures, shift in goals, etc. So lots of fuzziness here.

Risk tolerance can be broken down by ability and wiliness.

On ability, what do we know? What type of return does she need to meet her minimum goals? If she falls short can she reduce her goals. If she falls short can she increase her savings? What other risks does she face? Job security? Health issues? Honestly, we can answer any of these issues. However we face a very low income and lots of uncertainty.

On willingness, what do we know? She seems uninterested and passive. I question her ability to understand the risks or the motivation to learn. (I am looking for a better word than sophistication but that is kind of what I am aiming for. As a counterpoint, my mother had a PhD, always balanced her checkbook to the penny, and always spent less then what she earned was horrible when it came to investments. For 20 years she plowed all of her 401(k) into a money market fund.)

The only bit of information that indicates that she can bear risk is that she has "exceptionally low expenses". Everything else points to being risk adverse or uncertainty. When faced with uncertainty one should skew towards being conservative.

I might make an expectation for a target date fund for retirement. I am not a huge fan of them. However, their one virtue is simplicity - being able to tie one specific goal to one specific pot of cash. I think that would increase her chance of ridding out any volatility.


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Re: My friend wants to invest money; please review my advice for her

Post by Pharmacist »

goingup wrote:
Pharmacist wrote:
goingup wrote:
dontrunaway wrote:Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
I vehemently object to your suggestion. :shock:

That 40K sounds to be all her worldly money, which has been socked away in a dark safe place for a long time, never subjected to vagaries of the Market. Now you suggest a 75/25 AA based on what, exactly?

My first impulse would be high yield savings, CD, or very conservative balanced fund.
Putting your life savings in CDs and high yeild savings at age 30? That's what you would recommend? Are you joking? The whole point of fixed income is to reduce volatility and protect your money when you are nearing retirement. At age 30 I'm pretty sure she can ride out any volatility...

Now if she is going to flip out when the stock market drops 10% and assume you are an idiot then you might want to take a more defensive/conservative position but to do that based solely on her income doesn't make sense. I personally would be hesitant to give her any advice until she understands volatility and that she could sit on a loss for months/years.
No, I'm not joking. Neither is Bill Berstein when he cautions that young people who have never been invested in a bear market would do well to be conservative in their allocations otherwise they may bolt from the market at when trouble hits. http://www.morningstar.com/cover/videoc ... ?id=670230

Perhaps the situation is different for you, Pharmacist. Perhaps you are an experienced investor with lots of human capital. A low-wage earner with no investing experience should be advised that with a 75% stock allocation it's possible to lose 1/3 of your investment.
The average person (idiot) will bail out of the market at the first sign of negative volatility. That doesn't mean that equities are not the best option... in fact he directly states that a strong equities position is the best thing to hold in the first investment phase.

Rather than telling new investors to ride out volatility he just tells them to hold a safer investment because he assumes that they will not stick to their strategy when they see a loss. He is probably correct seeing as the average person has the IQ of a potato but really we are getting into a debate on human behaviour as opposed to investment strategy.

This is why I would never give a friend investment advice in the first place.
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Re: My friend wants to invest money; please review my advice for her

Post by Rob5TCP »

I just went through this with a close friend. Finally I put it concretely - you have your life savings of $150,000;
if you lost 1/2 in the stock market ($75,000 in big letters) what would you do.

She would be in tears and having nightmares. I asked her how much would not make her crazy:
she said about a $30,000 loss she could live with it. Though she would be unhappy (who would).
So, I have her setup for 40/60.
The 60% is split up several different ways:
$45,000 is in CD's of various lengths to setup a ladder; the best is paying about 3% and some decent deals down to about 1.4% for the shortest CD.
$25,000 we are discussing Total Bond Market vs. Intermediate Bond Market
and $20,000 will go into IBonds and TIPS (Though probably no IBonds until November).

Don't talk how much risk - ask her how much she can afford to lose w/o freaking and just selling at the bottom.
Her time frame before she wants these funds is also critical. She should do most of the talking.
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Re: My friend wants to invest money; please review my advice for her

Post by FiveK »

billfromct wrote:Don't forget that she would qualify for the Federal "Saver's credit" for her contribution to a Roth IRA. With her adjusted gross income (AGI) of $20k, the Saver's credit would be 20% of the first $2k retirement contribution or $400.
If her AGI was $20,001, the Saver's credit would be 10% of the first $2k of her retirement contribution.
If she used a traditional IRA and contributed ~$1600, her saver's credit of $800 would take her federal income tax to $0. That would give her a marginal tax savings of ~60%, and is a great reason to use the tIRA for that amount. Amounts above that could go to a Roth IRA.

Check her specific numbers with a tax calculator that considers the saver's credit - that rules out TaxCaster. In short, getting her AGI below $18,500 is likely a good idea in her situation.
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Re: My friend wants to invest money; please review my advice for her

Post by JonnyDVM »

gbru316 wrote:
Fallible wrote:
dontrunaway wrote: William Bernstein's e-book If You Can, or "Getting Started" in the wiki?
I just directed a young (24ish) coworker to these sources today. She was very, very grateful. In her words "Everyone says "save, save, save" but no one ever tells you how you should do.
I would definitely buy "if you can" for her. It's a short easy read and will allow her to take charge of her own finances. Your plan was fine. But better to let her make her own plan.
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Re: My friend wants to invest money; please review my advice for her

Post by FiveK »

JonnyDVM wrote:I would definitely buy "if you can" for her.
Or direct her to http://www.etf.com/docs/IfYouCan.pdf, where it can be had for free due to Mr. Bernstein's generosity.
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Re: My friend wants to invest money; please review my advice for her

Post by Valuethinker »

dontrunaway wrote:Thanks for all the responses. I'll clarify that she has exceptionally low expenses, so she's able to save nearly all of the $20,000 she earns a year. As for the goals, there's nothing concrete. I suppose it's retirement savings; she would probably also use some of it to travel every few years. She found herself with money accruing in her bank account, and she realized it was probably not the smartest thing to just let so much money sit in a bank earning essentially nothing, so she asked me for advice on a better place to allocate it. The few thousand she still has in the bank seems an ample emergency fund.

The 25–75 bonds–stocks asset ratio I chose is fairly arbitrary, and any attempts to elicit her risk tolerance have been met with "I don't know; what should it be?" type of responses. She's pretty unmotivated to learn about managing her finances, reasoning that she can just have someone who knows more than she would have the patience to learn advise her on what to do. At the moment that person is me, and if I don't offer her a plan, she'll just ask her dad, or a friend, who I fear may give worse advice. And so that's more of the circumstances for this thread. Since I haven't seen much vehement criticism of the specific investments I suggest in the OP, I'll assume they aren't too unreasonable.
Half that money, or maybe even 25k, should go into *risk free* investments. Bank CDs.

Why? because she might need that money for emergencies. And she cannot afford to lose that-- with such a low income, she cannot build it back up quickly. What if she loses her job? Or is disabled or ill and unable to work? Medical insurance and uncovered costs?

I would take 20k into bank CDs (maybe on a ladder 1, 2, 3, 5 years) which are cashable with an interest penalty and are FDIC insured and 20k into Vanguard Total Stock Market fund.
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Re: My friend wants to invest money; please review my advice for her

Post by JonnyDVM »

FiveK wrote:
JonnyDVM wrote:I would definitely buy "if you can" for her.
Or direct her to http://www.etf.com/docs/IfYouCan.pdf, where it can be had for free due to Mr. Bernstein's generosity.
That's still up ? Nice. That is indeed extremely generous.
I’d trade it all for a little more | -C Montgomery Burns
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