27, no investments, please help

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tinvestor
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27, no investments, please help

Post by tinvestor » Mon Mar 20, 2017 6:35 pm

Hey guys I have a problem with my current financial situation that gives me high levels of anxiety.

I've been fortunate enough and have lived frugally enough to survive college without debt, then saved most of my money the past 5 years since graduating. I was an expat for one year which allowed me to save about 2x, and 4 years ago they gave me RSUs (very very lucky) which nearly tripled, but I sold upon vesting recently. My only investment and "risk exposure" was those RSUs ( or at least that's how i justified staying out of the market with my savings ) but now i'm 100% in cash.

I only ever matched my employer's 401k contribution and that was in bonds and now self-directed (sitting in cash), no IRA contributions, I bought a used car cash, I hate debt and have no debt, have a credit card just for the 1% back & to play the credit score game, I cut the cord and just pay $40 for internet etc etc. My only plan was simple, save cash.

I basically had no plan other than save as much as I could and be as conservative as possible since more than half my net worth was in RSUs that were all in one stock (my company's stock) and I didn't want to be "greedy" going all in with my savings too. I admit I was also afraid of getting into the stock market at all time highs and have been waiting for a crash to potentially get in, but of course it has only kept making new all time highs and i've lost against inflation on my savings.

This is a problem i've delayed acting upon but simply cannot afford to keep ignoring. I am now losing thousands a year to inflation. The stock market is only more inflated now and there is just nowhere to go to protect my money against inflation. I've started taking steps like opening a Roth IRA and contributed the max of $11k (2016 + 2017), and I am now maxing out my 401k (increasing contribution from from $7k to $18k), but again those are just sitting in cash. I understand my money will be worthless by retirement age if i don't do something, but at the same time my biggest fear is losing 30-50% of my hard earned money in a market crash. I would be depressed and likely sell at the bottom. I remember the 2002 and 2008 crashes and my father lost a lot of money, probably why I am so scarred.

Long story short I have $30k in 401k, $11k in Roth IRA and $2k in HSA. Then I have $235k in my bank accounts. I make $87k and typically $10k bonus. I max out my ESPP but always sold for the guaranteed 15%. I've been reading a lot and understand the bogle philosophy, but my biggest problem is going all in at all time highs ! What and how would you invest my 401k, roth and savings ? Thanks in advance.

chicagoan23
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Re: 27, no investments, please help

Post by chicagoan23 » Mon Mar 20, 2017 6:59 pm

Where do you live? Do you rent? If so, maybe look into a down payment for a house. I bought my first condo at age 26 and you definitely have the cash to do it too.

If you are fearful of the stock market, you can always just put your pre tax retirement accounts into a target retirement date fund and then never look at it. The fund will make age appropriate allocations for you. Trust that process.

As you get older and more financially secure, you will likely get more comfortable with risk. You have plenty of time.

fleebjuice
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Re: 27, no investments, please help

Post by fleebjuice » Mon Mar 20, 2017 10:56 pm

First off, congrats. It looks like you've done a great job saving. And it sounds like you recognize your limitations, including behavioral (which is important).

One point I would note is that you are looking at something like a 35-70 year time horizon on your investments. What are the odds of equities under-performing bonds over that long of a period? I don't know, but I'd guess low. I understand the fear of investing at the peak. And your behavioral concerns. Is there a happy medium that would keep you satisfied? How about putting your 401k and IRA (and possibly also HSA) 100% in equities (TSM with or without some international), taking comfort from the understanding that you won't withdraw for decades--just let it be. Then for the taxable amounts, to the extent you don't need them for short-term goals (e.g., house down payment), why not at least put them in a 60/40 stock/bond balanced fund? That at least should protect you from inflation, generate some profit over time, and be highly unlikely to suffer anything approaching a 30-50% drawdown. Maybe at some point you'll feel comfortable increasing the equity portion (during a drawdown or otherwise).

BTW, since you are great at saving, try to think of a drawdown as a great opportunity to save as much as possible and invest in equities--rather than focusing on the (temporary) losses.
Posts are for informational purposes only. Nothing herein is intended as legal or tax advice or to create an attorney-client relationship.

tinvestor
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Re: 27, no investments, please help

Post by tinvestor » Tue Mar 21, 2017 11:11 am

I've called Fidelity, Vanguard and others and reading nonstop. I decided to leave 401k and IRA with Fidelity but open a Vanguard account for my taxable account. There's a .49% prime money market that I will move all my money into ASAP, then set up automatic contributions from it into VTSAX every week or two weeks and DCA over the next 1 to 2 years. The weekly, or monthly contributions and amount is what i don't know 100% yet, or my AA. I will also have a component of "add more on a dip" manually if/when needed. I am maxing out my 401k until the end of the year so about 1.5k a month will be DCA'd right into fidelity's FSTZX, I need a strategy for the current 30k.

About my AA, aren't bonds supposed to go down with rising interest rates ? I see they've already gone down, is it a dip or just the beginning ? I'm not nearly as familiar with bonds as I am with equities, leaning towards parking my cash in money market instead of bonds and investing 80% over 1-2 years into VTSAX. If i'm lucky enough, i'll catch a downturn before i run out of cash. I will try to leave 20% in cash/bonds always ready for a sudden opportunity.

As much as I want to try to time it, i've daytraded enough to understand i'm not gona time it perfectly, but I've decided I must DCA and cast a wide net to try and catch a discount, and hope for a good correction before I'm all in. Days like today down almost 1% I would do a manual contribution, but trying to rely mostly on my periodic conversions from money market to keep emotions away as much as possible. Now the question is if I should start my journey by putting 10-20% of my 401k in today being a nice discount from last week.

jjface
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Re: 27, no investments, please help

Post by jjface » Tue Mar 21, 2017 11:28 am

The most important thing for you right now is actually your contributions which you seem to be on top of. So you should congratulate yourself and not be so concerned.

The second most important thing for you is getting your stock-bond mix right. The higher the stock proportion the more risk. And for someone with a fear of the stock market you might be better off with a lower stock proportion.

This introduction is highly recommended as a first read. It is short.
http://www.etf.com/docs/IfYouCan.pdf

It recommends you consider starting with 1/3 in total us stock, 1/3 in total international and 1/3 in total bond. I would say that sounds pretty good for you. Set aside some cash for an emergency fund - typically 6-12 months and then the rest split as above across your portfolio (ie it doesn't matter that much if all your 401k is total stock as long as overall you have 1/3 of each across your whole portfolio not including your emergency fund).

Finally bonds really means fixed income and not just bond funds. If you do not like bonds/bond funds or are scared of them then consider putting some or all of your bond money in CDs, ibonds or eebonds rather than low interest money market funds. That is perfectly acceptable.

Oh yes and forget watching the market. Leave it alone and just keep contributing to the funds when you get the money. Markets go up and down but what is the most important is that in 30-50 years when you actually want the money to spend the markets will most likely have gone up from now - probably considerably.

:happy

mhalley
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Re: 27, no investments, please help

Post by mhalley » Tue Mar 21, 2017 11:38 am

Yes, bonds will initially go down with an increase in interest rates. BUT you are in the accumulation phase, so that means that the next time you buy bonds, they will be on sale. Also, it means that the yield from the bond fund goes up as the bond fund replaces maturing bonds with higher yielding ones.
As to the stock market impending crash, no one knows when that will happen. So if you are extremely wary, setup a relatively conservative asset allocation, say 60/40, and dca until you are fully invested. As you read more and become less fearful of the nasty ol market, you should eventually realize that you should be more aggressive and eventually change to a more traditional aa, i.e. Age in bonds, age minus 10-20, or whatever lets you sleep.

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StormShadow
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Re: 27, no investments, please help

Post by StormShadow » Tue Mar 21, 2017 11:48 am

tinvestor wrote:...my biggest fear is losing 30-50% of my hard earned money in a market crash. I would be depressed and likely sell at the bottom.

My advice... don't invest in the stock market.

The stock market will crash. Likely several times in your lifetime. And you won't be able to predict when it'll happen. Could be today, could be next year.

If you already know that you'd do something rash when it happens, then you shouldn't put your money at risk from yourself.

Billionaire
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Re: 27, no investments, please help

Post by Billionaire » Tue Mar 21, 2017 11:49 am

I think your easiest entry point would be your 401K. You are essentially dollar cost averaging with payroll deductions. You could gradually dollar cost average your existing cash balance in the 401K into your investment mix.

JoesMeatloaf
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Re: 27, no investments, please help

Post by JoesMeatloaf » Tue Mar 21, 2017 1:55 pm

Someone once told me that if you were afraid to go all in (meaning, a lump sum contribution), then it was a signal your AA was wrong. There is no such thing as timing the market. Cover up the last three years of the charts - people asked the same questions about the market they thought was clearly "too hot."

Read this: https://personal.vanguard.com/pdf/s315.pdf

I suppose the counter argument is that, thanks to politics (or whatever) we are not in a "traditional market" but there is no way you can know that. Even if you DCA over the next year or 18 months, you'll just be changing timing, not your exposure to risk (which looks at both up and downside potential).

IMO, keep the portion of the money you need for emergencies (and any large purchases like a house) liquid, and take the rest of that $235k and get it on board. Going forward, max your 401k and IRAs.

--edit --

I replied primarily to your original post, reading the rest of the thread, this guy nails it:

StormShadow wrote:
tinvestor wrote:...my biggest fear is losing 30-50% of my hard earned money in a market crash. I would be depressed and likely sell at the bottom.

My advice... don't invest in the stock market.

The stock market will crash. Likely several times in your lifetime. And you won't be able to predict when it'll happen. Could be today, could be next year.

If you already know that you'd do something rash when it happens, then you shouldn't put your money at risk from yourself.

Vanguard Fan 1367
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Re: 27, no investments, please help

Post by Vanguard Fan 1367 » Tue Mar 21, 2017 7:10 pm

I like John Bogle's advice, put at least some money into something like Vanguard Total Stock Market Fund and never look at the statements. I started off slowly myself with Vanguard's S & P 500 fund and a 100 dollar a month investment program. You sound like you have enough money to at least open a Vanguard Total Stock Market Fund account and maybe do the dollar cost averaging thing by investing like I did of 100 a month or more so that you can get used to investing. I started stock investing in 1994 and luckily enjoyed what Malkiel calls the best 6 years in Stock Market History. But there have been drops in 2000 and 2008 but I held on.

If you can get started with a 3000 dollar account and add 100 monthly maybe that would help you get over your stock market phobia.

I would also recommend Bogle's books. "The John Bogle Reader" was the best 22 bucks I ever spent.

tinvestor
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Re: 27, no investments, please help

Post by tinvestor » Wed Mar 22, 2017 8:00 pm

Thanks for the great advice. I opened my Vanguard account and funded it with a big chunk of the cash. My backdoor Roth IRA conversion finally took effect and the $11k are ready to be invested. I still need to look into bonds, what they're expected to do with interest rates going higher, and if i should do something like "Vanguard Long-Term Bond Index Fund (VBLTX)" instead of the prime money market while I DCA into the market. I also need to decide how exactly i'm going to set my automatic buys into VTSAX. Honestly paying close attention to the market too with the VIX rising.

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StormShadow
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Re: 27, no investments, please help

Post by StormShadow » Wed Mar 22, 2017 11:36 pm

tinvestor wrote:Thanks for the great advice. I opened my Vanguard account and funded it with a big chunk of the cash. My backdoor Roth IRA conversion finally took effect and the $11k are ready to be invested. I still need to look into bonds, what they're expected to do with interest rates going higher, and if i should do something like "Vanguard Long-Term Bond Index Fund (VBLTX)" instead of the prime money market while I DCA into the market. I also need to decide how exactly i'm going to set my automatic buys into VTSAX. Honestly paying close attention to the market too with the VIX rising.

Why would you invest into a long term bond fund when you expect interest rates to go higher?

If you're planning to make a change in the near future, then put it into a short term bond fund or just keep it in money market/savings account.

ZenInvestor
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Re: 27, no investments, please help

Post by ZenInvestor » Thu Mar 23, 2017 6:41 am

You are in an interesting situation. On one hand you are advanced in your behavior - your savings rate and mindset are perfect and habitual. On the other hand you are a novice - your investment anxiety is intense. A couple thoughts for you:

- By keeping your wealth in Cash you are virtually guaranteeing long term failure. Inflation will eat away at your savings and you will spend your life on the hamster wheel trying to catch the elusive carrot.

- Investing in equities means that you are an owner of businesses. By doing to through a diversified index approach you effectively eliminate some business ownership risks and also eliminate the need for your personal efforts to be consumed by your businesses. This understanding is VITAL to overcoming anxiety. I believe it was Buffet who said, "in the short term the stock market is a voting machine, in the long term it is a weighing machine." The mental shift from "owning stocks" to "owning businesses" changes ones perspective to focus on the weighing machine, NOT the voting machine.

- FIXED INCOME, even in a rising interest rate environment, are important in a portfolio to reduce volatility and REDUCE THE CHANCE THAT YOU WILL PANIC AND MAKE A DEVASTATING BEHAVIORAL MISTAKE. Think of it as insurance against your palpable anxiety. That said, fixed income doesn't have to be bonds. it can be: Savings Account, Bonds, I-Bonds, EE-Bonds, CD ladder. Spend some time researching these and contemplating their role as insurance against your anxiety.

You are in great shape, but you NEED to build conviction. EVERYONE has to build conviction to STAY THE COURSE. Think on it. Research it. Use the same mental tools that enabled your savings behavior to establish habitual conviction.

Tamarind
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Re: 27, no investments, please help

Post by Tamarind » Thu Mar 23, 2017 7:45 am

You say that you could not stand a 30-50% drop. Ok, what kind of drop could you handle? Would 20% also make you queasy? 10%? If so, I agree that you are just going to have to come to terms with losing some to inflation, because you are unable to tolerate the cure. Some folks just shouldn't invest in stocks for psychological reasons, and it is much better to know that about yourself than to keep fleeing the market.

You can shop for CDs which will lock your money up for a few years but provide a totally safe return of around 2% for 5 years. After the Great Depression, an entire generation of investors kept their life savings in safe instruments like these, and though they could have made a much better return elsewhere, most of them did ok since they also had high savings rates. If you save 40-50% of gross income, you'll probably be able to retire without market risk...though not early.

Perhaps you could still invest in bond funds. During the very worst single year for the total bond index ever, it declined less than 9%. Although bond funds decline when interest rates rise, the magnitude of the change is much smaller than a change in the stock market. And as the fund drops, your monthly income from yield will gradually increase, so that you return to a growing balance relatively quickly. Long term bonds are more sensitive to rates than intermediate bonds and will fluctuate more.

On your big pile of cons to not investing, add the fact that by doing almost all your saving in taxable accounts you have paid tens of thousands of dollars in taxes that you did not need to. It's good that you captured the match, though.

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marti038
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Re: 27, no investments, please help

Post by marti038 » Thu Mar 23, 2017 7:57 am

You're doing really, really well. Congrats.

I'd look at it this way. Nothing is certain, but...

the odds of losing loads of cash between now and the time you're able to touch retirement money (we'll assume 59-1/2) because of a steady or even quick and irrevocable market decline are very small. In fact, it would be the first time in history the market failed to recover over a span that long.

the odds of losing loads of value in the cash you've saved to inflation over that period because you never put it to work are virtually 100%.

Even if you jumped in now, when equities are admittedly high (but not necessarily over-priced) you've got the one thing one your side now that you'll never get back...TIME.

You're obviously a smart guy. Start reading about investing and build some confidence in a plan, but start putting that cash to work!

SweeneyTodd
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Re: 27, no investments, please help

Post by SweeneyTodd » Thu Mar 23, 2017 10:59 am

tinvestor wrote:This is a problem i've delayed acting upon but simply cannot afford to keep ignoring. I am now losing thousands a year to inflation. The stock market is only more inflated now and there is just nowhere to go to protect my money against inflation. I've started taking steps like opening a Roth IRA and contributed the max of $11k (2016 + 2017), and I am now maxing out my 401k (increasing contribution from from $7k to $18k), but again those are just sitting in cash. I understand my money will be worthless by retirement age if i don't do something, but at the same time my biggest fear is losing 30-50% of my hard earned money in a market crash.


After a certain level of cash cushion in savings accounts, CDs, etc., you're losing a lot in opportunity cost. I'll give you an example. I bought Apple shares in the early 2000s at about $4/share. It's now worth $140/share. If that $4 was in a savings account, I would have missed out on the 35-fold increase. Put your money to work. If you're worried about individual stocks, you can buy mutual funds in a brokerage account.

I put some money meant for a house down payment in a mutual fund. It doubled in about 5 years by the time I sold it to put towards the house.

tinvestor wrote:I would be depressed and likely sell at the bottom. I remember the 2002 and 2008 crashes and my father lost a lot of money, probably why I am so scarred.


The trick to live through crashes is to ignore the market. Mr. Market is bipolar, so don't get excited by his irrational exuberance, or get sad because of his despondence.

I live through 2008 without selling a single stock when everyone around me was moving to cash.

tinvestor wrote:Then I have $235k in my bank accounts.


If you're worried about buying at the top of the market, using dollar cost averaging. Setup regular transfers (e.g., monthly) from your bank account to an investment account. Spread the purchase price over a period of a year or two. That way you won't have to worry.

chicagoan23
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Re: 27, no investments, please help

Post by chicagoan23 » Thu Mar 23, 2017 12:29 pm

tinvestor wrote:Thanks for the great advice. I opened my Vanguard account and funded it with a big chunk of the cash. My backdoor Roth IRA conversion finally took effect and the $11k are ready to be invested. I still need to look into bonds, what they're expected to do with interest rates going higher, and if i should do something like "Vanguard Long-Term Bond Index Fund (VBLTX)" instead of the prime money market while I DCA into the market. I also need to decide how exactly i'm going to set my automatic buys into VTSAX. Honestly paying close attention to the market too with the VIX rising.


Some additional thoughts/questions:

1. Why did you do a backdoor Roth conversion? Given your income you should have been able to make standard Roth contributions, in addition to the 401(k) contributions? If you are making tax-deferred contributions and then converting them to Roth, I would suggest you not do that.

2. Given the many decades of potential compounding available to you and the limited amount of tax-deferred space, I would maximize pre-tax contributions and minimize your income tax each year. A proposed contribution priority: first, contribute to the 401(k) up to the employer match, then max out an HSA, then go back to the 401(k) up to the annual $18k max, then max the Roth IRA, then do taxable investments.

3. As mentioned above, long-term bonds are not a good idea for you. As Warren Buffett said last month, "It absolutely baffles me who buys a 30-year bond...I just don't understand it. The idea of committing your money at roughly 3 percent for 30 years ... doesn't make any sense to me." I would suggest a short-term bond fund or a total bond fund if you are going to make the allocations yourself.

4. I would suggest that you not "pay close attention to the market", and especially something like the VIX. That really won't give you any good ideas about what to do with your investments. You will not glean any special insight by noticing changes in what traders are paying for out-of-the-money options on S&P 500 index contracts that expire in a month. That has absolutely no value to someone like you, who will be investing for 50+ years.

5. No one wants to lose their "hard earned money" with a decline in their investment portfolio. That said, investing in assets that are not riskless will inevitably result in some losses. That will not change. Historically, investing in equities has resulted in positive returns after inflation. It is unlikely that will change over your investing lifetime.

6. I still think your best bet is to put all of your retirement assets into a target date fund for when you turn age 65 and then never look at it or change it. I would argue that is preferable even compared to VTSAX. It is good that you recognize what you might do in a market selloff, so you need to protect yourself from your worst impulses.

7. You did not respond to my earlier question about real estate, but if you are renting, then a down payment would be a good use of some of your cash. Buy a house or condo that you think you would be able to rent out if you were forced to move. It makes financial sense and emotionally it will give you a greater sense of security. At least that was my experience.

pkcrafter
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Re: 27, no investments, please help

Post by pkcrafter » Thu Mar 23, 2017 1:49 pm

OK, you are risk averse, not a big problem, but you need to stop allocating money until you have a plan. You need to come up with an asset allocation that you can and will stay with. Think of all accounts as one and think long term, not today and tomorrow. Also note that the market is always subject to volatility, but when it strikes on the downside, you don't lose any shares, only price fluctuation. Doesn't matter at all if you've got 25 years to go.

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.

tinvestor
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Re: 27, no investments, please help

Post by tinvestor » Sun Mar 26, 2017 6:30 pm

chicagoan23 wrote:
tinvestor wrote:Thanks for the great advice. I opened my Vanguard account and funded it with a big chunk of the cash. My backdoor Roth IRA conversion finally took effect and the $11k are ready to be invested. I still need to look into bonds, what they're expected to do with interest rates going higher, and if i should do something like "Vanguard Long-Term Bond Index Fund (VBLTX)" instead of the prime money market while I DCA into the market. I also need to decide how exactly i'm going to set my automatic buys into VTSAX. Honestly paying close attention to the market too with the VIX rising.


Some additional thoughts/questions:

1. Why did you do a backdoor Roth conversion? Given your income you should have been able to make standard Roth contributions, in addition to the 401(k) contributions? If you are making tax-deferred contributions and then converting them to Roth, I would suggest you not do that.

2. Given the many decades of potential compounding available to you and the limited amount of tax-deferred space, I would maximize pre-tax contributions and minimize your income tax each year. A proposed contribution priority: first, contribute to the 401(k) up to the employer match, then max out an HSA, then go back to the 401(k) up to the annual $18k max, then max the Roth IRA, then do taxable investments.

3. As mentioned above, long-term bonds are not a good idea for you. As Warren Buffett said last month, "It absolutely baffles me who buys a 30-year bond...I just don't understand it. The idea of committing your money at roughly 3 percent for 30 years ... doesn't make any sense to me." I would suggest a short-term bond fund or a total bond fund if you are going to make the allocations yourself.

4. I would suggest that you not "pay close attention to the market", and especially something like the VIX. That really won't give you any good ideas about what to do with your investments. You will not glean any special insight by noticing changes in what traders are paying for out-of-the-money options on S&P 500 index contracts that expire in a month. That has absolutely no value to someone like you, who will be investing for 50+ years.

5. No one wants to lose their "hard earned money" with a decline in their investment portfolio. That said, investing in assets that are not riskless will inevitably result in some losses. That will not change. Historically, investing in equities has resulted in positive returns after inflation. It is unlikely that will change over your investing lifetime.

6. I still think your best bet is to put all of your retirement assets into a target date fund for when you turn age 65 and then never look at it or change it. I would argue that is preferable even compared to VTSAX. It is good that you recognize what you might do in a market selloff, so you need to protect yourself from your worst impulses.

7. You did not respond to my earlier question about real estate, but if you are renting, then a down payment would be a good use of some of your cash. Buy a house or condo that you think you would be able to rent out if you were forced to move. It makes financial sense and emotionally it will give you a greater sense of security. At least that was my experience.



I did a backdoor roth because last year my W2 went way above the 131k limit with RSUs vesting, and i'd rather be safe than sorry with the "extra step" . I maxed this year's and last year's Roth and increased my 401k contributions to max it out as well (plus company matches 4%). I am currently renting but can't buy a house right now, that will happen after I get married in 2-3 years. My rent cost will be cut in half this year though when we live together.

I have moved most of my cash to vanguard prime money market and i'm looking to start the automatic fund contributions into VTSAX soon. Should I do a lump sum contribution of $11k on my Roth to get it over with? For the 401k i'm thinking about 30% lump sump then DCA with monthly contributions + remaining 70% until end of the year ?

tinvestor
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Re: 27, no investments, please help

Post by tinvestor » Sat Apr 01, 2017 12:22 pm

I put 100% of my roth (11k) into FSTVX on the 27th, glad i caught the bounce and 1%+ buffer already, sad I didn't do the same for the 401k and taxable account. I'm deciding to put the whole 401k (30k) into FSTVX soon, maybe half first and DCA the rest along with my "catch" up contributions to hit my 18k max this year. My biggest dilemma is with my Vanguard taxable account (200k in prime money market). I'm leaning towards 140k-150k into VTSAX (half first, then DCA the rest) and 50-60k into bonds.


The question about bonds in taxable account is what's my best option?

Not tax exempt:

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) 0.06% ER
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) 0.09% ER

Tax exempt:

Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) 0.06% ER, .25% purchase fee
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) %.09 ER, $50k min or it goes to .19%

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