New Investor! 15k to invest!

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MrTimmerman
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Joined: Fri Oct 10, 2008 12:34 pm

New Investor! 15k to invest!

Post by MrTimmerman » Fri Oct 10, 2008 12:40 pm

Hey everyone,

I've been browsing the forums for the past couple of days, and haven't really found what I'm looking for, and I hope you all can help.

I'm a 4th year in college, going through the NROTC program. USAA has a neat starting loan for Naval Officers that is $25,000 with a 2% interest rate (now it's at 3). I got this about 8 months ago, and have used about a third of it on a trip to Africa while I still could travel ;).

My question is, what would you all do with ~15k if you were in my position? I'll let you know that I will be paid pretty well right out of college, so I doubt I will have to touch it for some time.

Thanks for the help, and if this is too rudimentary of a post, could you lead me towards some good reading on the subject? I've been going through Amazon, and there are way too many to choose from.

-Matt

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Ted Valentine
Posts: 1559
Joined: Tue Jul 10, 2007 10:28 am
Location: Music City USA

Post by Ted Valentine » Fri Oct 10, 2008 1:52 pm

Welcome Matt!

I would use the money as follows:

1) Pay off any debt at high interest rates like credit cards or cars.
2) Establish an emergency/cash fund of 6 months living expenses in a money market account.
3) Fund a Roth IRA, assuming you have income. A good place to start is either one of the Vanguard target date retirement funds or the STAR fund, depending on how much risk you want to take.
4) Save for a house down payment. Look at a CD ladder if you're less than 10 years from purchasing.

Reading advice (pro tip: check your local library):
Boglehead's Guide (Larimore et al)
Random Walk Guide to Investing (Malkiel)
The Little Book or Common Sense Investing (Bogle)
Coffehouse Investor (Schultheis)
The only Investment Guide You'll Ever Need (Tobias)
The Only Guide to a Winning Investment Strategy You'll Ever Need (Swedroe).

Good luck!
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.

MrTimmerman
Posts: 3
Joined: Fri Oct 10, 2008 12:34 pm

Post by MrTimmerman » Fri Oct 10, 2008 2:16 pm

Ok, a few more follow-up questions.

1) Are student loans something I should pay off with the low interest loan, or should I wait until I get a steady paycheck (8 months) and pay them off then?

2) For the Roth IRA, is there a min/max investment? I guess it would depend on which I pick. I've heard the yonger you are, the riskier you should invest, is that true?

3) For the house down-payment, what do you think is the time period that it would take to save for that kind of payment? Assuming I save 5-10k a year (Ill be a bachelor, and the Navy has a housing allowance)

I will probably grab a bunch of those books from Amazon (they're cheap).

jhd
Posts: 99
Joined: Fri Jan 18, 2008 6:18 pm
Location: San Francisco, CA

Post by jhd » Fri Oct 10, 2008 3:28 pm

MrTimmerman wrote: 1) Are student loans something I should pay off with the low interest loan, or should I wait until I get a steady paycheck (8 months) and pay them off then?
I think a 6-month emergency fund should take priority over paying off a low interest student loan. I'd also fund the Roth before paying down the loan. What is the interest rate?
MrTimmerman wrote: 2) For the Roth IRA, is there a min/max investment? I guess it would depend on which I pick. I've heard the yonger you are, the riskier you should invest, is that true?
There is no minimum, though Vanguard has a $3K minimum to get into most of its funds. If you only want to buy $1K-$2K, you could pick up an ETF at a discount broker. Not sure what the max is right now - probably $5K/year or so.

If you're young and invested for the long run, your first investment after emergency funds should be a total stock market index. I'd go with VTWSX if it were me.
MrTimmerman wrote: 3) For the house down-payment, what do you think is the time period that it would take to save for that kind of payment? Assuming I save 5-10k a year (Ill be a bachelor, and the Navy has a housing allowance)
A 20% down payment is a good goal, though you can do less. So figure out when you want to buy a house and how much house your want.

MrTimmerman
Posts: 3
Joined: Fri Oct 10, 2008 12:34 pm

Post by MrTimmerman » Fri Oct 10, 2008 4:09 pm

Perfect!

My next questions:

1) What is the best way to invest in the total market stock index? I guess I don't know the term for it. I have accounts with Wells Fargo (Student Acct), USAA (loan acct), and E*Trade (just for research).

2) This is probably the question everyone is asking, but when is the best time to invest the 3-5k after the 6mo emergency fund?

As far as I can see it (and I have very very limited investing exp), you should invest RIGHT before the stocks begin to rise in price, so you get the most efficient buy/sell ration, is that correct?

Does it really matter if I did it now, and it came back up in 6 weeks, compared to doing it in a week, and it rising back up in 5 weeks?

Thanks again!

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Ted Valentine
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Location: Music City USA

Post by Ted Valentine » Fri Oct 10, 2008 5:00 pm

MrTimmerman wrote: 1) What is the best way to invest in the total market stock index? I guess I don't know the term for it. I have accounts with Wells Fargo (Student Acct), USAA (loan acct), and E*Trade (just for research).
I would invest in no load, no fee mutual funds directly with the company. If I were purchasing VTWSX, which is another good choice, you could do it here: https://personal.vanguard.com/us/JSP/Fu ... ist::tab=0

Realize that you're 100% stock with this fund, allocated to the total world market index. If you plan to buy and hold until you retire, you should do as well as the world does.
2) This is probably the question everyone is asking, but when is the best time to invest the 3-5k after the 6mo emergency fund?

As far as I can see it (and I have very very limited investing exp), you should invest RIGHT before the stocks begin to rise in price, so you get the most efficient buy/sell ration, is that correct?

Does it really matter if I did it now, and it came back up in 6 weeks, compared to doing it in a week, and it rising back up in 5 weeks?
Nobody can time the market. In fact John Bogle says not only does he not know anyone that can time the market, he doesn't know anyone that knows someone that can. Right time/wrong time, who knows? The market may turn around tomorrow and never look back. It may go down another 50% from where it is now. When you read more, you will learn about the risk and reward of the market.

I would advise you to go ahead and fund your Roth with $5,000 in a money market fund if you're unsure. Then after you've educated yourself on what you're buying and why you're buying it (hint: don't buy for past performance), pick the fund that fits your asset allocation plan.

I will leave you with this bit of information on market timing, and this is very relevant given that you're just starting out:
Larry Swedroe wrote in his book, The Only Guide to a Winning Investment Strategy:
If you had invested the same amount on January 1 of every year for 30 years beginning in 1965, your return would have been 11 percent per annum. If you had been unlucky enough to have invested the same dollar amount each year on the day that the S&P 500 Index hit its peak for that year, your return would still have been 10.6 percent per annum. That is less than a 0.5 percent per annum difference in returns. And no one is that unlucky. If, on the other hand, you were lucky enough to have chosen the market's low for the year, each year, then your return would have only increased to 11.7 percent per annum. That is an incremental return of just over 0.5 percent per annum. And no one is that lucky. If that does not qualify as much ado about nothing, I do not know what would.
Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.

skye
Posts: 14
Joined: Tue Jul 29, 2008 8:31 pm

Post by skye » Fri Oct 10, 2008 7:11 pm

MrTimmerman,
Welcome to the forum! First, I must confess that I'm new to investing myself and have little advice to offer, since I'm still learning. However, I am an Air Force officer and one of my financial regrets is not investing during my first year, and every year, in the military. I have a close friend who took your path - he took a very low interest loan after commissioning and invested it in an IRA. I took the same low interest loan and paid off credit card bills/school loans. The school loans should've waited since they were already low interest. My husband and I are both military and never have debt - we pay off cars, we pay credit cards every month, etc. The only debt we ever carry is for a home (sometimes a couple since we enjoy investing in real estate). However, in hindsight, I wish I had started investing immediately out of college as my friend did to: 1) Make investing a habit and 2) Gain all the compound interest and gains that would've occurred over the past 12 years. Instead, we paid off all debt and then started hoarding money in a savings account. While we're still living comfortably with money in the bank, we'll never know the gains we could've earned had we invested in the beginning and made it a habit. Bottomline: Take the money and invest in an IRA - I'm confident you will not regret that decision. On a side note, recommend buying a house everywhere you go - as long as the military will provide a housing allowance, you might as well use that to build equity in a home and keep the profit when you sell. (This has worked for me for 12 years, of course now we're in unchartered territory with the housing market but I still plan to buy at my next assignment).
Good Luck, God Bless and thanks for serving our great nation.
Skye[/b]

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