How to asset allocate when you have very little money?

[jlmitnick]

Two questions: (background: 26 yrs old, no debt except condo)

1) If you only had $3000, what is the best way to allocate that? I've been reading a lot on Bogleheads, and I just finished Four Pillars of Investing by William Berstein, and it seems to me like I'd want at least 4-6 different asset classes. But with such a low amount of money, simply buying 4-6 funds or ETFs, and rebalancing once per year would take up a huge portion of my money. I intend to max out my Roth each year going forward ($5000), but still it seems like I shouldn't get fancy with asset allocation yet. Should I just do 80% Total Stock Market and 20% Total Bond Market and be done with it?

2) The $3000 is in an Etrade Roth IRA account. So I can just buy VTI, and BND ETFs and be done with it.

Ideally I'd like to automate my investing and dollar cost average next year however - something like $95 a month (so I max out the Roth each year). While Etrade has some no load, no transaction fee funds that I'd be able to buy into each month for no cost, none of them are to my liking. I'd like to open a Vanguard account most likely. Should I leave the $3000 in Etrade (buy some ETFs) and open another Roth with Vanguard next year? Can I even do that, or do I have to close out my other Roth? Does it even matter?

Thanks!

[BL]

One simple way to start might be to find a Vanguard Target Retirement Fund that suits your asset allocation. It is simple, inexpensive, and includes a nice variety of index funds. The most important thing is to just get started!

[Jay]

I would advise against opening many funds until you have more assets. It just doesn't make sense at this point.

I believe four pillars addresses this by having some really scaled back simple portfolios for some of the 'just starting out' example scenarios.

If you can find a fund-of-funds that matches what you want your AA to be, such as one of the target retirement funds or the life strategy funds (although I don't like these for their use of timing) that might be a good way to go.

The STAR fund might be another good place to start out, I believe it's approximately a 60/40 split.

If none of those appeal to you, I don't think it would be the end of the world to invest 100% in total stock until such time as your assets are large enough that the amount you want to invest in total bond makes sense for the added headache it will add (annual fees, fund minimums, etc).

I'm not implying that AA isn't important, but you have time to get it right. In these early years, the contributions themselves are much more important than the exact AA you wind up with.

[Opponent Process]

I would move the money to a Vanguard TR fund and set up an automatic investment schedule. since you're not actively trading and don't have a lot of money, ETFs are not very useful here.

[G-Money]

Two questions: (background: 26 yrs old, no debt except condo)

1) If you only had $3000, what is the best way to allocate that? I've been reading a lot on Bogleheads, and I just finished Four Pillars of Investing by William Berstein, and it seems to me like I'd want at least 4-6 different asset classes. But with such a low amount of money, simply buying 4-6 funds or ETFs, and rebalancing once per year would take up a huge portion of my money. I intend to max out my Roth each year going forward ($5000), but still it seems like I shouldn't get fancy with asset allocation yet. Should I just do 80% Total Stock Market and 20% Total Bond Market and be done with it?

2) The $3000 is in an Etrade Roth IRA account. So I can just buy VTI, and BND ETFs and be done with it.

Ideally I'd like to automate my investing and dollar cost average next year however - something like $95 a month (so I max out the Roth each year). While Etrade has some no load, no transaction fee funds that I'd be able to buy into each month for no cost, none of them are to my liking. I'd like to open a Vanguard account most likely. Should I leave the $3000 in Etrade (buy some ETFs) and open another Roth with Vanguard next year? Can I even do that, or do I have to close out my other Roth? Does it even matter?

Thanks!

Bernstein sets out a recommendation for investors who are just starting out and don't have a lot of money to invest. See "Young Yvonne" starting on page 271 (from Google Books). There's a nifty chart on page 275.

You don't need to move your Etrade money to Vanguard, but it will be easier for record-keeping and fund minimum requirements to keep everything at one place.

BTW, I believe you meant you'd be contributing $95 per week ($95 x 52 = $4,940), not per month ($95 x 12 = $1,140). Assuming you're elibible to make the full contribution, you can put $5,000 in a Roth each year.

[InvestingMom]

I would move over to Vanguard (or one place to your liking...doesn't have to be vanguard although i am partial to them.) Call them up and ask about transfering. It will be easier in the long run if you set up everything in one place.

I think your plan of 80% total stock market and 20% total bond fund is perfect, (although I agree with G-money that it is worth checking out Bernstein's recommendation.)

[Alto Astral]

I agree with G-Money to keep things at one place. At this point TR funds are the best way to go about AA.

[jlmitnick]

Bernstein sets out a recommendation for investors who are just starting out and don't have a lot of money to invest. See "Young Yvonne" starting on page 271. There's a nifty chart on page 275.

You don't need to move your Etrade money to Vanguard, but it will be easier for record-keeping and fund minimum requirements to keep everything at one place.

BTW, I believe you meant you'd be contributing $95 per week ($95 x 52 = $4,940), not per month ($95 x 12 = $1,140). Assuming you're elibible to make the full contribution, you can put $5,000 in a Roth each year.

Haha, yes I meant per week.

And yes, thanks for the advice everyone. I think I'll just move everything over to Vanguard and do Target Retirement, and set up auto payments.

I'll probably wind up with more money over the long term if I spend my time focusing on how to advance in my career than on the minutia of AA when I'm just starting out.

This stuff is just so interesting though! It's too bad that the result of reading Bogleheads and similar books is that we're supposed to just passively index and that we can't beat the market. Strangely, I wish the key to investing were actually more complicated than it is!

[Taylor Larimore]

Hi Jim:

I think I'll just move everything over to Vanguard and do Target Retirement, and set up auto payments.

A good decision.

Strangely, I wish the key to investing were actually more complicated than it is!

Most of us have an innate desire to complicate things. Merchandisers use this trait to sell us more goods. Its also a technique used by the Wall Street marketing machine to make us think we can't possibly manage our own investments.

[LRonHalfelven]

Just checking: is this $3000 over and above the amount you have in your emergency fund?

[InvestingMom]

Bernstein sets out a recommendation for investors who are just starting out and don't have a lot of money to invest. See "Young Yvonne" starting on page 271. There's a nifty chart on page 275.

You don't need to move your Etrade money to Vanguard, but it will be easier for record-keeping and fund minimum requirements to keep everything at one place.

BTW, I believe you meant you'd be contributing $95 per week ($95 x 52 = $4,940), not per month ($95 x 12 = $1,140). Assuming you're elibible to make the full contribution, you can put $5,000 in a Roth each year.

Haha, yes I meant per week.

And yes, thanks for the advice everyone. I think I'll just move everything over to Vanguard and do Target Retirement, and set up auto payments.

I'll probably wind up with more money over the long term if I spend my time focusing on how to advance in my career than on the minutia of AA when I'm just starting out.

This stuff is just so interesting though! It's too bad that the result of reading Bogleheads and similar books is that we're supposed to just passively index and that we can't beat the market. Strangely, I wish the key to investing were actually more complicated than it is!

That is funny. Your comment about wanting it to be more complicated than it is really cracks me up. Its true. Getting to the conclusion that it really is simple takes some time and effort and it is ironic that the final conclusion is that it is really simple. I think this is why bogleheads aggregate on this website so much....we have spent so much time learning about it all and we end up with nothing to do after we figure it out....except spread the work.

I think your conclusion about spending more time on your career is very wise. The other somewhat key information we learn as bogleheads is that saving is the key element towards building the nest egg.

[caklim00]

If all I had was $3000 to invest I would spread it between US SCV (VBR) and International SCV (DLS/DGS).

[YDNAL]

Two questions: (background: 26 yrs old, no debt except condo)

I'll probably wind up with more money over the long term if I spend my time focusing on how to advance in my career than on the minutia of AA when I'm just starting out.

jl,

Very sharp 26yo... no debt, ignoring minutiae, and concentrating on the career!

[paulsiu]

I think when you have very little money, diversification is less of an issue. Suppose you contribute $3K and then suffer a horrible 50% loss, your next year contribution of $3K will essentially make it whole. When you have a million dollars, then it's pretty hard to replace the loss and AA becomes more important.

I tend to start out with the most volatile assets first. It's stocks for the long term. Bonds tend to get added last.

[Taylor Larimore]

If all I had was $3000 to invest I would spread it between US SCV (VBR) and International SCV (DLS/DGS).

According to Morningstar, SCV (Small-Cap Value) is about 3% in one corner of the total stock market. You would be making a HUGE bet on one investment style.

Vanguard's Target Retirement Funds were designed by Vanguard experts. These funds are very diversified with thousands of securities in all cap-size and styles so whatever happens you will never have everything in a losing asset-class.

In my opinion, a suitable Target Fund is a far better choice than holding everything in one small asset class.

[GammaPoint]

Keeping it in a Target Retirement fund is probably a good place to start. In 2 years or so you'll be able to open up a number of funds and allocate among them as you like. I'm in a similar situation in that I'm new to investing and can't open up all the funds that I want right away. However, I have 1 year more of ROTH contributions to play with plus my fiancee's ROTH so I'm getting closer to being able to do it. After this upcoming year's contribution I'll be able to have a balanced portfolio of 8 funds. But my international allocation is currently only one fund, and will remain that way until I have enough assets to do something differently (allocate among the different regions individually, or add small cap international to the mix).

With the amount of money we're investing it's more important to keep contributing as much as we can than the slight benefit we may get from having more funds with which to rebalance with. But all the knowledge you've gained from reading will come in very handy a couple years from now when you can really implement whatever asset allocation you want (and I guess even more later when your portfolio size is huge compared to your yearly contributions).

[retiredjg]

I agree that using a TR fund is a good idea - US Stocks, International Stocks including emerging markets, and bonds - all in one nice package and one low cost.

ETFs are not appropriate for regular investing (weekly, monthly) unless you get free trades. I don't know how to get free trades if you have little money.

TR 2025 and TR 2030 are the ones that are near 80% stock and 20% bonds.

VG says that you can invest a minimum of $100 (after your initial $3k) and you plan to do $95. Not sure if there is a work-around (other than doing it every 2 weeks) or if they will just accept the $95 and not say anything.

As already asked, you do have an emergency fund, right?

[dkdoy]

Just starting out I would go with the TR fund

[jlmitnick]

To answer the emergency fund questions, the answer is, yes, I have a couple thousand in a checking account, from which I pay my bills.

As to switching to Vanguard, will it be totally free? If I put in $3000, and set up biweekly contributions of >$100 to the TR fund, will I ever pay any fees or transactions costs or anything?

[BL]

Yes, it is totally free from Vanguard. They take it out of my checking account and it is purchased the next business day. You need to add at least $100 at a time but you chose how often (automatic or not).

If the $3000 is too large a chunk for you to start, Vanguard Star (60/40) is maybe the only one that requires only $1000 to start. It is also a very good fund, but not as high in equities as some of the Target Rs and it is not made up of index funds.

[stan1]

As to switching to Vanguard, will it be totally free? If I put in $3000, and set up biweekly contributions of >$100 to the TR fund, will I ever pay any fees or transactions costs or anything?

From the Vanguard website:

Vanguard charges a $20 annual account service fee for each Vanguard fund with a balance of less than $10,000 in an account. This fee does not apply if you sign up for account access on Vanguard.com and choose electronic delivery of statements, confirmations, fund reports, and prospectuses.

So you just need to sign up for web access and choose electronic delivery to avoid an annual account service fee.

[retiredjg]

To answer the emergency fund questions, the answer is, yes, I have a couple thousand in a checking account, from which I pay my bills.

Don't want to discourage a new investor, but I'm not sure this counts as an emergency fund. It should be, at a minimum, 3 months of expenses.
6 months would be much better, but it depends on the type of job you have.

As to switching to Vanguard, will it be totally free? If I put in $3000, and set up biweekly contributions of >$100 to the TR fund, will I ever pay any fees or transactions costs or anything?

If you sign up for electronic prospectus retrieval and electronic statements, there are no fees for most funds. (A few funds have a small fee that goes into the fund. It is not a commission and it benefits all fund owners. The TR funds do not have such a fee.)

One thing you could do is invest that $3k in a Roth IRA and put it in money market rather than the TR fund. This is a way to use your Roth IRA as your emergency fund. If you don't take out anything for an emergency, when your real emergency fund is large enough, you exchange the money market for the TR fund of your choice and it goes back to being a regular Roth IRA. Do not do this unless you have the discipline not to raid the Roth IRA for something less than a real emergency.

[DiscoBunny1979]

VG says that you can invest a minimum of $100 (after your initial $3k) and you plan to do $95. Not sure if there is a work-around (other than doing it every 2 weeks) or if they will just accept the $95 and not say anything.

As long as someone makes an auto plan election to contribute on an auto pay plan through an automatic stretch plan whereas weekly payments are stretched throughout the year in the amounts of $96.35 for the first week and $96.15 for the next 51 weeks for a total of $5,000 then there is no problem for the ROTH contribution for a "stretch" payment plan and the $100 minimum is not required.

By the the way, if Vanguard are such "experts" in creating the Retirement accounts, then they are just as such "experts" in creating the STAR Fund. I would definately consider putting funds into STAR until monies there were at least 30-50K.

[White Coat Investor]

Two questions: (background: 26 yrs old, no debt except condo)

1) If you only had $3000, what is the best way to allocate that? I've been reading a lot on Bogleheads, and I just finished Four Pillars of Investing by William Berstein, and it seems to me like I'd want at least 4-6 different asset classes. But with such a low amount of money, simply buying 4-6 funds or ETFs, and rebalancing once per year would take up a huge portion of my money. I intend to max out my Roth each year going forward ($5000), but still it seems like I shouldn't get fancy with asset allocation yet. Should I just do 80% Total Stock Market and 20% Total Bond Market and be done with it?

2) The $3000 is in an Etrade Roth IRA account. So I can just buy VTI, and BND ETFs and be done with it.

Ideally I'd like to automate my investing and dollar cost average next year however - something like $95 a month (so I max out the Roth each year). While Etrade has some no load, no transaction fee funds that I'd be able to buy into each month for no cost, none of them are to my liking. I'd like to open a Vanguard account most likely. Should I leave the $3000 in Etrade (buy some ETFs) and open another Roth with Vanguard next year? Can I even do that, or do I have to close out my other Roth? Does it even matter?

Thanks!

It doesn't matter. Hope some of this helps. I wrote it a while back so I could just post the links when it seemed appropriate. It seems appropriate in response to your question.

http://www.bogleheads.org/forum/viewtop ... highlight=

http://www.bogleheads.org/forum/viewtopic.php?p=84934

[retiredjg]

As long as someone makes an auto plan election to contribute on an auto pay plan through an automatic stretch plan whereas weekly payments are stretched throughout the year in the amounts of $96.35 for the first week and $96.15 for the next 51 weeks for a total of $5,000 then there is no problem for the ROTH contribution for a "stretch" payment plan and the $100 minimum is not required.

Well, that's good to know. Can you do that when you first open the account, or only after the first $3k investment? I tried to look it up, but did not find anything.