First Ever Investment

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osullivanliamd
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First Ever Investment

Post by osullivanliamd »

Hi everybody!

I'm a big fan of the boglehead investing philosophy and decided that I would take advice on my first ever investment from the bogleheads themselves! I and 21 years old and have about $13K saved up from working this summer and intend to put $5K in a Roth IRA before the year runs out (so I can invest another $5K next year). However, I'm not entirely certain how I should invest my first $5K. I was putting serious thought into investing it entirely in VFINX, but then I would have 100% of my invested allocations in stocks. Then I began thinking that maybe I should invest in a target fund, such as VFFVX.

I'm way too young and new at this to really understand what I'm doing. Am I headed in the right direction? Which do you think I should put my hard-earned money into?

Reference:
- 21 years old
- Serious Relationship (5+ years)
- College Graduate with no loans
- Contemplating Law School in 2 years (plan on attending school on a scholarship)
- Willing to learn!

Sorry if these seems a little scatter-brained. I'm overwhelmed by the whole concept of personal investing. Thanks for all of your help!

Take care,
Liam
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Random Musings
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Re: First Ever Investment

Post by Random Musings »

The first ever "investment" should be in your emergency fund (if needed). Also, do you think that you will need any other cash for other, shorter-term horizon expenditures?

After that, a Roth is nice. For diversification purposes, I would utilize a Target Retirement fund that matches your need and willingness for risk (don't look at the date of the fund, but look at the equity/bond allocation).

RM
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tludwig23
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Re: First Ever Investment

Post by tludwig23 »

I agree with RM about the emergency fund.

Since you can contribute to your 2011 Roth until April 15, 2012, I'd wait until next year and put the whole $10K in at once and buy Vanguard Total Stock Market Admiral Shares. Then when you add $5K is 2013 you can buy Vanguard Total Bond Market. Voila. Diversified and with very low expenses.
xerty24
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Re: First Ever Investment

Post by xerty24 »

Are you working now, and if so, do you know your tax rate? I ask because if you're not going to work during law school, it would probably make sense to have a deductible/traditional IRA now instead of Roth. You could get the tax break now and convert it to Roth when you've got no income in law school (and pay no taxes that way).
No excuses, no regrets.
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rdmayo21
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Re: First Ever Investment

Post by rdmayo21 »

I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.

IMO maxing out a Roth for any given year should have priority over setting up a separate emergency fund, especially if you know you won't be able to do both in a given year. There are two scenarios: either you'll need the money for an emergency or you won't. If you do, you can withdraw your Roth contributions with no penalties, and since you were going to put that money in an emergency fund anyway, you won't feel bad for taking money out of the Roth. If you don't need it, you can keep the money in the Roth and allow it to grow.
spefactor
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Re: First Ever Investment

Post by spefactor »

rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.
I agree with others here that you should have significant savings in the way of an emergency fund before investing in stocks.

Edit: Removed capital gains comment
Last edited by spefactor on Thu Oct 20, 2011 3:13 pm, edited 2 times in total.
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interplanetjanet
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Re: First Ever Investment

Post by interplanetjanet »

rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.

IMO maxing out a Roth for any given year should have priority over setting up a separate emergency fund, especially if you know you won't be able to do both in a given year. There are two scenarios: either you'll need the money for an emergency or you won't. If you do, you can withdraw your Roth contributions with no penalties, and since you were going to put that money in an emergency fund anyway, you won't feel bad for taking money out of the Roth. If you don't need it, you can keep the money in the Roth and allow it to grow.
I agree with this, with the caveat that the money that represents the part of your EF that's in your Roth IRA should be in something reasonably stable. This doesn't have to be a money market but I don't think equities would be a good idea. Once you build up an EF in taxable, the Roth EF can be moved into your normal asset allocation.

A deductible TIRA may be a better choice, taxwise, for the OP - but if they don't have an adequate emergency fund I would suggest putting the money into a Roth IRA in something conservative until one can be built up.

-janet
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interplanetjanet
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Re: First Ever Investment

Post by interplanetjanet »

spefactor wrote:
rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.
I think the problem with this strategy is that he would incur capital gains when he wants to switch to the underlying funds.
The OP is talking about investments within a Roth IRA, so there should be no capital gain issues (CG tax is effectively 0% in IRAs).

-janet
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rdmayo21
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Re: First Ever Investment

Post by rdmayo21 »

interplanetjanet wrote:
rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.

IMO maxing out a Roth for any given year should have priority over setting up a separate emergency fund, especially if you know you won't be able to do both in a given year. There are two scenarios: either you'll need the money for an emergency or you won't. If you do, you can withdraw your Roth contributions with no penalties, and since you were going to put that money in an emergency fund anyway, you won't feel bad for taking money out of the Roth. If you don't need it, you can keep the money in the Roth and allow it to grow.
I agree with this, with the caveat that the money that represents the part of your EF that's in your Roth IRA should be in something reasonably stable. This doesn't have to be a money market but I don't think equities would be a good idea. Once you build up an EF in taxable, the Roth EF can be moved into your normal asset allocation.

A deductible TIRA may be a better choice, taxwise, for the OP - but if they don't have an adequate emergency fund I would suggest putting the money into a Roth IRA in something conservative until one can be built up.

-janet
I agree about being conservative in the IRA in the being, if no other EF exists. Actually, it could probably just be kept that way for good with this strategy: http://www.bogleheads.org/wiki/Placing_ ... ed_Account
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grap0013
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Re: First Ever Investment

Post by grap0013 »

I'm about as aggressive with investing as you can get without using leverage and even I don't think you should be messing around with this stuff yet. Focus on your career/income then investing. Human capital is huge. Don't bank on that scholarship to law school and save your money in something safe for college. You'll need it.
There are no guarantees, only probabilities.
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Re: First Ever Investment

Post by abuss368 »

* Consider establishing a separate emergency fund in a liquid savings account.

* Then consider an IRA (Roth, Traditional, or both) and taxable account.
John C. Bogle: “Simplicity is the master key to financial success."
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

I just checked in on my phone, so I can't respond to each comment yet. However, I did want to say thanks! And I wanted to clear up that I will have $8k already allocated in an Ally Savings Account (~0.91% interest) that I planned on having as an emergency fund.
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Toons
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Re: First Ever Investment

Post by Toons »

I also like the idea of Target Fund ( VFFVX).Keep investing in it every year,let the fund do the automatic rebalancing for you . :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

Random Musings wrote:The first ever "investment" should be in your emergency fund (if needed). Also, do you think that you will need any other cash for other, shorter-term horizon expenditures?

After that, a Roth is nice. For diversification purposes, I would utilize a Target Retirement fund that matches your need and willingness for risk (don't look at the date of the fund, but look at the equity/bond allocation).

RM
The only shorter-term horizon expenditure I could possibly see is a house, but that won't be for at least another 6 years. One big question I have about the Target Retirement funds is whether or not I can keep my money in the fund after the target date has passed. For example, if I invest in the Target Retirement 2055 Fund, can I keep my money in that fund (continuing to grow) until 2065?
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

tludwig23 wrote:I agree with RM about the emergency fund.

Since you can contribute to your 2011 Roth until April 15, 2012, I'd wait until next year and put the whole $10K in at once and buy Vanguard Total Stock Market Admiral Shares. Then when you add $5K is 2013 you can buy Vanguard Total Bond Market. Voila. Diversified and with very low expenses.
I already have an emergency fund that I'm comfortable with ($8K in savings).

I can't invest in Admiral Shares because I won't be putting at least $100K, I thought. And why would I wait until next year when I could begin seeing growth on my first $5K from the last couple months of 2011?
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

xerty24 wrote:Are you working now, and if so, do you know your tax rate? I ask because if you're not going to work during law school, it would probably make sense to have a deductible/traditional IRA now instead of Roth. You could get the tax break now and convert it to Roth when you've got no income in law school (and pay no taxes that way).
I am paying 15% federal taxes. And I wouldn't necessarily know how to maneuver my money properly haha. If one could do that, couldn't one just invest everything in a Traditional IRA tax free for the first 44 years and then swap it all over to a Roth IRA for the 45th year and take it all out tax free?
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.

IMO maxing out a Roth for any given year should have priority over setting up a separate emergency fund, especially if you know you won't be able to do both in a given year. There are two scenarios: either you'll need the money for an emergency or you won't. If you do, you can withdraw your Roth contributions with no penalties, and since you were going to put that money in an emergency fund anyway, you won't feel bad for taking money out of the Roth. If you don't need it, you can keep the money in the Roth and allow it to grow.
So if I put $5K in the Target Retirement 2055 Fund for the next ten years, I could potentially swap all of the funds in my eleventh year into three separate Indices (American Stock, International Stock, Bond)? If that's the case, that seems like the safest and potentially best route to go for me. Also, once I have $100K invested in total, I can swap it all over from something like a Target Retirement Fund into a Target Retirement Fund Admiral Class for related fee?
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

interplanetjanet wrote:
rdmayo21 wrote:I like the idea of the target fund for starting out. It's good to have diversification from the beginning. Once you have enough invested, you can exchange it for its underlying funds and then eventually convert to admiral class.

IMO maxing out a Roth for any given year should have priority over setting up a separate emergency fund, especially if you know you won't be able to do both in a given year. There are two scenarios: either you'll need the money for an emergency or you won't. If you do, you can withdraw your Roth contributions with no penalties, and since you were going to put that money in an emergency fund anyway, you won't feel bad for taking money out of the Roth. If you don't need it, you can keep the money in the Roth and allow it to grow.
I agree with this, with the caveat that the money that represents the part of your EF that's in your Roth IRA should be in something reasonably stable. This doesn't have to be a money market but I don't think equities would be a good idea. Once you build up an EF in taxable, the Roth EF can be moved into your normal asset allocation.

A deductible TIRA may be a better choice, taxwise, for the OP - but if they don't have an adequate emergency fund I would suggest putting the money into a Roth IRA in something conservative until one can be built up.

-janet
I have an adequate emergency fund for right now in a savings account (~$8K). Why would a Traditional IRA be a better choice than a Roth IRA? I figure that when I'm finally pulling my money out, I will likely be in a higher tax bracket than 15%.
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Re: First Ever Investment

Post by tludwig23 »

osullivanliamd wrote:
xerty24 wrote:Are you working now, and if so, do you know your tax rate? I ask because if you're not going to work during law school, it would probably make sense to have a deductible/traditional IRA now instead of Roth. You could get the tax break now and convert it to Roth when you've got no income in law school (and pay no taxes that way).
I am paying 15% federal taxes. And I wouldn't necessarily know how to maneuver my money properly haha. If one could do that, couldn't one just invest everything in a Traditional IRA tax free for the first 44 years and then swap it all over to a Roth IRA for the 45th year and take it all out tax free?
re: Admiral Shares... Now $10K minimum for most of the equity index funds. You could certainly put $5K in Vanguard TSM Investor shares now, add $5K next year, then convert it to Admiral shares. Even on the investor shares the expenses are pretty low.

re: Trad-> Roth timing: The conversion is taxed in the year you convert it. So, if you convert, say $24K while in law school ($20K principal + $4K growth), you'll have $24K of income that year. But if you have no other taxable income, your overall tax rate will be very low. (May affect financial aid, if relevant to your situation). If you did this for 44 years, you'd have a huge income upon conversion in year 45, and thus be in a high tax bracket. Plus the option might not even exist by then.
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

grap0013 wrote:I'm about as aggressive with investing as you can get without using leverage and even I don't think you should be messing around with this stuff yet. Focus on your career/income then investing. Human capital is huge. Don't bank on that scholarship to law school and save your money in something safe for college. You'll need it.
Law school is going to be funded by work; it was actually in my contract. Thanks, though!
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

abuss368 wrote:* Consider establishing a separate emergency fund in a liquid savings account.

* Then consider an IRA (Roth, Traditional, or both) and taxable account.
Step 1: Done!
Step 2: Working on that right now! Trying to figure out the right investment for my Roth IRA!
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

tludwig23 wrote:
osullivanliamd wrote:
xerty24 wrote:Are you working now, and if so, do you know your tax rate? I ask because if you're not going to work during law school, it would probably make sense to have a deductible/traditional IRA now instead of Roth. You could get the tax break now and convert it to Roth when you've got no income in law school (and pay no taxes that way).
I am paying 15% federal taxes. And I wouldn't necessarily know how to maneuver my money properly haha. If one could do that, couldn't one just invest everything in a Traditional IRA tax free for the first 44 years and then swap it all over to a Roth IRA for the 45th year and take it all out tax free?
re: Admiral Shares... Now $10K minimum for most of the equity index funds. You could certainly put $5K in Vanguard TSM Investor shares now, add $5K next year, then convert it to Admiral shares. Even on the investor shares the expenses are pretty low.

re: Trad-> Roth timing: The conversion is taxed in the year you convert it. So, if you convert, say $24K while in law school ($20K principal + $4K growth), you'll have $24K of income that year. But if you have no other taxable income, your overall tax rate will be very low. (May affect financial aid, if relevant to your situation). If you did this for 44 years, you'd have a huge income upon conversion in year 45, and thus be in a high tax bracket. Plus the option might not even exist by then.
I finally understand the Admiral Shares portion! Wow, I must need glasses! Would it cost me any money to swap over my shares from Investor to Admiral once I get the $10K in next year?

And OK, now I understand what you are talking about. That doesn't seem like a bad idea at all. I'll have to give that some thought.
Breezy
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Re: First Ever Investment

Post by Breezy »

Just wanted to say YAY for you! I love reading posts by smart, young, responsible people.
Topic Author
osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

For all those keeping score at home, I think I'm going to sleep on committing $5K into a Roth IRA with VTSMX, then invest another $5K into the VTSMX through my Roth IRA next year and swap the shares over into VTSAX. I came to the conclusion that it's really a buyer's market and I can always invest $3K in VBMFX in 2013, while investing the remaining $2K in VTSAX, thus giving me a portfolio consisting of entirely Total Market Index Funds at a 80/20 Stock/Bond allocation.

Thank you everyone for all your help and please don't hesitate to verbally smack me on the nose with a rolled up newspaper and tell me all of the wrong decisions I just made!
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

Breezy wrote:Just wanted to say YAY for you! I love reading posts by smart, young, responsible people.
Thank you! You Bogleheads really are making this a whole lot easier than it probably should be! Whenever I go for a run or am walking a reasonable distance, I just pop in my headphones and listen to The Little Book on Common Sense Investing. Once I finish a chapter, I come running to this forum and start researching things I've never even thought about before!
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rdmayo21
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Re: First Ever Investment

Post by rdmayo21 »

osullivanliamd wrote:For all those keeping score at home, I think I'm going to sleep on committing $5K into a Roth IRA with VTSMX, then invest another $5K into the VTSMX through my Roth IRA next year and swap the shares over into VTSAX. I came to the conclusion that it's really a buyer's market and I can always invest $3K in VBMFX in 2013, while investing the remaining $2K in VTSAX, thus giving me a portfolio consisting of entirely Total Market Index Funds at a 80/20 Stock/Bond allocation.

Thank you everyone for all your help and please don't hesitate to verbally smack me on the nose with a rolled up newspaper and tell me all of the wrong decisions I just made!
Although I like where your head's at, wanting to have the lowest cost funds possible, I think you need to be focusing more on asset allocation when first starting out. Why take unnecessary risk with 100% in equities for just a slight decrease in expense ratio? I think you would be better off gradually going into admiral shares, there's no rush ;)
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interplanetjanet
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Re: First Ever Investment

Post by interplanetjanet »

osullivanliamd wrote:I have an adequate emergency fund for right now in a savings account (~$8K). Why would a Traditional IRA be a better choice than a Roth IRA? I figure that when I'm finally pulling my money out, I will likely be in a higher tax bracket than 15%.
You hadn't mentioned your marginal tax rate at the time I made my comment. Does that include state as well?

At 15%, with an expected high earning career in front of you, Roth is likely the way to go. Even if it ends up not being optimal it won't be by much.

-janet
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interplanetjanet
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Re: First Ever Investment

Post by interplanetjanet »

interplanetjanet wrote:
osullivanliamd wrote:I have an adequate emergency fund for right now in a savings account (~$8K). Why would a Traditional IRA be a better choice than a Roth IRA? I figure that when I'm finally pulling my money out, I will likely be in a higher tax bracket than 15%.
You hadn't mentioned your marginal tax rate at the time I made my comment. Does that include state as well?

At 15%, with an expected high earning career in front of you, Roth is likely the way to go. Even if it ends up not being optimal it won't be by much.

In a nutshell, Roth is better if you expect your tax rate for withdrawals to be higher than your tax rate for contributions, and Traditional is better if you expect otherwise. Predicting distant tax rates is difficult but it seems likely the system will remain progressive.

-janet
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osullivanliamd
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Re: First Ever Investment

Post by osullivanliamd »

interplanetjanet wrote: You hadn't mentioned your marginal tax rate at the time I made my comment. Does that include state as well?

At 15%, with an expected high earning career in front of you, Roth is likely the way to go. Even if it ends up not being optimal it won't be by much.

In a nutshell, Roth is better if you expect your tax rate for withdrawals to be higher than your tax rate for contributions, and Traditional is better if you expect otherwise. Predicting distant tax rates is difficult but it seems likely the system will remain progressive.

-janet
Well I worked in Texas, so I don't have any State Taxes :D Thanks for the input, thanks!
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Re: First Ever Investment

Post by pkcrafter »

Long thread for what seems to be a rather simple question. I'm going to have to go with those suggesting a TR fund or Lifestrategy fund. These funds offer TSM plus international and bonds, so you automatically get broader diversification. And I'd also suggest a maximum asset allocation of 80% stocks. Keep emergency funds in low risk areas and mentally separate them from long term investments.

And here's your best tip--read the Investors Start-Up Kit and read one of the four suggested starter books. Link at bottom of main page.

http://www.bogleheads.org/wiki/Boglehea ... art-up_kit

Paul
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Re: First Ever Investment

Post by Default User BR »

osullivanliamd wrote:I finally understand the Admiral Shares portion! Wow, I must need glasses! Would it cost me any money to swap over my shares from Investor to Admiral once I get the $10K in next year
No. In fact, eventually Vanguard will do it for you. Many people request it as soon as they qualify.



Brian
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BL
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Re: First Ever Investment

Post by BL »

I am not sure if you know that you don't have to go through a broker; just call Vanguard directly, and they will give you the necessary directions.
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