Beginning investor - guidance requested

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sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Beginning investor - guidance requested

Post by sman09 » Tue Jun 05, 2018 2:06 am

Dear BH members

First, thanks a lot for all the help i have received so far on this forum! i greatly appreciate the generosity of the members in terms of offering their time and expertise - i hope to pass on the benefit i am receiving to others who may need them.

I'm trying to get my finances in order to ensure a secure future for our family. Due to lack of knowledge of investing and belief that investing is risky, i have all my savings (non-401k) in bank.

Only recently have i begun to read up (many thanks to BH Wiki and the excellent discussions here) extensively about investing and invested some money in Betterment and Wealthfront just to get started even as i continue to learn and educate myself. I would appreciate your help with the following queries to aid my understanding.

Prior to that some background info to help you advice:

Money
- in bank - about $140,000 (in checking and MM account)
- in Betterment - $10,000 (invested just few days ago)
- in WealthFront - $10,000 (invested just few days ago)
- in 401k - about $85,000 (from former employer)
(Did not contribute to 401k plan with new employer thinking getting a higher take home pay was better than investing and losing money in the event of a downturn - only recently realized the need to begin contributing again and have been reading extensively the last 2 months to structure my 401k portfolio)

Planning on buying a modest home in the next 1 year or so.

Setting aside money for mortgage down payment and emergency funds, we should still have about $60,000 - 80,000 to invest.

Goal: to have saved at least $500,000 in the next 8-10 years in my investment accounts


Queries:

- As i set out to invest in my employer's 401k i have the following questions:

A. Investing in Bonds/Bond Index Funds

- given that the bonds have been not doing well and also views expressed in popular press that bonds are no longer safe vehicles to park money (see for e.g., https://www.forbes.com/sites/robisbitts ... 119db17a5d), is it still the opinion of BHs that "one starting to invest" must put money in bonds

- the reason i ask is, by looking at numbers on return by 1 mo, 3 mo, YTD etc., it is apparent that there has been a negative return ob bonds (apologies if i am misquoting/stating error) - i cannot explain to myself why i should invest in something that is very apparent is going to lose value right after i invest. Could you please shed some light and help me see the logic?



B. Structuring retirement portfolio



- Also, from reading the BH Wiki, i like the 3-fund portfolio methodology. By default, the 401k plan offered through my employer would be the Target date fund
- i was wondering whether it would be a good idea to have the retirement portfolio as a
- 50% target date fund (say 2045) and
the remaining 50% be comprised of
- Fidelity's (1) total market index fund,(2) total international index fund and (3) U.S. bond index fund

the logic is since i am new to investing about 50% of the money put towards retirement will be under the control of a firm like Fidelity and only the other 50% is under self-directed investing.

i am very attracted to sector funds such as IT and Health care and was wondering whether it would be okay to also introduce a small part of my 401k be towards a low cost mutual fund or ETF from Fidelity targeting these sectors.


C. Handling the old 401(k)


What would be the best way to use my funds in the 401(k) with the old employer - would it be a good idea to roll it over to an IRA at Fidelity (given that i will be investing towards my 401k with them) or Vanguard or something else?



D. Index funds

If i invest in index funds through a taxable investment account (say at Vanguard), how exactly does selling the index fund work (when i need the money)? From reading online, i understand that mutual funds are much better and less volatile-prone compared to index funds when it comes to selling. But not quite able to understand why that is - if i invest in index funds for 10 years and then decide to sell them, is there a chance of making a loss (even if on an average over the 10-year period the market has returned say 5 - 6 %)? If not, under what conditions is index funds risky while selling?


E. Wait or take the plunge?

Reading various posts, by now i know that timing the market is bad. However, also given the widespread prediction that we may be in for a correction later this year or next, does it still make sense for someone setting out to invest to invest some $60,000 in index funds?

Please don't get me wrong for asking a question for which the answer seems obvious yes to people who are already invested - where i'm coming from
is, if i had been invested the last few years and have had the chance to let my investments appreciate,(thanks to the bull run the last few years), i would not be worried about taking a hit when time comes for a correction (hopefully unlike 2008) as the gains made earlier might help weather the impact of a correction - at least the principal would not have been affected

however, if now is when i begin investing then all the money i invest is at stake without having had the chance to appreciate prior to being affected by the correction. While timing the market is bad, given the likelihood of a correction occurring (given the longest bull market run (about 9 years, if im right from what i recall reading)), would it be still wise to take the plunge - or having waited this long, should i wait another year or two with cash and then take the plunge when the market is ripe?


(edited the post to include the below question:

F. Given the details i had presented above about our financial situation (also available below for your convenience) how would you go about investing if you were in my place
Family income per year - about $100,000

Money
- in bank - about $140,000 (in checking and MM account)
- in Betterment - $10,000 (invested just few days ago)
- in WealthFront - $10,000 (invested just few days ago)
- in 401k - about $85,000 (from former employer)
(Did not contribute to 401k plan with new employer thinking getting a higher take home pay was better than investing and losing money in the event of a downturn - only recently realized the need to begin contributing again and have been reading extensively the last 2 months to structure my 401k portfolio)

Planning on buying a modest home in the next 1 year or so.

Setting aside money for mortgage down payment and emergency funds, we should still have about $60,000 - 80,000 to invest.

Goal: to have saved at least $500,000 in the next 8-10 years in my investment accounts


Many thanks for considering my request and reading these details!
Last edited by sman09 on Tue Jun 12, 2018 11:24 pm, edited 1 time in total.

TexMexIndex
Posts: 30
Joined: Wed Mar 28, 2018 12:38 pm

Re: Beginning investor - guidance requested

Post by TexMexIndex » Tue Jun 05, 2018 2:38 am

Max out your retirement before you worry about increasing taxable. 18.5 k in you 401K annually, 5.5-11k(If married) in a IRA (Roth preferably).

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Tue Jun 05, 2018 2:47 am

TexMexIndex wrote:
Tue Jun 05, 2018 2:38 am
Max out your retirement before you worry about increasing taxable. 18.5 k in you 401K annually, 5.5-11k(If married) in a IRA (Roth preferably).
Thank you @TexMexIndex for the suggestion! I am actively considering maxing the 401k as you suggest and also want to catch up on the lost time by starting to invest outside 401k as well.

Did not consider the IRA - thanks for pointing it out!

User avatar
luminous
Posts: 102
Joined: Sat Dec 30, 2017 10:28 pm

Re: Beginning investor - guidance requested

Post by luminous » Tue Jun 05, 2018 5:16 am

Hello! I definitely agree that the first thing to focus on is maximizing your retirement tax shelters: 401k and Roth IRA.

In your shoes I’d select a target date fund for all my retirement accounts (in fact that’s what I’ve done for real). For me the advantage of a target date fund is it strongly discourages meddling with my investments based on what i’ve read in the news that day or how I’m feeling. That was a problem for me earlier in my career. It sounds like it might be a problem for you. You hypothesized that putting half in a target date fund and half in a self-directed three fund setup would be good, but honestly is more work for no benefit at all.

How are the fees at your old and new 401k plans? I’d use that to decide if I rolled over the old 401k.

Your question about mutual funds vs index funds tells me you should read more about the basics of investing and selling in taxable accounts. Index funds are mutual funds, though not all mutual funds are index funds.

Timing the market (avoiding bond funds or even stocks because “a correction is coming” for example) doesn’t work. I know it doesn’t feel possible, but there are lots of studies that show that even professional investors can’t successfully beat index funds over the long haul.

I suggest your write an IPS https://www.bogleheads.org/wiki/Investm ... _statement
They are invaluable for decision making. What are your financial goals, how do you plan on reaching them, etc. There are many threads with examples on the forum. An IPS can really reduce the emotional load of making these decisions.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2026.

onourway
Posts: 1379
Joined: Thu Dec 08, 2016 3:39 pm

Re: Beginning investor - guidance requested

Post by onourway » Tue Jun 05, 2018 5:41 am

I would suggest you read The Bogleheads Guide to Investing cover to cover and make sure you understand most of what's in it before you make any more investment decisions (other than maxing out your 401k in the meantime). You have a number of basic misunderstandings about investments that the book will help sort out. For example investing with both Wealthfront and Betterment says to me that you are in a hurry to 'do something' even though you don't fully understand why.

To answer a couple of your questions.

A) Regarding bonds. Yes, there are many skeptics about bonds that have come out of the woodwork recently. To me this indicates two things. One, that investors have incredibly short memories, and two, that investors, even educated investors, repeatedly make the same behavioral errors. We are only ~5 years out from a ~15 year period in which bonds returned more than the US stock market (~1999-2013). When bond yields rise, bond prices fall. You, as an astute investor, want to buy assets when prices are depressed, not when they are over-heated.


E) Wait or take the plunge?
When we say 'you can't time the market' we mean it. Not sometimes. Every time. The most likely scenario of you waiting to invest is that you will lose out on gains you could have otherwise made because most of the time the market goes up. Yes, there is a chance that you will lose money *in the short term* by investing today. But even most seasoned investors here - many of whom have 7-8 figures in investments, if you gave them their entire portfolio in cash today and asked them what they wanted to do with it, the answer would be to get it back fully invested as soon as possible. Missing out on a single day could cost them tens or even hundreds of thousands of dollars! Get invested, make future contributions as large as you can handle and automatic, and forget about any notion of 'principle'. You need to get your dollars into the great compounding machine. Every day you sit on the sidelines you are missing out.

User avatar
BeBH65
Posts: 1278
Joined: Sat Jul 04, 2015 7:28 am

Re: Beginning investor - guidance requested

Post by BeBH65 » Tue Jun 05, 2018 12:16 pm

Our wiki page on Prioritizing_investments might be of interest to you.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Wed Jun 06, 2018 1:40 am

BeBH65 wrote:
Tue Jun 05, 2018 12:16 pm
Our wiki page on Prioritizing_investments might be of interest to you.
Thank you very much BeBH65 for pointing me to the page with information about prioritizing investments. It was interesting to see that taxable accounts were nearly at the bottom of the list.

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Wed Jun 06, 2018 1:50 am

TexMexIndex wrote:
Tue Jun 05, 2018 2:38 am
Max out your retirement before you worry about increasing taxable. 18.5 k in you 401K annually, 5.5-11k(If married) in a IRA (Roth preferably).
The expense ratio on my retirement plan is roughly .65% the 401k from the prior employer (funds of which are yet to be rolled over) also had a similar expense ratio

BTW, one factor i missed to mention is my employer contributes to employee retirement without needing the employee to contribute anything. Given this background and the ER of the target date fund should i still max out my 401k contributions? or should i choose cheap mutual funds/ETFs to invest in through Fidelity?

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Wed Jun 06, 2018 1:58 am

luminous wrote:
Tue Jun 05, 2018 5:16 am
Hello! I definitely agree that the first thing to focus on is maximizing your retirement tax shelters: 401k and Roth IRA.

In your shoes I’d select a target date fund for all my retirement accounts (in fact that’s what I’ve done for real). For me the advantage of a target date fund is it strongly discourages meddling with my investments based on what i’ve read in the news that day or how I’m feeling. That was a problem for me earlier in my career. It sounds like it might be a problem for you. You hypothesized that putting half in a target date fund and half in a self-directed three fund setup would be good, but honestly is more work for no benefit at all.

How are the fees at your old and new 401k plans? I’d use that to decide if I rolled over the old 401k.

Your question about mutual funds vs index funds tells me you should read more about the basics of investing and selling in taxable accounts. Index funds are mutual funds, though not all mutual funds are index funds.

Timing the market (avoiding bond funds or even stocks because “a correction is coming” for example) doesn’t work. I know it doesn’t feel possible, but there are lots of studies that show that even professional investors can’t successfully beat index funds over the long haul.

I suggest your write an IPS https://www.bogleheads.org/wiki/Investm ... _statement
They are invaluable for decision making. What are your financial goals, how do you plan on reaching them, etc. There are many threads with examples on the forum. An IPS can really reduce the emotional load of making these decisions.
Thank you @luminous for taking the time to offer your insights and guidance.
luminous wrote:
Tue Jun 05, 2018 5:16 am
Hello! I definitely agree that the first thing to focus on is maximizing your retirement tax shelters: 401k and Roth IRA.

In your shoes I’d select a target date fund for all my retirement accounts (in fact that’s what I’ve done for real). For me the advantage of a target date fund is it strongly discourages meddling with my investments based on what i’ve read in the news that day or how I’m feeling. That was a problem for me earlier in my career. It sounds like it might be a problem for you. You hypothesized that putting half in a target date fund and half in a self-directed three fund setup would be good, but honestly is more work for no benefit at all.

How are the fees at your old and new 401k plans? I’d use that to decide if I rolled over the old 401k.
Thanks again for the advice with regard to sticking to target date funds and for sharing your personal experience.

The expense ratio on my retirement plan is roughly .65% - the 401k from the prior employer (funds of which are yet to be rolled over) also had a similar expense ratio

BTW, one factor i missed to mention is my employer contributes to employee retirement without needing the employee to contribute anything. Given this background and the ER of the target date fund should i still max out my 401k contributions? or should i choose cheap mutual funds/ETFs to invest in through Fidelity which is also allowed in my plan?
luminous wrote:
Tue Jun 05, 2018 5:16 am

Your question about mutual funds vs index funds tells me you should read more about the basics of investing and selling in taxable accounts. Index funds are mutual funds, though not all mutual funds are index funds.
i meant to say index-tracking ETFs when i said index funds in my post. However, i agree, i should definitely read more on investing as you suggest.


luminous wrote:
Tue Jun 05, 2018 5:16 am
Timing the market (avoiding bond funds or even stocks because “a correction is coming” for example) doesn’t work. I know it doesn’t feel possible, but there are lots of studies that show that even professional investors can’t successfully beat index funds over the long haul.
thanks for sharing this :happy

luminous wrote:
Tue Jun 05, 2018 5:16 am
I suggest your write an IPS https://www.bogleheads.org/wiki/Investm ... _statement
They are invaluable for decision making. What are your financial goals, how do you plan on reaching them, etc. There are many threads with examples on the forum. An IPS can really reduce the emotional load of making these decisions.

will look in to this and create an IPS

Thanks again!

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Wed Jun 06, 2018 2:25 am

onourway wrote:
Tue Jun 05, 2018 5:41 am
I would suggest you read The Bogleheads Guide to Investing cover to cover and make sure you understand most of what's in it before you make any more investment decisions (other than maxing out your 401k in the meantime).
Thank you @onourway for the pointer and advice! Will sure look in to it.

onourway wrote:
Tue Jun 05, 2018 5:41 am

To answer a couple of your questions.

A) Regarding bonds. Yes, there are many skeptics about bonds that have come out of the woodwork recently. To me this indicates two things. One, that investors have incredibly short memories, and two, that investors, even educated investors, repeatedly make the same behavioral errors. We are only ~5 years out from a ~15 year period in which bonds returned more than the US stock market (~1999-2013). When bond yields rise, bond prices fall. You, as an astute investor, want to buy assets when prices are depressed, not when they are over-heated.
I agree with the point " buy assets when prices are depressed, not when they are over-heated" - with regard to bonds my concern is given that YTD or even 1 month yield seems negative, it appears upon investing in bonds in the current scenario, right off the bat, i am going to lose the principal. i can understand taking a hit on the investment all of a sudden right after investment or after a while - but to invest in something knowing fully well that it's been sliding, seems challenging.

If BH-ers could help me understand the logic behind investing in bonds in these times, would be very helpful.


onourway wrote:
Tue Jun 05, 2018 5:41 am
E) Wait or take the plunge?
When we say 'you can't time the market' we mean it. Not sometimes. Every time. The most likely scenario of you waiting to invest is that you will lose out on gains you could have otherwise made because most of the time the market goes up. Yes, there is a chance that you will lose money *in the short term* by investing today. But even most seasoned investors here - many of whom have 7-8 figures in investments, if you gave them their entire portfolio in cash today and asked them what they wanted to do with it, the answer would be to get it back fully invested as soon as possible. Missing out on a single day could cost them tens or even hundreds of thousands of dollars! Get invested, make future contributions as large as you can handle and automatic, and forget about any notion of 'principle'. You need to get your dollars into the great compounding machine. Every day you sit on the sidelines you are missing out.
Excellent! thanks again!

onourway
Posts: 1379
Joined: Thu Dec 08, 2016 3:39 pm

Re: Beginning investor - guidance requested

Post by onourway » Wed Jun 06, 2018 5:35 am

SANSRN wrote:
Wed Jun 06, 2018 2:25 am

I agree with the point " buy assets when prices are depressed, not when they are over-heated" - with regard to bonds my concern is given that YTD or even 1 month yield seems negative, it appears upon investing in bonds in the current scenario, right off the bat, i am going to lose the principal. i can understand taking a hit on the investment all of a sudden right after investment or after a while - but to invest in something knowing fully well that it's been sliding, seems challenging.

If BH-ers could help me understand the logic behind investing in bonds in these times, would be very helpful.
I'd say that one of the first things you will need to learn to accept in becoming a successful investor is that sometimes you will lose money. You need to get comfortable with that because even with 'conservative' investments (i.e. money in a bank account) your 'principle' may be safe, but you are still taking losses, they are just not as readily visible to you. You are losing to inflation, and you are losing to taxes. When you save money in a bank account rather than filling your tax advantaged space, you are paying a great deal of unnecessary tax. That is a real loss to your bottom line. When you receive interest on that savings, you owe tax once again, whereas had that money been put in those tax advantaged accounts, it'd be growing tax-free. So really this is simply a matter of perspective. With stock and bond investments you can lose money in a more visible way at times, but in the long run, done correctly, you stand to make much more money by investing in a tax-efficient manner than simply saving.

That said, you can possibly get away without necessarily investing in bonds today. You need to read the book so that you understand important concepts such as choosing an asset allocation and tax-efficient investing. With that knowledge, and perhaps a full review here of your situation, according to the template outlined in the sticky post at the top of this forum, we can help you choose investments. One of the primary lessons of the book is looking at the big picture and tuning out the 'noise'. Bond investing in 2018 is a perfect opportunity to put that lesson into practice and it's illuminating to see just how many Bogleheads struggle to stick to the plan even when they should know better. The fact that their bond investments are fluctuating in value by a few percent is to be expected, and long-term plans should not be altered because we are currently in one of those negative cycles. Meddling with your plan, once set, nearly always reduces return. Set a plan, write an Investor Policy Statement to remind you what to do when you are tempted to wander, and Stay the Course.

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dwickenh
Posts: 1449
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: Beginning investor - guidance requested

Post by dwickenh » Wed Jun 06, 2018 7:25 am

SANSRN wrote:
Tue Jun 05, 2018 2:06 am
Dear BH members

First, thanks a lot for all the help i have received so far on this forum! i greatly appreciate the generosity of the members in terms of offering their time and expertise - i hope to pass on the benefit i am receiving to others who may need them.

I'm in my mid-30s and trying to get my finances in order to ensure a secure future for our family. Due to lack of knowledge of investing and belief that investing is risky, besides having little money to invest during 5 of the last 10 years, i have all my savings (non-401k) in bank.

Only recently have i begun to read up (many thanks to BH Wiki and the excellent discussions here) extensively about investing and invested some money in Betterment and Wealthfront just to get started even as i continue to learn and educate myself. I would appreciate your help with the following queries to aid my understanding.

Prior to that some background info to help you advice:

Family income per year - about $100,000

Money
- in bank - about $140,000 (in checking and MM account)
- in Betterment - $10,000 (invested just few days ago)
- in WealthFront - $10,000 (invested just few days ago)
- in 401k - about $85,000 (from former employer)
(Did not contribute to 401k plan with new employer thinking getting a higher take home pay was better than investing and losing money in the event of a downturn - only recently realized the need to begin contributing again and have been reading extensively the last 2 months to structure my 401k portfolio)

Planning on buying a modest home in the next 1 year or so.

Setting aside money for mortgage down payment and emergency funds, we should still have about $60,000 - 80,000 to invest.

Goal: to have saved at least $500,000 in the next 8-10 years in my investment accounts


Queries:

- As i set out to invest in my employer's 401k (Fidelity) and in Vanguard index funds (perhaps purchase them via a no-commission player) i have the following questions:

A. Investing in Bonds/Bond Index Funds

- given that the bonds have been not doing well and also views expressed in popular press that bonds are no longer safe vehicles to park money (see for e.g., https://www.forbes.com/sites/robisbitts ... 119db17a5d), is it still the opinion of BHs that "one starting to invest" must put money in bonds

- the reason i ask is, by looking at numbers on return by 1 mo, 3 mo, YTD etc., it is apparent that there has been a negative return ob bonds (apologies if i am misquoting/stating error) - i cannot explain to myself why i should invest in something that is very apparent is going to lose value right after i invest. Could you please shed some light and help me see the logic?



B. Structuring retirement portfolio



- Also, from reading the BH Wiki, i like the 3-fund portfolio methodology. By default, the 401k plan offered through my employer would be the Target date fund
- i was wondering whether it would be a good idea to have the retirement portfolio as a
- 50% target date fund (say 2045) and
the remaining 50% be comprised of
- Fidelity's (1) total market index fund,(2) total international index fund and (3) U.S. bond index fund

the logic is since i am new to investing about 50% of the money put towards retirement will be under the control of a firm like Fidelity and only the other 50% is under self-directed investing.

i am very attracted to sector funds such as IT and Health care and was wondering whether it would be okay to also introduce a small part of my 401k be towards a low cost mutual fund or ETF from Fidelity targeting these sectors.


C. Handling the old 401(k)


What would be the best way to use my funds in the 401(k) with the old employer - would it be a good idea to roll it over to an IRA at Fidelity (given that i will be investing towards my 401k with them) or Vanguard or something else?



D. Index funds

If i invest in index funds through a taxable investment account (say at Vanguard), how exactly does selling the index fund work (when i need the money)? From reading online, i understand that mutual funds are much better and less volatile-prone compared to index funds when it comes to selling. But not quite able to understand why that is - if i invest in index funds for 10 years and then decide to sell them, is there a chance of making a loss (even if on an average over the 10-year period the market has returned say 5 - 6 %)? If not, under what conditions is index funds risky while selling?


E. Wait or take the plunge?

Reading various posts, by now i know that timing the market is bad. However, also given the widespread prediction that we may be in for a correction later this year or next, does it still make sense for someone setting out to invest to invest some $60,000 in index funds?

Please don't get me wrong for asking a question for which the answer seems obvious yes to people who are already invested - where i'm coming from
is, if i had been invested the last few years and have had the chance to let my investments appreciate,(thanks to the bull run the last few years), i would not be worried about taking a hit when time comes for a correction (hopefully unlike 2008) as the gains made earlier might help weather the impact of a correction - at least the principal would not have been affected

however, if now is when i begin investing then all the money i invest is at stake without having had the chance to appreciate prior to being affected by the correction. While timing the market is bad, given the likelihood of a correction occurring (given the longest bull market run (about 9 years, if im right from what i recall reading)), would it be still wise to take the plunge - or having waited this long, should i wait another year or two with cash and then take the plunge when the market is ripe?


(edited the post to include the below question:

F. Given the details i had presented above about our financial situation (also available below for your convenience) how would you go about investing if you were in my place
Family income per year - about $100,000

Money
- in bank - about $140,000 (in checking and MM account)
- in Betterment - $10,000 (invested just few days ago)
- in WealthFront - $10,000 (invested just few days ago)
- in 401k - about $85,000 (from former employer)
(Did not contribute to 401k plan with new employer thinking getting a higher take home pay was better than investing and losing money in the event of a downturn - only recently realized the need to begin contributing again and have been reading extensively the last 2 months to structure my 401k portfolio)

Planning on buying a modest home in the next 1 year or so.

Setting aside money for mortgage down payment and emergency funds, we should still have about $60,000 - 80,000 to invest.

Goal: to have saved at least $500,000 in the next 8-10 years in my investment accounts


Many thanks for considering my request and reading these details!
Roll the old 401K into your new 401K(ask your HR rep about doing this)

Forget taxable accounts until you are maxing your 401K(18500.00), and Roth IRA(5500.00)

Don't invest in bonds, just invest in a target date fund(which invests in bonds for you)

70% stocks/30% bonds or 80/20 would be appropriate for your age. Pick a target date fund with those allocations vs just the date.

Invest immediately after setting aside the money needed for the down payment in 1 year(save this in money market or high yield savings account)

If you want to invest in a sector fund, allow no more than 5% of your investments into IT or healthcare(I invest 5% in healthcare myself)

Don't let short term loss projections change a good plan. You have a 25-30 year horizon and things smooth out considerably over that time

frame

Best to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

TexMexIndex
Posts: 30
Joined: Wed Mar 28, 2018 12:38 pm

Re: Beginning investor - guidance requested

Post by TexMexIndex » Wed Jun 06, 2018 11:54 am

trying to think through the .65 annual in your 401K vs Taxable.

In a taxable you pay on dividends or capital gains, which you wouldn't in the same way for non taxable.

Anyone on here have thoughts? I would assume in a taxable you could get things down to .3 or less annually as far as annual fees go.

I could see a Roth after you get a company match in your 401K. The question is is when is a 401K annual fee high enough that you would be better in
taxable?

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Beginning investor - guidance requested

Post by megabad » Wed Jun 06, 2018 3:36 pm

SANSRN wrote:
Tue Jun 05, 2018 2:06 am
A. Investing in Bonds/Bond Index Funds
- given that the bonds have been not doing well and also views expressed in popular press that bonds are no longer safe vehicles to park money (see for e.g., https://www.forbes.com/sites/robisbitts ... 119db17a5d), is it still the opinion of BHs that "one starting to invest" must put money in bonds
Yes. I might say 10-20% of your portfolio for your age. I believe in diversifying my investments. You actually may want to hold more since you appear to be more fiscally conservative than me

- the reason i ask is, by looking at numbers on return by 1 mo, 3 mo, YTD etc., it is apparent that there has been a negative return ob bonds (apologies if i am misquoting/stating error) - i cannot explain to myself why i should invest in something that is very apparent is going to lose value right after i invest. Could you please shed some light and help me see the logic?
I would read up on how bonds work, I think a few posts have touched on this. Short term interest rate fluctuations may lower NAV temporarily. Of course, you still get the coupon payments. When investing in bond funds, I would suggest you hold a duration that you are comfortable with. If you are investing for the long term, I would not think that a short term decrease in NAV should bother you much.

B. Structuring retirement portfolio

- Also, from reading the BH Wiki, i like the 3-fund portfolio methodology. By default, the 401k plan offered through my employer would be the Target date fund
- i was wondering whether it would be a good idea to have the retirement portfolio as a
- 50% target date fund (say 2045) and
the remaining 50% be comprised of
- Fidelity's (1) total market index fund,(2) total international index fund and (3) U.S. bond index fund

the logic is since i am new to investing about 50% of the money put towards retirement will be under the control of a firm like Fidelity and only the other 50% is under self-directed investing.

i am very attracted to sector funds such as IT and Health care and was wondering whether it would be okay to also introduce a small part of my 401k be towards a low cost mutual fund or ETF from Fidelity targeting these sectors.

These are all personal investment decisions for you to make. I would only suggest that if you are going to use the Target Date Fund, I might just put 100% of it there. Otherwise you have sort of defeated the point of simplicity and autorebalancing in my opinion. I do not tilt economic sectors (within US equity market) because I do not believe that I have more and better information than the market, but you will have to make your own decision there.

C. Handling the old 401(k)

What would be the best way to use my funds in the 401(k) with the old employer - would it be a good idea to roll it over to an IRA at Fidelity (given that i will be investing towards my 401k with them) or Vanguard or something else?
If the 401k fees are high, I would rollover to Fidelity or low cost custodian of your choice.

D. Index funds

If i invest in index funds through a taxable investment account (say at Vanguard), how exactly does selling the index fund work (when i need the money)? From reading online, i understand that mutual funds are much better and less volatile-prone compared to index funds when it comes to selling. But not quite able to understand why that is - if i invest in index funds for 10 years and then decide to sell them, is there a chance of making a loss (even if on an average over the 10-year period the market has returned say 5 - 6 %)? If not, under what conditions is index funds risky while selling?

I am sure you can find a good explanation of the differences between ETFs that would explain better than I could. Mutual Funds sell at NAV determined by what time you put the order in (usually the closing NAV for the day). ETFs are sold like stocks and you will have a bid-ask-spread when transacting such that it can be difficult to say exactly the value to the penny until the transaction goes thru. However, bid ask spreads on large heavily traded indexed ETFs are very small. I would say that you can "lose money" when selling either one, but my ETFs and mutual funds at Vanguard have no transaction fees so any loss would be tied almost exclusively to market performance.

E. Wait or take the plunge?
If investing for the long term, I would take the plunge.

F. Given the details i had presented above about our financial situation (also available below for your convenience) how would you go about investing if you were in my place

1) Make sure I have house downpayment + closing costs + at least $10k in additional house expenses for the new house in savings account.
2) Invest remainder of savings in Vanguard Total Stock Market Index Mutual Fund.
3) Rollover old 401k to Vanguard into Rollover IRA, put in target retirement fund based on age (2050?). Messes up backdoor rIRA possibly, but probably not an issue for you near term.
4) Get 401k match (sounds like you don't have to contribute anything here)
5) max Roth IRA (target retirement)
6) max 401k (not sure if 0.65 ER is the admin fee or the expense ratio or both, but just shoot for lowest ER option here, there is usually an index fund with less than 0.65 ER)

Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Wed Jun 06, 2018 6:24 pm

Thank You @megabad, @TexMexIndex, @ dwickenh, @onourway so much for taking the time to read my request and sharing your thoughts. Also, thanks to all members who had responded since i initially made the request for guidance.

Since it will be a while before i get to properly respond and follow up on your suggestion, wanted to make sure to thank you all for your advice and for taking the time to help me.

Also wanted to add a note about investing in Betterment and Wealthfront that i did, which is not consistent with the BH investment philosophy. I figured that it will be a while before i feel confident enough to set out investing on my own - as i kept reading, the one recurrent theme that hit me hard was time is the biggest factor in building wealth. Worrying that in reading up and figuring things in getting ready to set out to invest might cost me time, i thought at the very least i would get started on the path of investing by relying on established players - reading online, it seemed, these two were decent. I do not intend to go down that path in excess of what i have invested with them. But just seeing the money at work makes me feel like i have begun and gives me a feel of what it is to be invested.

Thanks again!

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Sun Jun 10, 2018 12:23 am

dwickenh wrote:
Wed Jun 06, 2018 7:25 am

Roll the old 401K into your new 401K(ask your HR rep about doing this)

Forget taxable accounts until you are maxing your 401K(18500.00), and Roth IRA(5500.00)

Don't invest in bonds, just invest in a target date fund(which invests in bonds for you)

70% stocks/30% bonds or 80/20 would be appropriate for your age. Pick a target date fund with those allocations vs just the date.

Invest immediately after setting aside the money needed for the down payment in 1 year(save this in money market or high yield savings account)

If you want to invest in a sector fund, allow no more than 5% of your investments into IT or healthcare(I invest 5% in healthcare myself)

Don't let short term loss projections change a good plan. You have a 25-30 year horizon and things smooth out considerably over that time

frame

Best to you,

Dan
Thanks a lot @Dan for the step-by-step guidance and for sharing your advice on various aspects. I will keep this in mind as i set out to invest.

It appears my employer does not allow rolling in funds from other 401K - so, IRA route is the way to go it appears.

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Sun Jun 10, 2018 12:27 am

megabad wrote:
Wed Jun 06, 2018 3:36 pm

Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.
they seem to do tax-loss harvesting and that was attractive to me.

Had no idea about the possibility of a wash sales event by investing through 2 vendors! If both of them perform TLH, is there still a possibility of a wash sale?

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Sun Jun 10, 2018 12:32 am

megabad wrote:
Wed Jun 06, 2018 3:36 pm
SANSRN wrote:
Tue Jun 05, 2018 2:06 am
A. Investing in Bonds/Bond Index Funds
- given that the bonds have been not doing well and also views expressed in popular press that bonds are no longer safe vehicles to park money (see for e.g., https://www.forbes.com/sites/robisbitts ... 119db17a5d), is it still the opinion of BHs that "one starting to invest" must put money in bonds
Yes. I might say 10-20% of your portfolio for your age. I believe in diversifying my investments. You actually may want to hold more since you appear to be more fiscally conservative than me

- the reason i ask is, by looking at numbers on return by 1 mo, 3 mo, YTD etc., it is apparent that there has been a negative return ob bonds (apologies if i am misquoting/stating error) - i cannot explain to myself why i should invest in something that is very apparent is going to lose value right after i invest. Could you please shed some light and help me see the logic?
I would read up on how bonds work, I think a few posts have touched on this. Short term interest rate fluctuations may lower NAV temporarily. Of course, you still get the coupon payments. When investing in bond funds, I would suggest you hold a duration that you are comfortable with. If you are investing for the long term, I would not think that a short term decrease in NAV should bother you much.

B. Structuring retirement portfolio

- Also, from reading the BH Wiki, i like the 3-fund portfolio methodology. By default, the 401k plan offered through my employer would be the Target date fund
- i was wondering whether it would be a good idea to have the retirement portfolio as a
- 50% target date fund (say 2045) and
the remaining 50% be comprised of
- Fidelity's (1) total market index fund,(2) total international index fund and (3) U.S. bond index fund

the logic is since i am new to investing about 50% of the money put towards retirement will be under the control of a firm like Fidelity and only the other 50% is under self-directed investing.

i am very attracted to sector funds such as IT and Health care and was wondering whether it would be okay to also introduce a small part of my 401k be towards a low cost mutual fund or ETF from Fidelity targeting these sectors.

These are all personal investment decisions for you to make. I would only suggest that if you are going to use the Target Date Fund, I might just put 100% of it there. Otherwise you have sort of defeated the point of simplicity and autorebalancing in my opinion. I do not tilt economic sectors (within US equity market) because I do not believe that I have more and better information than the market, but you will have to make your own decision there.

C. Handling the old 401(k)

What would be the best way to use my funds in the 401(k) with the old employer - would it be a good idea to roll it over to an IRA at Fidelity (given that i will be investing towards my 401k with them) or Vanguard or something else?
If the 401k fees are high, I would rollover to Fidelity or low cost custodian of your choice.

D. Index funds

If i invest in index funds through a taxable investment account (say at Vanguard), how exactly does selling the index fund work (when i need the money)? From reading online, i understand that mutual funds are much better and less volatile-prone compared to index funds when it comes to selling. But not quite able to understand why that is - if i invest in index funds for 10 years and then decide to sell them, is there a chance of making a loss (even if on an average over the 10-year period the market has returned say 5 - 6 %)? If not, under what conditions is index funds risky while selling?

I am sure you can find a good explanation of the differences between ETFs that would explain better than I could. Mutual Funds sell at NAV determined by what time you put the order in (usually the closing NAV for the day). ETFs are sold like stocks and you will have a bid-ask-spread when transacting such that it can be difficult to say exactly the value to the penny until the transaction goes thru. However, bid ask spreads on large heavily traded indexed ETFs are very small. I would say that you can "lose money" when selling either one, but my ETFs and mutual funds at Vanguard have no transaction fees so any loss would be tied almost exclusively to market performance.

E. Wait or take the plunge?
If investing for the long term, I would take the plunge.

F. Given the details i had presented above about our financial situation (also available below for your convenience) how would you go about investing if you were in my place

1) Make sure I have house downpayment + closing costs + at least $10k in additional house expenses for the new house in savings account.
2) Invest remainder of savings in Vanguard Total Stock Market Index Mutual Fund.
3) Rollover old 401k to Vanguard into Rollover IRA, put in target retirement fund based on age (2050?). Messes up backdoor rIRA possibly, but probably not an issue for you near term.
4) Get 401k match (sounds like you don't have to contribute anything here)
5) max Roth IRA (target retirement)
6) max 401k (not sure if 0.65 ER is the admin fee or the expense ratio or both, but just shoot for lowest ER option here, there is usually an index fund with less than 0.65 ER)

Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.


Thanks a lot for the detailed and step-by-step guidance! Really appreciate it!!



Mutual Funds sell at NAV determined by what time you put the order in (usually the closing NAV for the day). ETFs are sold like stocks and you will have a bid-ask-spread when transacting such that it can be difficult to say exactly the value to the penny until the transaction goes thru. However, bid ask spreads on large heavily traded indexed ETFs are very small. I would say that you can "lose money" when selling either one, but my ETFs and mutual funds at Vanguard have no transaction fees so any loss would be tied almost exclusively to market performance.


thanks again for this explanation which makes it clear. So, on any given day/time the price of a index mutual fund and the ETF equivalent to vary substantially although they are both essentially tracking the same index?

also, even if my intention is to buy/invest and hold for the long term, is still this point a concern?

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Mon Jun 11, 2018 11:15 am

megabad wrote:
Wed Jun 06, 2018 3:36 pm
Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.

Thanks again @megabad for the heads up about the possible wash sales.

I was not aware of the concept of wash sales - reading up have some understanding now.

[My intention is to set out on my own and follow the 3/4 fund portfolio strategy once i am ready to fully focus on the exercise - at this time, caught up with commitments on the personal front and do not want to attempt doing such important task and so using the time to learn. Perhaps a not good call - but given my inability to do anything significant on my own at this time, i decided to go with Betterment and WF for one year while maxing out contribution to 401k]


Could you please help with the below query:
megabad wrote:
Wed Jun 06, 2018 3:36 pm
Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.

Given that both Betterment and Wealthfront do TLH, could it still lead to a wash sales event? Is it like end of the year each firm would give me a list of stocks sold and then i file it with tax returns? If there is anything out of place - such as the same fund sold by one firm being bought my another in to my account, then it would construe a wash sale?

My portfolio details for you to be able to better advise

at Betterment:

- VTI 31.9% (Wright in portfolio)

- VTV 8.5%

- VOE 6.9%

- VBR 5.9%

- VEA 23.1%

- VWO 13.9%

- VTIP 0.6%

- AGG 1.1%

- MUB 3.8%

- BNDX 2.9%

- EMB 1.5%


at Wealthfront

- VTI 35.1%

- VEA 25.9%

- IEMG 16.4%

- VIG 8.2%

- VTEB 13.8%

- Cash 0.6%


Thank you!

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Beginning investor - guidance requested

Post by megabad » Mon Jun 11, 2018 2:10 pm

SANSRN wrote:
Sun Jun 10, 2018 12:32 am
So, on any given day/time the price of a index mutual fund and the ETF equivalent to vary substantially although they are both essentially tracking the same index?

also, even if my intention is to buy/invest and hold for the long term, is still this point a concern?
The performance as measured at the closing NAV should not vary substantially between the two for most highly liquid indexed ETFs. If you hold Vanguard Funds at Vanguard, I would suggest it matters little for most people which you choose. If we are talking non-vanguard funds or you hold them elsewhere, then a case could be made for ETFs.
SANSRN wrote:
Mon Jun 11, 2018 11:15 am
Given that both Betterment and Wealthfront do TLH, could it still lead to a wash sales event? Is it like end of the year each firm would give me a list of stocks sold and then i file it with tax returns? If there is anything out of place - such as the same fund sold by one firm being bought my another in to my account, then it would construe a wash sale?
Yes, there may be a wash sale given the overlap in fund ownership or there may not be, but it would be hard to predict if one would buy within 30 days of the other selling. I am assuming you would receive a 1099B at the end of year reporting transactions just as you do with a normal broker (I am not a Betterment/Wealthfront customer). If you executed a sell and then a buy on exactly the same ETF within 30 days, then you would have a wash sale which simply means you cannot deduct the loss this year and will have to adjust the cost basis of the holding to reflect the wash sale. Legally, not a big deal, but from a paperwork standpoint, it can become difficult since you will have to keep track of everything yourself (unless you have a "guy").

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Mon Jun 11, 2018 3:19 pm

Thank you very much for taking the time to answer my queries and explaining how wash sale is a possibility and the work involved in reconciling the statements. I am trying to simplify things and this sounds just the opposite of what i am aiming for.

If I request one of Betterment/Wealthfront to close my account would it amount to a short term gain if any of the holdings had appreciated? or do they have the ability to close my account without such an occurrence?

Aside, it's surprising to think how little of this is taught even at the college level to all students irrespective of major and how just being part of an active forum like this helps one learn concepts important to financial health. If the reference to wash sale was not made in the comments, i would have had no idea of such a thing! If one does not have a family member or a friend who is financially knowledgeable until one comes across a forum like this, one is literally lost engaging in poor actions.

Thanks for all the guidance so far!

sman09
Posts: 211
Joined: Fri Mar 23, 2018 12:02 am

Re: Beginning investor - guidance requested

Post by sman09 » Tue Jun 12, 2018 3:31 pm

Dear BHs

I would really appreciate your guidance with this.

I had earlier made a post asking for guidance with my finances and in doing so had stated my current financial position and investment.

Among the several very useful guidance received in replies, was the comment by @megabad that said
Not a big fan of Betterment and Wealthfront for taxable accounts and I don't know what funds they hold so watch out for wash sales if this applies.
I had not heard the term wash sales before and reading up further led me to interesting prior discussions here on BH. Given the possibility of a wash sale as was elaborated in additional explanation
Yes, there may be a wash sale given the overlap in fund ownership or there may not be, but it would be hard to predict if one would buy within 30 days of the other selling. I am assuming you would receive a 1099B at the end of year reporting transactions just as you do with a normal broker (I am not a Betterment/Wealthfront customer). If you executed a sell and then a buy on exactly the same ETF within 30 days, then you would have a wash sale which simply means you cannot deduct the loss this year and will have to adjust the cost basis of the holding to reflect the wash sale. Legally, not a big deal, but from a paperwork standpoint, it can become difficult since you will have to keep track of everything yourself (unless you have a "guy").
i am thinking of closing one of the two accounts or possibly both.

Would the fact that both accounts were open for under a month have any tax implications?

Also, assuming i close both the taxable accounts, what would be a good option to move the funds to?

Thank you!

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