Financial advice for a young whippersnapper?

[Jadow]

r u emma watson? im a fan.

 

[leotheliongrrr]

I haven't read through all responses in the thread, so forgive me if I missed something. If you are ever planning to buy a home, make sure you have at 3 lines of credit open for at least a year. For that reason alone, I wouldn't cancel the credit card.

I used to have a single credit card, and no student/car loans, and I applied for a mortgage. Despite having enough for a 25% downpayment, the only loans I could get had around 300-400 dollars of PMI (mortgage insurance) attached per month (add that on top of HOA and I told the bank to stuff it). Their reasoning was, while I had a great credit score, I didn't have enough credit history.

It's pretty BS, because I figured being able to save up a lot of cash for a downpayment and only have a single credit card proves to the mortgage broker/bank that I am responsible person and should get a nice loan. But NOOOOOOOOOOOOOOOOOOOOOOO! This is AMURIKA and we have to borrow borrow borrow, juggle, juggle, juggle to prove our worth.

 

[DaveSimmons]

So... with retirement saving squared away (401k, potentially Roth IRA), a generous checking account, and enough "rainy day" money sitting in Savings (~half my gross income atm, which is well over a year's worth of expenses)... what now? Bonds? CDs? ...Stocks? (I'm mildly risk-adverse). Granted I don't even really know what those words really mean (learned in school, promptly forgot) and I should/will do some research, but wondering if there's anything I should be doing right now that has slipped my notice.

That depends on when you might need the money:

1-3 years, for example for a house down payment:

The "high" interest savings account is probably the best choice, because you can take out the money at any time without losing anything. With stock funds, that isn't always true, for example 2009-2010 you needed to leave the money in stock funds until the market recovered.

4+ years, for waiting on the house or to retire early:

I still favor stock index funds. They can be mutual funds or ETFs (exchange traded funds). S&P 500 fund shares are good because the tax bite is low and the fund expense ratio is low too. Those Vanguard Target 2050 shares are also a decent choice if you want to be a bit more diversified.

Trading individual stocks is gambling. Don't do it.

Bonds aren't expected to do well any time soon -- as the economy recovers, people move back to stocks, and interest rates finally rise, bond funds may drop in value not increase.

You want some money in cash and bonds but you get the bonds through your 401k Target fund, and cash from your savings account.

Disclaimer: I've been investing for ~15 years now but I am not a financial planner, so take this with a grain of salt.

 

[Sho'Nuff]

So far you are doing many of the right things.

You have the emergency fund you need which is about 6 months worth of expenses, so 6 x $2,500 = $15,000.

Keep that much in your savings and/or checking at all times.

I have never understood this advice. I get the part about having a safety net. What I don't get is why it needs to be in a vehicle that loses money most of the time (interest earned by savings/checking rarely exceeds inflation). At least consider putting backup money in a money market fund where it will do better than earn 0.25% a year.

If your argument is that the liquidity of a checking account is why the safety net should be stored there, with the exception of CDs and Bonds it is possible to retrieve money from most investment vehicles within a week to 10 days (and in most cases less than that). It is a rare scenario where a person will need their entire safety net in a shorter time period than that.

OP, you are doing very well so far. Keep it up. Talking to a financial advisor can help or hurt. The key is educating yourself and not buying into everything your advisor says without checking it out first. For the time being, if you invest outside your 401k you should stick to mutual funds. Lots of folks like Vanguard because they are have very low expenses. But low expenses generally means less active management, which can mean lackluster performance. Not saying that all vanguard funds are like that, but some are. As an alternative, you might want to check out American Funds. Little bit more expensive, but they have been good to me over the years. Of course, YRMV.

Once you have a some more cash saved up and are a bit more knowledgeable about how to evaluate a company, consider stashing some (relatively small) amount of money to "play" in the stock market. I've done that several times over the years, and had some nice payoffs (bought (relatively few) shares of Chipotle at $36, Apple at $80) Can be a lot of fun. Just make sure the amount you "play" with is small enough that you are ok with losing it all if the crap hits the fan.

A few tips from Warren Buffet:

1. Never invest in a business you cannot understand;
2. If you don't feel comfortable owning something for 10 years, don't own it for 10 minutes;
3. Buy companies with a strong histories of profitability and a dominant business franchise.

 

[OverVolt]

The baby boomers pensions are working out so well, you should totally take their advice.

 

[shadow9d9]

Buying a house would be a terrible idea at your age. It locks you into a location, adds all sorts of possible expenses/repairs, and you lose 6% when you go to sell.

 

[rcpratt]

Plenty of good advice in here, but I just wanted to say that it's all pretty much fine-tuning at this point. You're doing better than 95% of people your age, if not better. I was in a pretty similar situation about a year ago, although now I have less cash after buying a house.

 

[Exterous]

OP, you are doing very well so far. Keep it up. Talking a financial advisor can help or hurt. Key is educating yourself and not buying into everything your advisor says without checking it out first. For the time being, if you invest outside your 401k you should stick to mutual funds. Lots of folks like Vanguard because they are have very low expenses. But low expenses generally means less active management, which can mean lackluster performance. Not saying that all vanguard funds are like that, but some are. As an alternative, you might want to check out American Funds. Little bit more expensive, but they have been good to me over the years. Of course, YRMV.

I think your definition of 'lackluster' is a bit off. If by lackluster you mean that by making the decision to go with an index fund you will do better than ~65% of mutual funds then you would be right but I hardly think that qualifies as lackluster.

Out of curiosity I took a look at American Funds and did some comparisons on their primarily US based funds.

If we take their 'New Economy Fund' ANEFX and AMCAP fund AMCPX and compare it with Vanguards total stock market fund VTSMX we get the following numbers for $10,000 invested 10 years ago:
ANEFX: $23,912
VTSMX: $20,883
AMCPX: $19,900

The ANEFX fund does indeed outperform the index fund although the AMCPX fails to do so. However, it should be noted that ANEFX cost $1500 more to invest in than VTSMX and AMCAP cost $1300 more to invest in even though the returns were less. Could you really know 10 years ago that you would pay an extra $1500 to make an extra $3000 by choosing ANEFX as opposed to paying an extra $1300 to under perform by $1000 going with AMCPX?

Of more important note is that there are large sales charges of 5.75% on these funds. This will greatly impact your returns if you invest for short periods of time or make frequent, regular contributions. Lets see what happens to profit on $10,000 over a period of only 1 year:
VTSMX: $903.36 (Total fees: $18.80)
AMCPX: $220.06 (Total fees: $646.67)
ANEFX: $207.80 (Total fees: $658.40)

Over 75% of your returns were eaten up with their fees. Seems a high price to pay for the slim chance of outperforming the market

 

[jagec]

Why not do the Reward Checking and earn some money (3 to 4% at least).

Are you from the past?

If not, PLEASE give me a link.

 

[Svnla]

Are you from the past?

If not, PLEASE give me a link.

Ask and you shall receive, young grass hopper.

Here is one = http://www.depositaccounts.com/checking/reward-checking-accounts.html

and another one (just because you said please in CAPS 🙂 ) = http://www.money-rates.com/rewardschecking.htm

<<<<---- knows a few things about financial stuffs.

Edit: As I said, those are Reward Checking accounts, you have to do some minor stuffs such as Online only, at least 10 debits each month to earn those rates. I have 4 of them right now and they are paying much better than regular CDs and savings from the local CUs and banks.

 

[Jeff7]

I think your definition of 'lackluster' is a bit off. If by lackluster you mean that by making the decision to go with an index fund you will do better than ~65% of mutual funds then you would be right but I hardly think that qualifies as lackluster.

Out of curiosity I took a look at American Funds and did some comparisons on their primarily US based funds.

If we take their 'New Economy Fund' ANEFX and AMCAP fund AMCPX and compare it with Vanguards total stock market fund VTSMX we get the following numbers for $10,000 invested 10 years ago:
ANEFX: $23,912
VTSMX: $20,883
AMCPX: $19,900

The ANEFX fund does indeed outperform the index fund although the AMCPX fails to do so. However, it should be noted that ANEFX cost $1500 more to invest in than VTSMX and AMCAP cost $1300 more to invest in even though the returns were less. Could you really know 10 years ago that you would pay an extra $1500 to make an extra $3000 by choosing ANEFX as opposed to paying an extra $1300 to under perform by $1000 going with AMCPX?

Of more important note is that there are large sales charges of 5.75% on these funds. This will greatly impact your returns if you invest for short periods of time or make frequent, regular contributions. Lets see what happens to profit on $10,000 over a period of only 1 year:
VTSMX: $903.36 (Total fees: $18.80)
AMCPX: $220.06 (Total fees: $646.67)
ANEFX: $207.80 (Total fees: $658.40)

Over 75% of your returns were eaten up with their fees. Seems a high price to pay for the slim chance of outperforming the market

And of course, let's say you've hit it really lucky and got a hot-shot manager who's really doing a great job of outpacing the market enough to also make up his own salary and the various expenses incurred by frequent trading.
He's not going to be there forever. He might find another job, get promoted, or get assigned to a different fund. Or it's possible he's just having a lucky streak, which won't hold up over the long run.


My take: If these managers were genuinely good at picking stocks, they wouldn't be working for someone else. Not for long, anyway.

 

[brianmanahan]

The ANEFX fund does indeed outperform the index fund

did, not does.

you can't predict what the future returns will be. the only thing you know for sure is what it will cost you. and over the long run, passive index funds that keep costs low (< %0.2) end up beating about %80 of the comparable active managed funds in total return.

 

[Svnla]

@ OP - here is my detail reply to your questions from post #1. There were some good suggestions already in this thread.

From your post, I am assuming that you are 25 or younger, therefore, can take more risks.

Make sure you credit score is FICO.
Go to annualcreditreport.com to get all 3 of your free reports and see if there are any errors or mistakes. No score, just report.

Move your money from Capital1 checking and saving accounts (after you meet the minimum requirement for no fee) to Reward Checking accounts (see my links above) and earn more interest than the 1% of your car loan.

Pay off all your CC before due date, no balance carrying over from month to month.

I would start to invest in stocks, especially Index Funds. Make sure you can afford not to lose any sleep if the market went down.
Do not cancel any of your credit cards as long as you don't owe any money on them. You need the longevity in your credit file.

I am not sure where you are in the US so can't tell you which online bank. I used to have HSBC and ING but their rates went down a lot lately so I closed them out.

Make sure you have at least 6 months emergency fund before you try anything else.

Other than that, you are doing very well financially than the majority of folks in the US.

 

[RockinZ28]

Ok I need 401K help. I only started it ~1 year ago, just selected the aggressive goalmaker option. This is through Prudential.

So looking into my account, this is what my holdings are comprised of:

36% allocated
ER=1.08%
International Blend Fund (sub-advised by Wellington Management) International Stock - Blend

19% allocated
ER=0.98%
Eaton Vance Large Cap Value Fund A

19% allocated
ER=0.93%
T. Rowe Price Growth Stock Adv

Then there are 4 more with 6-7% allocation each, with ER at .095%+.

These are my other unused options:

What should I change? I see the VTSMX is ER of .18%, and it has a higher YTD return than all of my current holdings, and even slightly higher return on the 10 year/since inception.
All the Lifetime Fund options have pretty high ER, and lower 10 year return values also.

 

[jagec]

Ask and you shall receive, young grass hopper.

Here is one = http://www.depositaccounts.com/checking/reward-checking-accounts.html

and another one (just because you said please in CAPS 🙂 ) = http://www.money-rates.com/rewardschecking.htm

Sure enough, lots of qualifications needed to open those accounts, but those are some pretty sweet rates for something federally insured. I think that the best one that I qualify for is MECU. Shame about the low limits, but you can't have it all I guess.

 

[Jeff7]

Ask and you shall receive, young grass hopper.

Here is one = http://www.depositaccounts.com/checking/reward-checking-accounts.html

and another one (just because you said please in CAPS 🙂 ) = http://www.money-rates.com/rewardschecking.htm

<<<<---- knows a few things about financial stuffs.

Edit: As I said, those are Reward Checking accounts, you have to do some minor stuffs such as Online only, at least 10 debits each month to earn those rates. I have 4 of them right now and they are paying much better than regular CDs and savings from the local CUs and banks.

Wow....I guess I don't really shop that much. :$ I think I'd have a tough time maintaining 15 per month - the local credit union's req. is 15 PIN or signature debit transactions. 😱


Is that just to discourage people from simply parking their money there, or what? Do they earn something from debit transactions?

 

[DaveSimmons]

Ok I need 401K help. I only started it ~1 year ago, just selected the aggressive goalmaker option. This is through Prudential.
...
ER=1.08% International Blend Fund (sub-advised by Wellington Management) International
ER=0.98% Eaton Vance Large Cap Value Fund A
ER=0.93% T. Rowe Price Growth Stock Adv
...

What should I change? I see the VTSMX is ER of .18%, and it has a higher YTD return than all of my current holdings, and even slightly higher return on the 10 year/since inception.
All the Lifetime Fund options have pretty high ER, and lower 10 year return values also.

The Vanguard fund is a good index fund that gives you the entire US stock market with a very low expense ratio. You don't need any more US stock funds to be diversified since you have 1,000+ stocks right there. The only reason you might want to also have (say) the Dryden S&P 500 index fund is if you want to balance the amounts of large companies vs. small companies different;y from the mix in the Vanguard fund.

If it was my 401k I'd put something 70-80% into that and 20-30% into an international fund.

I'd put -0- into those high-expense actively managed funds from Eaton and T Rowe Price. If there are any international index funds in your 401k I'd prefer them to that International Blend Fund, but I'd need to know the choices before deciding.

 

[Svnla]

Sure enough, lots of qualifications needed to open those accounts, but those are some pretty sweet rates for something federally insured. I think that the best one that I qualify for is MECU. Shame about the low limits, but you can't have it all I guess.

I don't think the requirements are that steep. You can buy 15 items or less during the 30 days. I have a small business on the side and I use debit to buy small items. The only thing I do not like is the low amount that can earn the high rate, $30K or less.

But 3 to 4 percent rate with FDIC insured can't be beat at anywhere else. Perfect place to put your emergency fund.

Wow....I guess I don't really shop that much. :$ I think I'd have a tough time maintaining 15 per month - the local credit union's req. is 15 PIN or signature debit transactions. 😱


Is that just to discourage people from simply parking their money there, or what? Do they earn something from debit transactions?

The banks and CUs do earn some money from your debit transaction but I think the main reason is to make it harder to earn the high rates. Even you missed by one debit transaction, the rate would went down to .05% or less for that month. I know because it happened to me before, missed it by one transaction and by one day. They would not give me a break even I spoke with the branch manager. 🙁

 

[lothar]

Wow....I guess I don't really shop that much. :$ I think I'd have a tough time maintaining 15 per month - the local credit union's req. is 15 PIN or signature debit transactions. 😱


Is that just to discourage people from simply parking their money there, or what? Do they earn something from debit transactions?

Macros.
Learn how to use it.

 

[Jeff7]

Macros.
Learn how to use it.

?
Not sure what that means in this context.😳

 

[Exterous]

The Vanguard fund is a good index fund that gives you the entire US stock market with a very low expense ratio. You don't need any more US stock funds to be diversified since you have 1,000+ stocks right there. The only reason you might want to also have (say) the Dryden S&P 500 index fund is if you want to balance the amounts of large companies vs. small companies different;y from the mix in the Vanguard fund.

If it was my 401k I'd put something 70-80% into that and 20-30% into an international fund.

I'd put -0- into those high-expense actively managed funds from Eaton and T Rowe Price. If there are any international index funds in your 401k I'd prefer them to that International Blend Fund, but I'd need to know the choices before deciding.

I would potentially change that depending on how much he was investing. If he is investing over and above the company match I would look at instead taking that 'over and above' part and opening an Roth IRA with it. I would then use the Roth to cover the international segment. This is actually very similar to what I do. I have a total domestic stock market index fund available but the lowest foreign fund has an ER of 1.65%. I opened an account with Vanguard and use that for my foreign component at a much lower 0.22%

 

[lothar]

?
Not sure what that means in this context.😳

http://www.fatwallet.com/forums/finance/1017241/?start=0
Been doing that for over 2 years.

 

[Sho'Nuff]

I think your definition of 'lackluster' is a bit off. If by lackluster you mean that by making the decision to go with an index fund you will do better than ~65% of mutual funds then you would be right but I hardly think that qualifies as lackluster.

Out of curiosity I took a look at American Funds and did some comparisons on their primarily US based funds.

If we take their 'New Economy Fund' ANEFX and AMCAP fund AMCPX and compare it with Vanguards total stock market fund VTSMX we get the following numbers for $10,000 invested 10 years ago:
ANEFX: $23,912
VTSMX: $20,883
AMCPX: $19,900

The ANEFX fund does indeed outperform the index fund although the AMCPX fails to do so. However, it should be noted that ANEFX cost $1500 more to invest in than VTSMX and AMCAP cost $1300 more to invest in even though the returns were less. Could you really know 10 years ago that you would pay an extra $1500 to make an extra $3000 by choosing ANEFX as opposed to paying an extra $1300 to under perform by $1000 going with AMCPX?

Of more important note is that there are large sales charges of 5.75% on these funds. This will greatly impact your returns if you invest for short periods of time or make frequent, regular contributions. Lets see what happens to profit on $10,000 over a period of only 1 year:
VTSMX: $903.36 (Total fees: $18.80)
AMCPX: $220.06 (Total fees: $646.67)
ANEFX: $207.80 (Total fees: $658.40)

Over 75% of your returns were eaten up with their fees. Seems a high price to pay for the slim chance of outperforming the market

Your points are valid, but let me make a few counter points:

1. I never said that Vanguard funds were bad or should be avoided ad nauseum. I simply invited the OP to educate himself about them and certain other funds. I own several vanguard funds myself, for the very reasons you are advocating. "Lackluster" performance was probably not the best word to use in conjunction with all Vanguard funds.

2. Your cost comparison is valid for the OP and other investors who are just getting started, i.e., folks that do not have a relatively large sum of money in the market.
What you neglected to mention (perhaps because you were not aware of this fact) is that the sales charge (front load) of American Funds goes down significantly when one invests certain amounts of capital with them. Granted those breaks take a while to obtain when you are just starting out, but once you hit them they make American's active managed funds look much more attractive. 1.5% (what I am charged) for active management is not too bad, IMO. But I agree that 5.75% (which I believe your example calculations were based on) is too much.

3. Your profit calculation is correct for one year. But that is not really reflective of the strategy most individuals take with respect to saving for their retirement, is it? Most young people who are starting to invest for retirement will have their money in the market for 20-30+ years, not one year. It would be interesting to see how your comparison shakes out over a longer period.

For the record, I am a patent attorney and I have no affiliation with American or Vanguard.

 

[kranky]

1.5% doesn't sound like a lot. But with a 20-30 year horizon, it practically guarantees the actively managed fund will lag a low-cost index fund, even if you ignore the front end load.

The scenario is:
initial investment $10,000, with $5,000 per year added.
One fund is an index fund with an 0.2% ER, the other is a fund with a 1.5% ER.
Both funds grow 4%/year over 25 years.

After 25 years, the index fund is ahead by 21%. That high ER is a huge, huge drag on results over the long term.

There is no evidence that a higher ER pays off over the long term compared to the overall market.

 

[Exterous]

2. Your cost comparison is valid for the OP and other investors who are just getting started, i.e., folks that do not have a relatively large sum of money in the market.
What you neglected to mention (perhaps because you were not aware of this fact) is that the sales charge (front load) of American Funds goes down significantly when one invests certain amounts of capital with them. Granted those breaks take a while to obtain when you are just starting out, but once you hit them they make American's active managed funds look much more attractive. 1.5% (what I am charged) for active management is not too bad, IMO. But I agree that 5.75% (which I believe your example calculations were based on) is too much.

You are correct in that I was unaware that their sales charge lowered for higher amounts. However, I still believe that a sales charge of 1.5% is still too high for reasons I will go into shortly (not to mention I doubt that he would have the $750,000+ required to attain such a rate)

3. Your profit calculation is correct for one year. But that is not really reflective of the strategy most individuals take with respect to saving for their retirement, is it? Most young people who are starting to invest for retirement will have their money in the market for 20-30+ years, not one year. It would be interesting to see how your comparison shakes out over a longer period.

My intent was not so show that one year was reflective of a retirement strategy - just to show the implications of a sales charge when contributing constantly over a set period of time (Hence the "or make frequent, regular contributions." part). This is a very valid and highly used method of retirement saving. As you get closer to retirement age those sales charges get ever more important as you have less time to make up the ground - should the fund have the performance to do so.

One of the pitfalls of the Reuters or Morningstar (or really whoever) $10,000 invested returns I noted in my earlier post is that it only takes a straight $10,000 after fees. But when investing in a front end loaded fund you don't really get $10,000 invested. In this particular case you get $9425 invested.

Now - working the numbers over 20 years:
ANEFX returns $6.1655 for ever dollar invested* ($61,655 returned over the last 20 years from a $10,000 investment). The $9,425 you really invested after giving them $10,000 resulted in $58,109
The calculation for Vanguard is a bit easier as there is no sales charge. Your $10,000 is invested and returned $52,534*

Now - an extra $5,575 is none to shabby. Unfortunately there is another catch. This does not factor in the ER you have paid. For that we turn to the SEC's fee calculator.

ANEFX ER fees after 20 years using $9,425 and assuming their stated return % over the last 20 years = $4,608 in fees
VTSMX ER fees after 20 years using $10,000 and assuming their stated return over the last 20 years = $882 in fees.

Your $5,575 in additional return has been reduced by $3,726 in additional fees. The true added return is $1849. At the vary least nothing to really write home about after all the agonizing or blind luck in choosing this fund. Certainly not a very promising added return after we paid them thousands of dollars to out perform a fund that does nothing but mimic the market

We haven't even touched on the potential tax implications should they apply! (~48% turnover vs 5% turn over. ANEFX returns reduced by 1.26 over the last 15 years vs VTSMX 0.43. Ouch again!)

Now - before we take a look at what happens when the sales charge goes down I would like to address their fee schedule. They don't start reducing their fees until around the $25,000 mark. While I congratulate you on having achieved a higher savings total and therefore the reduced fees their products are already designed to rape the majority of Americans given that the majority of Americans have $25,000 or less in the summation of their retirement accounts. The majority of those approaching (55-64), while having the highest retirement savings level, have accumulated just enough to achieve the the 3.5% sales charge level**

Ok - now that we have gotten the fact that the American Funds are not really designed for the majority of American's well being (Although - IMO this holds true for pretty much every fund with a sales charge) lets look at what happens if the sales charge is less:

For the sake of simplicity lets say the sales charge of 1.5% attained at $750,000 was really attained at $10,000. The $10,000 invested in ANEFX becomes $9850 which bumps the return up to $60,730. Looking better. Unfortunately though a higher balance means more ER fees, but not by too much - $4890. With Vanguard staying the same your profit is now $8196-$4890 = $3,306

Did it do better? Absolutely. But lets take a look at AMCPX even if we use the reduced sales charge:
$5.6983 returned per $1 invested over 20 years. $4,273 in fees over the 20 years. 1.5% sales charge = $9850 invested. $9850*5.6983 = $56,128 - $4,273 in fees for a return of $51,855 or a loss of ~$800 for all that hard work you paid them to do. (As a quick aside - the American Funds don't do as badly as I thought they might when I started this)Whether you make money by paying someone completely depends on your ability to pick the fund. How likely are you to pick the right one(s) given that most unde rperform? Is it an extra $1,000 to $3000 after 20 years really worth the 65% chance that you will lose money?

Another important piece of information is that I believe this entire post is actually biased against the VTSMX fund. The American funds have holdings in cash and foreign investments should have been able to hold them over in rough times for the US stock market. If the fund managers were really worth their snuff then these should have been leveraged to their fullest while the VTSMX fund had to sit there and take every downturn in the US stock market as they came along. It couldn't try to underweight the housing market because of an impending housing bubble. It had to buy tech stocks during at the very height of the .com bubble.

For example - the Swensen model uses a simple 6 Index fund ETFs to create a portfolio that adds around 3-4% on VTSMX's singular performance over the last 20 years. There are no up to date figures on what his portfolio would return so exact numbers have no place here but a 3% increase would result in a portfolio value of $86,637 (Before ER) from that same $10,000. I think you would be very hard pressed to come up with a portfolio of American Funds that could return that after their fees and sales charges not to mention their added problems when having to consider tax efficiency.

*Using Morningstar's returns from 1992 to present
**http://crr.bc.edu/wp-content/uploads/2012/07/IB_12-13.pdf