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Investment Advice: Medium to Long Term with low risk

sao123

sao123

Lifer
So as I posted here a week ago, my grandmother has passed on.

Each grandchild of hers recieved an inheritance of $700.
I want to invest this money safely for my yet to be concieved first child.

I am thinking this would be either a great investment towards college application fees or a first car, as a present from the loving great grandparent the child will never know.

What I want is a long term safe investment, so I want to avoid the stock market.
I was checking out the I bonds, EE bonds, and CD's. Now i dont know mcuh about investing, so if someone could shed some light on each of the options, and some advice on which way to head.

Much appreciated.
 
Risk (permanent loss of capital) and stock market volatility are different things. And your very conservative investments risk not even keeping up with inflation over time.

If you can throw in $2300 of your own, investing it in Vanguard Index Total Stock Market (VTSMX) and leaving it untouched for at least 30 - 40+ years is probably the smartest thing you can do ($3000 is minimum initial investment amount).

Don't think about using the money for college application fees or a first car, think more in terms of downpayment for a home or retirement fund for your child. It would be like your grandmother leaving your child a stock certificate she bought many many years ago when she was young, ignored, and now is worth lots of money (individual stocks are much much more risky than a broadly diversified mutual fund such as VTSMX).

This particular fund is actually very low risk if you have an appropriately long time horizon because it is so diversified (tracks whole U. S. stock market), and is very aggressive at the same time because it is 99+% stocks all the time (most actively managed mutual funds typically have 5 - 10% cash position, and over time, stocks >> bonds > cash). VTSMX is going to be very very hard to beat over extended periods of time, and particularly for an investment in a taxable account.

http://selectedfunds.com/pdf/SFSuccInv4Q07.pdf

http://www.amazon.com/Personal...&qid=1216823309&sr=8-1
http://www.amazon.com/Common-S...&qid=1216823690&sr=1-3


 
May as well just stick with a High Interest Savings Account.

It's 100% safe and offers a return that usually beats most other common investments such as CDs and Bonds. Plus the money is not locked in.

Either way, if you only have $700 to work with and don't plan on adding to it, you are not going to make a decent return on any investment considered safe.
 
Originally posted by: mshan
Risk (permanent loss of capital) and stock market volatility are different things. And your very conservative investments risk not even keeping up with inflation over time.
Click to expand...

the risk is that you need the money at a down point in the market's volatility.




long term (decades) you'd have to be ridiculously risk averse to invest in bonds over stocks.
 
Originally posted by: mshan
Risk (permanent loss of capital) and stock market volatility are different things. And your very conservative investments risk not even keeping up with inflation over time.

If you can throw in $2300 of your own, investing it in Vanguard Index Total Stock Market (VTSMX) and leaving it untouched for at least 30 - 40+ years is probably the smartest thing you can do ($3000 is minimum initial investment amount).

Don't think about using the money for college application fees or a first car, think more in terms of downpayment for a home or retirement fund for your child. It would be like your grandmother leaving your child a stock certificate she bought many many years ago when she was young, ignored, and now is worth lots of money (individual stocks are much much more risky than a broadly diversified mutual fund such as VTSMX).

This particular fund is actually very low risk if you have an appropriately long time horizon because it is so diversified (tracks whole U. S. stock market), and is very aggressive at the same time because it is 99+% stocks all the time (most actively managed mutual funds typically have 5 - 10% cash position, and over time, stocks >> bonds > cash). VTSMX is going to be very very hard to beat over extended periods of time, and particularly for an investment in a taxable account.

http://selectedfunds.com/pdf/SFSuccInv4Q07.pdf

http://www.amazon.com/Personal...&qid=1216823309&sr=8-1
http://www.amazon.com/Common-S...&qid=1216823690&sr=1-3
Click to expand...



back the freight train up... my kid's retirement???

Woah woah woah... they have to get to employment first before we start thinking about retirment..


My wife and I arent rich, and living paycheck to paycheck on low paying government jobs arent going to buy our first child a car or put him/her through college. Just as both me and my wife have done, the child will have to pay for their own 4 years of college and subsequent vehicles. They will also have to work their own 35 years to earn their own penchant or retirement 401k.


Our timeline is simple:
1yr:
Payoff remainder of credit debt.
Save for 8-12 weeks of unpaid maternity leave.
Concieve child.

2yr:
Remodel unused bedroom for child.
Birth Child.
Pay for child care services, post maternity leave.

15-20yr:
Use invested inheritance to pay portion of college bills or vehicle for first employment.


 
This just sounds foolish to me. Why wouldn't you want to put that $700 towards helping out your own flesh and blood? By setting them up as best as possible, in theory you will be indirectly helping out the future generations of your family anyway. You can see the fruits of your investment actually pay off this way, rather then be dead and gone and never know how the money you saved was spent. This has the added benefit of you being around to actually ensure the money is used in the way you intended it to be used.
 
Look into 529 plans. Save it for college. Make sure that it's a self directed fund and not one where someone else does whatever they want with your money inside the 529.
 
Why anyone recommends a total stock market index for the LONG TERM is beyond me. Small cap/mid cap growth funds beat the index by huge margins over the long run.
 
1yr:
Payoff remainder of credit debt. Save for 8-12 weeks of unpaid maternity leave
Click to expand...
If any of this debt is at an APY of 8% or more you should do this first.

Are you eligible for a Roth IRA? It would grow tax-free and you can take out the original contributions made over the years at any time. Invest in stock index mutual funds since we're looking at 16+ years before you will take out any of the money.
 
Originally posted by: crownjules
This just sounds foolish to me. Why wouldn't you want to put that $700 towards helping out your own flesh and blood? By setting them up as best as possible, in theory you will be indirectly helping out the future generations of your family anyway. You can see the fruits of your investment actually pay off this way, rather then be dead and gone and never know how the money you saved was spent. This has the added benefit of you being around to actually ensure the money is used in the way you intended it to be used.
Click to expand...

If the money is setup as a trust, can't you put rules into place for how the money is used, even if you are no longer alive?
 
Originally posted by: crownjules
This just sounds foolish to me. Why wouldn't you want to put that $700 towards helping out your own flesh and blood? By setting them up as best as possible, in theory you will be indirectly helping out the future generations of your family anyway. You can see the fruits of your investment actually pay off this way, rather then be dead and gone and never know how the money you saved was spent. This has the added benefit of you being around to actually ensure the money is used in the way you intended it to be used.
Click to expand...

I will know how it is spent. The investment will be in my name.
The investment will be disclosed to the child at the appropriate time.

The BEST way I can help out my own flesh and blood is to make sure they recieve an education and some work ethic to pass on to future generations.

Im not going to setup somewindfall millionaire fund for my grandchildren to recieve and make them all lazy rich white kids.
 
Originally posted by: JS80
Why anyone recommends a total stock market index for the LONG TERM is beyond me. Small cap/mid cap growth funds beat the index by huge margins over the long run.
Click to expand...

Do you think one should hold a small cap growth index instead of a total market index, or in addition to it? Could someone use a small cap growth index as the entire US holdings portion of their portfolio?

EDIT: Small cap growth doesn't appear to have done much better than total stock market over a very long period of time. What were you using to make your comparison?
 
I wouldn't put it in the stockmarket at the moment. Market volatility is extreme, and there is high risk of a recession which would reduce your return.

A simple high-street savings account would be the best thing to do at the moment. Maybe think about the stockmarket once the current turbulence has blown over - this might be 2-3 years.

Again, I'd echo the points made earlier - a whole market investment will probably have a lower return than a midcap/small cap investment, but with correspondingly lower risk and volatility. Another investment strategy that has beaten simple total market investments, is to invest in 'high yield' stocks - i.e. those with the most generous dividends. Historically, if you reinvest the dividends, the total return tends to beat unselected blue-chips - but with higher gains come higher risk and volatility. (A typical high dividend fund would have lost 40% of it's value in the last 8 months!).
 
at 10%, in the 15-20 years of your timeline, you'd end up with 3100-5100. At 5% (ie CDs or savings bonds), you'd end up with 1500-1900. After inflation, the 5% option is virtually nothing.

If you insist on an absolutely safe investment, I'd recommend I series savings bonds, because of the high rate of inflation right now.

Like DaveSimmons said, if you have credit card debt, get rid of that first, as it will allow you to save more in the future.

If you want to go the VTSMX route, buy its ETF VTI through a low cost brokerage for lower fees overall and no minimum investment.
 
$700 is going to go nowhere fast. Either start a monthly investment program that you can continue to make deposits into or save it for something short term.
 
Originally posted by: Special K
Originally posted by: JS80
Why anyone recommends a total stock market index for the LONG TERM is beyond me. Small cap/mid cap growth funds beat the index by huge margins over the long run.
Click to expand...

Do you think one should hold a small cap growth index instead of a total market index, or in addition to it? Could someone use a small cap growth index as the entire US holdings portion of their portfolio?

EDIT: Small cap growth doesn't appear to have done much better than total stock market over a very long period of time. What were you using to make your comparison?
Click to expand...

What are you comparing to? Russell 2k vs S&P 500

i think young people should only hold small/mid cap. then switch to broader index when they get older.
 
Google finance and Yahoo finance don't go back far enough, but I was trying to compare Vanguard's Total Market Index with their Small Cap Growth index.
 
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