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26 yr old requesting guidance from "seasoned" investors and successful professionals
Old 01-20-2011, 09:28 PM   #1
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26 yr old requesting guidance from "seasoned" investors and successful professionals

Hello, I am a 26 yr old college graduate (Go Navy, Beat Army), and currently about half way done with my MBA. I am married and have one child, though we are planning on one or two more sometime in the future. I plan on working for 30 more years, and hope to retire by 55. Currently single income, in the 70-80k range. We try to save about 20% of our income (10% long term in a TSP, 5% in a 529, and 5% to actively trade and "emergency fund" liquid saving).

My question lies with long term investing; should I cash out of the five mutual funds I currently own (lrg growth, value, intl, sml cap, fixed income) and buy low cost index funds (40% lrg cap, 20% intl, 20% sml cap) or would I be better off keeping them and see where they go? All the fees, expenses and taxes due to turnover rate in traditional mutual funds seem to water down the actual return. I read an interesting book about indexing and have since become skeptical of the traditional fund method and index method at the same time. If anyone has any comments on indexing, or investing/long term planning for a fairly young and ambitious guy, they will be well received.

Thanks for reading, and I look forward to hearing from you!
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Old 01-20-2011, 10:16 PM   #2
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Hello. Good to see the younger generation take a keen interest in retirement planning.

The first thing you must understand is that your assumption of being able to work at the same job over your entire career is a huge IF! Having finished a delicious ribeye steak dinner (complements of the Temporary Assistance to Needy Families Food Stamp program), I sit here typing as a multiple graduate degreed engineer that at age 45 is basically unemployable as an engineer in the American labor market - i.e., my particular technical expertise skills are considered to be obsolete by the American employer would rather hire a new college graduate, or hire an H1B foreigner to take the job onsite in the USA, or just flat out hire a foreigner in his own homeland, than hire a "seasoned" engineer.) There are many other instances of such age discrimination in the American labor market, and I believe it is only going to get worse, although through careful prescient selection - or good luck - if a career field or actual job that results in permanent employment or employability had been selected, the employee can have such a good stretch of income production. (For myself, the only reason I am in decent shape is that I don't have a family, have done an excellent job of saving and investing for my retirement, and have been able to coast for many years on debt that I recently wiped away in a Chapter 7 bankruptcy.)

So basically you should take the attitude that you will never know when the punch bowl will be taken away, and can only count on money you have already earned. Therefore you should live a life of reduced expectations, with a standard of living that can be more or less continued by a combination of government anti-poverty programs and a meager $8/hr or so job (which seems to be the base market value of labor in the USA.) You should save everything else you have, maxing out your 401K and your IRA (I would do it as a traditional IRA if I were in the 15% or higher bracket, since I don't think that anyone will be in a higher tax bracket in retirement.)

As far as what to invest in, I would say put the bulk of your cash in the S&P 500, or some similar USA large cap fund. The fact is that the American Corporation is the most suited to be profitable, since it has no allegiance to the American worker or the American people, and is like a Great White Shark in that the only thing it knows to do is to maximize the enhancement of shareholder value. And nowadays, such large American corporations derive a great deal of profits from abroad, so the globalization of investment is there already (i.e., you can think of such a large American corporation as being a mutual fund that carefully invests at home and abroad.) I believe that outside of the EAFE (i.e., Canada, Western Europe, Japan, Australia, etc.), investment is unpredictable, and within the EAFE, since the corporations have to take into account the citizenry of their home country (unlike the American corporation), they are inherently not as profitable (although certainly, a case could be made for careful market timing, especially when considering the foreign currency exchange situation.)

At your age, I would not bother with bonds or cash. If anything, with Ben Bernanke "quantitatively easing" the US Dollar, being long on bonds or cash is a sucker's bet. The only way the USA is going to come out of the debt crisis to do a good ole fashioned devaluation (which must be done slowly), which is why Bernanke is doing what he is doing.

Sorry if I sound cynical - I've had a hard financial and career life!
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Old 01-21-2011, 06:41 AM   #3
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I think I would not worry so much about living a monk-like life, especially with kids. Save your pennies as much as possible and always be on the lookout for ways to improve/update your skills. Keep yourself relevant and do not just plod along in the smae job.

As to investments, I would suggest swapping active equity funds for indices. Active bond funds with a good manager are a reasonable choice, as is active management in some of the more complicated strategies, but for straight equity funds its a waste of money.
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Old 01-21-2011, 07:02 AM   #4
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OP, you sound like a bright self starter. Read a couple of these books (buy them used on the internet) and lurk over to the Bogleheads forum for a while.

Investment Books

I would get rid of any high expense ratio funds and get a mix of low cost index funds. If you are investing over the next 30+ years, high fees have a long time to eat away at your stash.
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Old 01-21-2011, 10:36 AM   #5
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Originally Posted by swampwiz View Post
(I would do it as a traditional IRA if I were in the 15% or higher bracket, since I don't think that anyone will be in a higher tax bracket in retirement.)
This is an odd statement. Plenty retired US taxpayers pay taxes at the 25% maginal bracket or higher, even at current relatively low rates. Remember, it only takes taxable income of about $34,000 for a single filer to reach the top of 15%.

So I don't quite get your asssertion.

Ha
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Old 01-21-2011, 10:45 AM   #6
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Having finished a delicious ribeye steak dinner (complements of the Temporary Assistance to Needy Families Food Stamp program).... as a multiple graduate degreed engineer that at age 45 is basically unemployable as an engineer in the American labor market ....and have been able to coast for many years on debt that I recently wiped away in a Chapter 7 bankruptcy.)
Sorry, but I thought the OP was looking for positive guidance, not how to scam the system; maybe I misunderstood the question?
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Old 01-21-2011, 01:42 PM   #7
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(For myself, the only reason I am in decent shape is that I don't have a family, have done an excellent job of saving and investing for my retirement, and have been able to coast for many years on debt that I recently wiped away in a Chapter 7 bankruptcy.)
Does this statement imply bankruptcy fraud? As far as I know, one cannot coast on an absence of debt, but only on positive asset balances.

Ha
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Old 01-21-2011, 01:46 PM   #8
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Does this statement imply bankruptcy fraud? As far as I know, one cannot coast on an absence of debt, but only on positive asset balances.

Ha
This is well-plowed ground:
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After I sell my current homesite, I will have about $63K in cash, outside of my retirement accounts. I will take $53K of that and buy the house. Then, after spending the rest on fixing up the house and buying appliances and furniture, etc., I will file Chapter 7.
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Old 01-21-2011, 03:42 PM   #9
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Keep living and investment expences low, low cost index funds and etf's. Stay away from the traditional brokerage houses, and don't go to any " Free Investment Seminars, especially the ones where they buy you dinner!!!

My advise is not as an expert , rather as a "Seasoned" investor, having been roasted over a medium flame and seasoned to taste by Wall Street several times
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Old 01-21-2011, 04:48 PM   #10
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I was reading recently in the Otar book ("Unveiling the Retirement Myth") that
"The most important element during the seed money formation years is to invest with discipline, month after month, year after year. The reduced volatility of a conservative portfolio will give you much-needed staying power. Once this critical survival period is over then you have more experience to handle volatility with a larger portfolio and you will be more understanding of how markets work."
The idea is not to get scared off by a large drop in your young portfolio due to a bad market. He uses an example of 30% equity for the first four years, 50% for the next four years, and then 70%. He discusses an example comparing to more conventional/agressive wisdom for a young investor and says that 91% of the portfolio growth comes from disciplined investing and 9% from difference in the rate of growth.

Just a thought.
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Old 01-21-2011, 07:48 PM   #11
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extraneous post - please delete
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Old 01-21-2011, 07:51 PM   #12
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This is well-plowed ground:

Quote:
After I sell my current homesite, I will have about $63K in cash, outside of my retirement accounts. I will take $53K of that and buy the house. Then, after spending the rest on fixing up the house and buying appliances and furniture, etc., I will file Chapter 7.
As it turned out, I only spent about $45K on the house. And yes, my bankruptcy attorney advised me that it was legal, and the trustee did not mention a word about it as well.
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Old 01-21-2011, 07:57 PM   #13
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Does this statement imply bankruptcy fraud? As far as I know, one cannot coast on an absence of debt, but only on positive asset balances.

Ha
Not at all. At the time I was taking on new debt, it was my sincere belief that I would be able to restart my software development consulting business (i.e., after the total destruction of it via Hurricane Katrina), and that at the end of it all, I would be getting a big fat SBA loan to consolidate all that debt. I did due diligence - under the difficult circumstances of post-Katrina, followed by the Great Recession, as you might imagine - to try and restart that business, but in the end I simply ran out of time and had to properly execute a legal exit strategy (i.e., Chapter 7.) Neither the trustee nor any of my creditors could find anything that could be considered as fraudulent.

I did have some assets at the time, as I was given a grant from the government to eventually purchase a replacement home (which I ended up doing.)

It seems that you are saying that if someone becomes unemployed (or his business comes into hard times), and that person goes into debt to sustain his living standards, that somehow that is fraudulent. It would only be fraudulent if there were no reasonable expectation that the debtor could pay back the debt. Obviously, if someone were earning a certain level of income in a normal field of occupation or business, it would be reasonable for that person to presume that he will be able to again earn that level of income. That's the presumption that I made (as well as the presumption that I would be getting an SBA loan at the end to consolidate the debt), but it turned out that I was not able to do so.
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Old 01-22-2011, 01:35 PM   #14
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(Go Navy, Beat Army)
Currently single income, in the 70-80k range. We try to save about 20% of our income (10% long term in a TSP, 5% in a 529, and 5% to actively trade and "emergency fund" liquid saving).
My question lies with long term investing; should I cash out of the five mutual funds I currently own (lrg growth, value, intl, sml cap, fixed income) and buy low cost index funds (40% lrg cap, 20% intl, 20% sml cap)
If anyone has any comments on indexing, or investing/long term planning for a fairly young and ambitious guy, they will be well received.
Thanks for reading, and I look forward to hearing from you!
As long as you can contribute to it, then I'd recommend maxing the TSP. (Active duty, Reserve/National Guard, federal civil service.) It has the world's lowest expense ratio and you can split your contributions among the funds to get your desired asset allocation. I'd max the TSP before you even contribute to an IRA-- IRAs can't come close to the TSP's expense ratios.

If you're still on active duty then your probability of continued employment is pretty high-- right up until you submit your resignation letter. You might not need to build a very big emergency fund, and you certainly don't need to go to the eight-month length that Suze Orman has recommended. A month or two of pay should be enough until you're planning your military transition. Of course you may also be saving for a replacement vehicle or a home purchase.

We tried to save for a full ride at a four-year private college. That plan worked out pretty well (especially with Berkshire Hathaway) but if I was doing it again then I'd save for two years at a community college followed by two years at State U. Let the motivated college student either find their own scholarship money, work for it, or use the military. You'll also want to keep an eye on your GI Bill transferability to your spouse/kids... after you max out your own MBA's tuition assistance and GI Bill benefits.

If you can tolerate the volatility then I'd stick with a high-equity portfolio, perhaps 85-90%, and the rest in cash. No bonds. As long as you're in the military your "human capital" is the equivalent of Treasuries, and if you retire from the military then your pension will be the equivalent of I bonds. If you're planning to completely leave the military (not even Reserve/NG) then you'd want to shift your asset allocation to include bonds.

Here's some selected posts from the blog, but I'd recommend you read the whole thing in small doses:
Tailor your investments to your military pay and your pension | Military Retirement & Financial Independence
Where to put your savings while you’re in the military | Military Retirement & Financial Independence
Start saving early | Military Retirement & Financial Independence
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Old 01-22-2011, 06:21 PM   #15
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Expenses make a huge impact. If you do not have a trustworthy source of better than market returns then expenses become the most important item you can control. Index funds make a great deal of sense. The after tax / tax deferred argument needs to be considered depending on how long you plan on retiring before you can take penalty free withdrawals.
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Old 01-22-2011, 08:05 PM   #16
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ZJR922,

I deduced from your post ("Go Navy - beat Army") and the mention of the TSP that you are likely a recent Naval Academy grad and an active duty officer. When I read further posts, I see that Nords has given you precisely the advice I would have on investments - stick with the TSP. I would only add that if you are ever invited to a free chicken dinner/"seminar" by First Command (which targets military types for "financial planning") you should run the other way as fast as you can.

Although not an academy grad, I echo your "Go Navy - beat Army" sentiments!
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Old 01-25-2011, 12:03 PM   #17
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Does this statement imply bankruptcy fraud? As far as I know, one cannot coast on an absence of debt, but only on positive asset balances.

Ha
Hi I am planning a early retirement and is a 49 year old female. I have a question who do I contact to get the Traditional IRA started and can you eliborate on the S&P 500?
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Old 01-25-2011, 01:00 PM   #18
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Hi I am planning a early retirement and is a 49 year old female. I have a question who do I contact to get the Traditional IRA started and can you eliborate on the S&P 500?
Jennifer, is that you?
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