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Young guy. Where to start?
Old 06-23-2013, 01:13 AM   #1
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Young guy. Where to start?

Hey all,

First post here. My story: I'm a guy in his young 20's. Got a decent paying job out of college, and after a couple of years have been able to save up some money due to my frugal lifestyle.

My question is what to do with what I have saved? My goal is early financial freedom. Currently, I have a 401k through my company and I allocate the funds necessary to match.

I am currently renting and have not bought just yet because of the potential of relocation through my work. I will know more about my location within the year.

Should I start to invest in index funds? My worry with is the market looks overvalued at the moment. Should I wait until it evens out, or just go in knowing that I am going to hold for 30+ years anyways.

Any help would be appreciated.
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Old 06-23-2013, 06:13 AM   #2
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Hanging out around here is a good place to start. Are you eligible for Roth IRAs? I'd recommend opening one and funding it next, then dollar cost average into the market. Index funds are fine, I'm also a fan of a mutual fund called the Vanguard Wellington Fund, it is actively managed and still cheaper than most index funds.
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Old 06-23-2013, 07:30 AM   #3
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No load, low cost index funds are the way to go IMO. You could consider contributing more to your 401k or fund a Roth as chasesfish suggests or just invest in a taxable account for emergencies and since at some point you may want to use those funds for a down payment for a house.

I'm a fan of Vanguard as well. If you want easy, you could look at some of their balanced funds that are more heavily weighted towards equities such as Star, Wellington, Life Strategy Growth or a Target Retirement fund.

When I was your age I was 100% stock and their Total Stock Market Index Fund and International Stock Market Index Fund are my core holdings for domestic and international equities, respectively.
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Old 06-23-2013, 08:44 AM   #4
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Welcome aboard. To answer your question about where to put money you've saved and money you will save going forward, I agree to put it in simple index funds. I also like Vanguard. Just make sure you put it somwhere -- I'm about 10 years ahead of you and am more and more convinced that inaction is the worst possible course of action. Also, at a young age, big dips in equities or whatever you invest in aren't a big deal.

I would also suggest you hold out renting as long as you can. I bought a house very early because "that's what you do when you start making big money" and I wish I hadn't. Workers who are more geographically free stand to gain a larger share in the future, IMO. Also, renting makes it easy to get up and try out a different state or country.

[QUOTE=MegatronM;1332073]Hey all,

My question is what to do with what I have saved? My goal is early financial freedom. Currently, I have a 401k through my company and I allocate the funds necessary to match.

I am currently renting and have not bought just yet because of the potential of relocation through my work. I will know more about my location within the year.

QUOTE]
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Old 06-23-2013, 09:12 AM   #5
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.........I'm about 10 years ahead of you and am more and more convinced that inaction is the worst possible course of action............
Good advice. I squandered about 10 years of good growth vacillating over where to invest. Hint- the answer is not in Money Magazine's "Where to Invest this Month" articles. Plop your money in a Vanguard Total Stock market fund or similar and just leave it there. Max out your 401(k) and Roth opportunities.
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Old 06-23-2013, 09:17 AM   #6
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At your age I would put 80% of my investable assets in equities, and 20% in fixed income. Some people would say that at your age you could even do 100% equities, but I'd rather not be that aggressive personally. I like the Vanguard Total Stock Market and Vanguard Total International Market. For bonds, I use Vanguard Total Bond Market Index. If you are in a high tax bracket, you could also do a municipal bond fund if you want tax free dividends.
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Old 06-23-2013, 09:17 AM   #7
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Should I start to invest in index funds? My worry with is the market looks overvalued at the moment. Should I wait until it evens out, or just go in knowing that I am going to hold for 30+ years anyways.

Any help would be appreciated.
Let me tell you a story. I was like you, and wondering what I should do. It was 1986. The market was going up, up, up. I started investing. Then it crashed. I still stayed with the plan.

Was it scary? Yes. Took discipline. Now look what happened. That all time market high was 2500. Today it is 15000.

So, yes, you have a 30 year horizon. Stick with it. And as others mentioned, stay low cost. Back in the day, I made some mistakes with a lot of high load funds and individual stocks. I'm terrible at that.
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Old 06-23-2013, 11:09 AM   #8
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Yes, what everybody else says. I was going to answer last night, but my bed was calling. Here's what I was going to say, and it's the same as everyone else -

- You're off to a good start with the 401K. At the very minimum, keep putting enough money in so that you get all of the employer match that is available to you,

- As others have said, open an IRA (Roth probably makes more sense) and put as much in every year as you are allowed (if you have that much to invest),

- If you have anything left over after the above 2, put more into the 401K, up to the max amount you are allowed,

- If you still have money left over (in which case, wow, I'm impressed) open a regular (taxable) account with your broker and put it into that,

- You'll probably want an emergency fund. How much is up to you, and depends on how long-term and stable your employment situation is, as well as your estimate of the likelihood and "gravity" of emergencies happening,

- If you are investing in taxable accounts as well as the tax deferred ones (401K, IRA's), keep the less tax-efficient funds (e.g. bonds) in the tax deferred accounts to minimize your tax liability. Stick to low-cost index funds. Some 401K's offer good low-cost funds, others don't. Look for the lowest-cost funds available to you in your 401K, preferably without front or back loading. With some 401K plans, you have to take the best of a bad bunch but it's still worth doing - if only for that employer match.

- Don't worry about timing the market. If you are putting money in on a regular basis, you are dollar cost averaging into the market anyway. Besides, the market might keep going up for a while. Or it might not. Nobody really knows. You have a long time frame so, as others have said, when you put it in doesn't matter as much as the fact that you are putting it in,

- Your mix of equities to fixed income is up to you, but unless you're extremely conservative, make sure to have a healthy dollop of stock funds. At your age you can go 80/20. You could even go 100% equity funds, but that is up to you. I had about 20% in fixed income when I was working but looking back, I don't really know why because I didn't look at my balances very closely; I just kept working and scooping money into those accounts. Most people feel a bit better with at least something in there to reduce the volatility a bit. It's up to you,

- The most important thing is to put the money away in the first place. You have plenty of time to do some reading, learn a bit more, and adjust your asset allocations later, but you cannot make up for the time lost if you don't put the money away to begin with,

Hope that made some kind of sense. You have time on your side and your older self will be so grateful to your younger self that you started thinking about this, and doing something about it!
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Old 06-23-2013, 01:59 PM   #9
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Just make sure you put it somwhere -- I'm about 10 years ahead of you and am more and more convinced that inaction is the worst possible course of action.
QUOTE]
Yeah, I get a little sick looking at my savings just sit there. I foresee the market taking a bit of a dip, but it doesn't necessarily matter if I am planning on holding it for a long period of time. Is this correct?
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Old 06-23-2013, 03:29 PM   #10
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Yeah, I get a little sick looking at my savings just sit there. I foresee the market taking a bit of a dip, but it doesn't necessarily matter if I am planning on holding it for a long period of time. Is this correct?
Something like a 20% drop always matters, but it won't kill you. According to Morningstar the market is close to "fairly valued", so a big dip is likely to be followed by a big recovery. You can dollar cost average or value cost average if you are worried (not just uncertain, but worried) that the market may have a significant drop. But if the market goes up, as it does on average, averaging into the market loses you a little. Still, that can be better than never getting in at all. Just remember, it doesn't matter what the account value is until you're ready to start withdrawals.

Absolutely, index funds are a great place to start. Or try a target retirement fund with as large a date as they have, using index funds hopefully. If you would like to create your own portfolio mix, look at the simple composition of the Vanguard retirement funds and copy it, with your own tweaks if you want. I'd have no hesitation jumping into something like that and then taking a year or more to figure out if you feel better doing something different.
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Old 06-23-2013, 05:15 PM   #11
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Personally, I'd be cautious about funds with bond funds. When interest rates rise , these funds will get hammered. VWELX has bond funds.
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Old 06-23-2013, 05:31 PM   #12
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Personally, I'd be cautious about funds with bond funds. When interest rates rise , these funds will get hammered. VWELX has bond funds.
Remember, the title of this thread is "Young guy. Where to start?"

I would hope we would be pointing out he needs to focus on the long term and not be too concerned about what happens to his investments in the short run. Having a mix of equities and bonds has a very good historical record and I see no reason to believe than won't continue to be the case.
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Old 06-23-2013, 05:54 PM   #13
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I agree with what others have said. I think it was Julius Westheimer who stated that the best time to invest in the market is when you have the money. You are in your 20s so focus on the long-term. If you wait for the "perfect" time to invest, it will never come. You can learn a lot on this board. And if your portfolio goes down after you have made your decision, don't panic and sell. It always has bounced back.
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Old 06-23-2013, 11:23 PM   #14
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At your age I would put 80% of my investable assets in equities, and 20% in fixed income. Some people would say that at your age you could even do 100% equities, but I'd rather not be that aggressive personally. I like the Vanguard Total Stock Market and Vanguard Total International Market. For bonds, I use Vanguard Total Bond Market Index. If you are in a high tax bracket, you could also do a municipal bond fund if you want tax free dividends.
Would something like 40% in total stock market, 40% in total International market, and 20% in total bond be ideal? Also, if I decide to go this route is there a minimum initial investment amount?
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Old 06-24-2013, 02:04 AM   #15
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Remember, the title of this thread is "Young guy. Where to start?"

I would hope we would be pointing out he needs to focus on the long term and not be too concerned about what happens to his investments in the short run. Having a mix of equities and bonds has a very good historical record and I see no reason to believe than won't continue to be the case.
I disagree. Interest rates have no where to go but up. If you're a bond holder, you've experienced losses the past few weeks as rates have risen. I've personally gotten rid of bonds ( bond funds) in my retirement accounts, so I actually practice what I preach. To each his own. I'd rather risk being in stocks than be in bonds. If I want to balance my portfolio , I'd rather go equities and cash for now.
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Old 06-24-2013, 05:51 AM   #16
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I strongly agree with what David1961 said. I have made mistakes along the way, but I have friends who have been sitting on the sidelines for the past six years worried about getting burned and they have missed a great run up. It would be wonderful if you could get into the market during a big dip, chose the perfect funds, etc. etc. but just be aware of how many people end up paralyzed by fear and miss out completely. The only thing you can really control are your costs and your balances, and you should get some excellent advice on here about that. But get in and take the long view. The important thing is to get in.

In my case, I started off investing in mutual funds that had MERs that were way to high (Canada has some ridiculous MERs). Sure, I did not made as much as I might have investing in more cost effective funds, but I learned a valuable lesson and I still made a significant amount. Now some will tell you what a scam these funds were and how I could have made X amount more, but I definitely would have made zero had I stayed on the sidelines.
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Old 06-24-2013, 07:10 AM   #17
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Would something like 40% in total stock market, 40% in total International market, and 20% in total bond be ideal? Also, if I decide to go this route is there a minimum initial investment amount?
This seems like a very good starting allocation. As you get older and your life unfolds, you will get a better handle on your timeframe and risk tolerance and can adjust your AA. However, I would caution against adjusting your AA except for once a year on the same day and without much or any regard to the recent market.

Also, as someone else said, if or when you are saving enough to be doing taxable savings, try to do the two equity funds in taxable and the bond fund in pre-tax (401k).
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Old 06-24-2013, 07:53 AM   #18
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Would something like 40% in total stock market, 40% in total International market, and 20% in total bond be ideal? Also, if I decide to go this route is there a minimum initial investment amount?
If it were me, I would start out 100% equities given the difficulties that bonds will face over the next few years and would go 70/30 Total Stock/Total International Stock for now. Then in a few years, once/if interest rates have normalized, you can start allocating new money to domestic and international bonds.

FWIW, the Vanguard 2045 target date fund is 90 stock/10 bonds and is 70/30 domestic/international equities and 80/20 domestic/international bonds. See https://personal.vanguard.com/us/fun...tExt=INT#tab=2

Putting aside the current concerns with bond interest rate risk, this seems like a very sensible allocation for someone in their 20s or early 30s to me. I was 100% stocks back then.
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Old 06-24-2013, 02:52 PM   #19
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Hanging out around here is a good place to start. Are you eligible for Roth IRAs? I'd recommend opening one and funding it next, then dollar cost average into the market. Index funds are fine, I'm also a fan of a mutual fund called the Vanguard Wellington Fund, it is actively managed and still cheaper than most index funds.
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Old 06-24-2013, 08:22 PM   #20
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As my sign on name suggests I'm a fan of the Roth. Especially for someone young you could have many years of tax free growth ahead. Roth IRA invested in low cost market index fund would be an excellent next step for your FI plan. Congrats on a great start.
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