College Student Just Starting Investing

[marko]

Thought I might throw myself at the collective wisdom here.

Our 3rd year college age nephew has accumulated a nice chunk of cash over the summer.

He's a business major (but obviously an unsophisticated investor) and he'd like to put $500 into the market. Uncle marko has offered to match his investment and get him to $1K as a starting point and to monitor/advise along the way.

So we're looking at low minimum, moderate risk funds that might be a good place to get his feet wet. The main criteria seems to be low minimum. Yeah, I'm aware that the market is 'high' right now but a drop in price might also be what we now call a 'teachable moment'.

I was thinking of a simple S&P index fund but it seems the minimums are in the $10K range.

Any suggestions? I expect a lot of Vanguard suggestions from this forum but he's leaning toward TD Ameritrade as his savings is with TD Bank. Can he still buy Vanguard funds?

Thanks to all my friends here in advance!

 

[Senator]

Thought I might throw myself at the collective wisdom here.

Our 3rd year college age nephew has accumulated a nice chunk of cash over the summer.

He's a business major (but obviously an unsophisticated investor) and he'd like to put $500 into the market. Uncle marko has offered to match his investment and get him to $1K as a starting point and to monitor/advise along the way.

So we're looking at low minimum, moderate risk funds that might be a good place to get his feet wet. The main criteria seems to be low minimum. Yeah, I'm aware that the market is 'high' right now but a drop in price might also be what we now call a 'teachable moment'.

I was thinking of a simple S&P index fund but it seems the minimums are in the $10K range.

Any suggestions? I expect a lot of Vanguard suggestions from this forum but he's leaning toward TD Ameritrade as his savings is with TD Bank. Can he still buy Vanguard funds?

Thanks to all my friends here in advance!

An S&P ETF would be perfect.

There are many S&P ETFs. SPY, VOO, IVV and a few. Look for a $0 commission ETF. Fidelity offers IVV commission free.

 

[Gumby]

He could open a TD Ameritrade brokerage account and simply buy an appropriate ETF.

 

[samclem]

Assuming his income was lower than he expects it to be in retirement, starting and contributing to a Roth IRA woud be a good habit to get into.

The Vanguard Target Retirement Funds have a $1000 minimum. At his age, he'd choose one that would have a lot of equity exposure. If he bought the Year 2055 fund he'd have about 55% US stocks (big, small--everything), 35% foreign stocks, 7% US Bonds, 3% foreign bonds. The whole thing would cost him 0.16% . (That's less than $2/year on his $1000 investment).

A very good lesson to learn is to keep your hands off the money. He may eventually want to learn about investing and hopefully he'll learn good habits and stay away from the things that so many people do to hurt their results. But if he just learns to sock money away before he gets a chance to spend it and invest in a widely diversified portfolio at low cost, he'll be >well< ahead of 90% of the population. A Roth IRA invested in a Target Date Fund would be a great start.

 

[OldShooter]

... Our 3rd year college age nephew has accumulated a nice chunk of cash over the summer.

He's a business major (but obviously an unsophisticated investor) ...

Bill Bernstein's "If You Can" was written for him. Just 16 pages. Download here: If You Can and Rational Expectations

I would encourage him to read and re-read until he can quote the whole thing from memory. Also to read the suggested books.

RE S&P index funds, I have 2 1/2 reasons why I think investing in these is [-]truly foolish[/-] unwise.

1) They are sector funds: their sector is large CAP US stocks. So you are betting on just one horse in the race. A big horse, to be sure, but still only about 35% of worldwide investible stocks. Trying to pick winning sectors is hauntingly like trying to pick winning stocks, and we all know how well that works.

2) Because of the herding into S&P funds, prices of stocks in the index have become inflated. Evidence of this is that the traders are always trying to front-run additions and deletions from the index. When a stock is added, its price goes up. When deleted, its price goes down. IOW, membership in the "club" results in your stock price being inflated. When you shop, do you seek out overpriced merchandise?

2 1/2) If I were a market timer, which I am not, I would also point out that the US large CAP sector has had a particularly good run in the past few years and is overdue for a regression back to its mean.
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I would recommend a total world stock market fund, like one based on the ACWI All-Cap. As Gene Fama says: "We have to hold the market portfolio." IOW, everything. Here's a worthwhile 37 minutes where he explains: https://www.top1000funds.com/featured-homepage-posts/2015/12/11/investors-from-the-moon-fama/

 

[Blue Collar Guy]

INDENT]I would recommend a total world stock market fund, like one based on the ACWI All-Cap.

Im 15 % in international, I hope demand skyrockets in these funds, They have dragged my returns for 10 years. I hope every one reads your post. And buys them.

If it was my nephew, I put this Thousand bucks in a Roth total market(US) fund.

 

[OldShooter]

Im 15 % in international, I hope demand skyrockets in these funds, They have dragged my returns for 10 years. I hope every one reads your post. And buys them.

If it was my nephew, I put this Thousand bucks in a Roth total market(US) fund.

With respect, IMO that is kind of a buy high, sell low strategy. The whole point of buying the total world market is that over any given time period some sectors will be up and some sectors will be down, but nobody can predict which will be which. Again, IMO if you want to play with sector investments, a better reaction to the Internationals being down would be to buy that sector, expecting a reversion to the mean. Buy low, sell high, IOW.

Also, a lot of the recent apparent action in Internationals is due to currency movements. Over the long haul, these will IMO result in a weaker dollar and consequently even better looking International performance. If someone told me I had only two choices, 100% US or 100% non-US, I would take the 100% non-US portfolio in a heartbeat.

 

[DrRoy]

An S&P ETF would be perfect.

There are many S&P ETFs. SPY, VOO, IVV and a few. Look for a $0 commission ETF. Fidelity offers IVV commission free.

I support this, or a total market ETF like VTI.

 

[Doc0]

If I had $1000 for a youngster I'd buy brk.b in a roth and let it ride. When he gets to 5k of brk.b start to diversify by adding in different assets.

 

[FlaGator]

+1 on a total world fund/ETF in a Roth. Exactly where DD's earnings from her first job are going.

I intended to put the amount she earned in a Roth on her behalf, but the little pixie asked about doing the same before I had the right opportunity to bring it up

 

[Blue Collar Guy]

With respect, IMO that is kind of a buy high, sell low strategy. The whole point of buying the total world market is that over any given time period some sectors will be up and some sectors will be down, but nobody can predict which will be which. Again, IMO if you want to play with sector investments, a better reaction to the Internationals being down would be to buy that sector, expecting a reversion to the mean. Buy low, sell high, IOW.

Also, a lot of the recent apparent action in Internationals is due to currency movements. Over the long haul, these will IMO result in a weaker dollar and consequently even better looking International performance. If someone told me I had only two choices, 100% US or 100% non-US, I would take the 100% non-US portfolio in a heartbeat.

Thanks Shooter, I feel better. When I was reading everything I could get my hands on and probably only understood about 85% of it I knew there was a reason to get some International. Ill hang on to it, as something in my research said it was the thing to do.

 

[NW-Bound]

For a newcomer to learn, it is best to have at least one US ETF/MF and one international ETF/MF. He can then see how they don't always track, and learn the value of diversification. One can also learn diversification through slicing/dicing of different sectors but it takes a larger portfolio to do that.

I am sure one can find an MF that has both, but then he does not know what is going on inside it.

Regarding the S&P 500, it is up 10% YTD but only 10 companies provide most of that gain, and the other 490 companies are mostly languishing. It is hard for even a good company to do well if the rest of the economy does not. An uneven advance is not healthy.

 

[OldShooter]

Thanks Shooter, I feel better. When I was reading everything I could get my hands on and probably only understood about 85% of it I knew there was a reason to get some International. Ill hang on to it, as something in my research said it was the thing to do.

Well, here is another short read on Internationals: https://www.vanguard.com/pdf/ISGGEB.pdf All you really need is the graph on page 5, which shows that 30-40% internationals is the sweet spot for minimum portfolio volatility.

And (none of my business, of course) from reading your posts here, I think you would be a happier guy if you paid less attention to your portfolio. I discovered this forum a few months ago and have enjoyed the discussions, but portfolio management for us is a once-a-year thing. We're always at our lake home between Christmas and New Year; that's when we look at things and make any necessary decisions about trades. Most years there are no trades. Remember Buffett's ideal holding period? Forever.

IMO, investing done well is a very boring game. YMMV, of course.