Advice for a 20-something newbie investor

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cathy63

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A young friend has asked me for some help getting started with investing and I would love to get some recommendations and advice from the group here.

She is not interested in learning a lot about finance or the market and initially asked me about finding an advisor to do this for her (which I shot down). Her risk tolerance is fairly high and she really wants to invest her money and then ignore it, though she's willing to login and rebalance once a year and whenever she has extra money to add.

She is mid-20s, single, debt free, has a job and an emergency fund, and is not planning any major purchases or marriage any time soon. I would say her annual gross income is about $65K.

She has:
- 401(k) at Fidelity with $7.5K that was started about 6 months ago. This money has been in cash up to now. Adding $1K per month plus a small annual profit sharing contribution from the employer. There's no regular employer match. It seems like she can invest this in anything Fidelity offers. We did a screen-share last night, and I could see that it acts like a regular brokerage account, not like the Fidelity NetBenefits accounts with limited fund choices that I was more familiar with when working.

- Roth IRA at Vanguard with $22K split between VIMAX (mid-cap) and VTTSX (target 2060 fund). Don't know if she plans to contribute this year since she's focusing on putting money in the 401(k) now.

- $15K to invest in a taxable account at Vanguard.

So, what would you suggest she do with these accounts?
 
My easy recommendation for mid-20s person: 100% equities and just keep maximizing saving as much as you can. Timeframe is long 20-30 years at least until likely withdrawals, so just keep paying yourself first, let compounding do its magic. Don't worry about AA and rebalancing, except if wanting to switch funds a bit. Equities for the long haul.


As for what equities, make life easy and stick to wide diversified funds. Probably limited to what is available in the 401k plan, but there should be some decent options. For sure save the min reqd to get the company match if available on the 401k. at $65K income and being single, probably will be tough to max out the IRS pretax limit of $19.5K/year unless she doesn't do fun things and lives in a not as nice housing or has a beater car. Life in 20s still needs to have some blow the dough fun.


ETA: on the funds, I think a mix of NASDAQ, broad market, and maybe 15-20% intl. Depends on what choices are in the 401k plan.
 
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Save. At least 20% of take-home pay.
Invest. Index fund that mirrors the S&P500 and has minimal expenses.
 
Total Stock Market Index VTI and Vanguard's International Growth Fund VWIGX.

Fidelity charges $75 per purchase of Vanguard International Growth so I would spend all the current account holdings on that fund, then buy Vanguard's Total Stock Market ETF VTI for all additions to the account. I wouldn't rebalance until the share of VWIGX drops below 20%. Target balance 70% VTI, 30% VWIGX.
 
To amplify just a bit, I recommended some reading because I think this is the time to teach her to fish, not to just give here a few good fish. Even if she acts on the good fund recommendations here, that does not really set herself up to be her own investment advisor. That Bernstein piece, especially, includes a lot of reading recommendations. Bill Schultheis is so laid back that he provides a recipe for pumpkin pie. @cathy63, if you can convince your friend to invest a little time and at least try to like those [-]brussels sprouts[/-] investment books, she will be well rewarded for the rest of her life.

It is becoming less common for women to be ignorant of financial matters but it was one of DW's hot buttons when she was in the megbank trust department taking care of widows. She actually had trust beneficiaries who did not know how to write a check.
 
I have said many times that I'd hate to be 25 years old and starting saving for retirement. Especially with record low interest rates and record high stock market values.

But what you have on your side is time. Time is your ally, and so is compounding over that time.

It's always best to live within your means. And it doesn't hurt to be frugal. Often doing the small things can really payoff in the long term--like not smoking, carrying your lunch to work and avoiding those daily $5 Starbucks.

When I was working, we had a great 401K. But I was amazed that fewer workers really invested in the best possible accounts and watched their portfolio. And I couldn't believe that they didn't all have 10% held back in order to have the company put their 5% in.

But the 401K will not pay for ER. Beyond that, you've got to save much more--starting at the ROTH IRA. If and when you get married, that's when you find a spouse with the same goals and when you kick savings into high gear.

After all, Early Retirement is all a matter of execution of a long term plan. And the 20's is when you start with a little more than baby steps.
 
cathy63 said:
She is mid-20s, single, debt free, has a job and an emergency fund, and is not planning any major purchases or marriage any time soon. I would say her annual gross income is about $65K.
Click to expand...

Is she single? ;)
 
“She’s not interested in learning a lot ...?”

Speechless.
 
OldShooter said:
To amplify just a bit, I recommended some reading because I think this is the time to teach her to fish, not to just give here a few good fish. Even if she acts on the good fund recommendations here, that does not really set herself up to be her own investment advisor. That Bernstein piece, especially, includes a lot of reading recommendations. Bill Schultheis is so laid back that he provides a recipe for pumpkin pie. @cathy63, if you can convince your friend to invest a little time and at least try to like those [-]brussels sprouts[/-] investment books, she will be well rewarded for the rest of her life.

It is becoming less common for women to be ignorant of financial matters but it was one of DW's hot buttons when she was in the megbank trust department taking care of widows. She actually had trust beneficiaries who did not know how to write a check.
Click to expand...

I understand your point, and I did try that, but right now she just really wants some concrete instructions. Everything she looked at before she decided to email me for advice told her things like "a good stock market index fund", "100 minus your age in bonds", "some international stock". After talking to her for a while, I can now see why that sort of advice is very difficult for someone who's trying to figure out how to get started. The choices are endless and there's no way to tell what are the right ones. That's how she ended up with 50% of her investable savings in cash instead of investments.
 
38Chevy454 said:
My easy recommendation for mid-20s person: 100% equities and just keep maximizing saving as much as you can. Timeframe is long 20-30 years at least until likely withdrawals, so just keep paying yourself first, let compounding do its magic. Don't worry about AA and rebalancing, except if wanting to switch funds a bit. Equities for the long haul.

As for what equities, make life easy and stick to wide diversified funds. Probably limited to what is available in the 401k plan, but there should be some decent options. For sure save the min reqd to get the company match if available on the 401k. at $65K income and being single, probably will be tough to max out the IRS pretax limit of $19.5K/year unless she doesn't do fun things and lives in a not as nice housing or has a beater car. Life in 20s still needs to have some blow the dough fun.

ETA: on the funds, I think a mix of NASDAQ, broad market, and maybe 15-20% intl. Depends on what choices are in the 401k plan.
Click to expand...

As far as I can tell, the 401k plan has no restrictions on what she can purchase. That's one of the things that was confusing. I asked her to send me the list of funds available in her 401k before we talked so I could see what the options were, and she said there was no list. Then when we got online, I could see that she logs in through the regular fidelity.com page, and when she clicks on Trade, she can type any symbol in the box. This account may be something Fidelity offers for very small businesses with only a couple of employees, more like a solo 401k than a large employer plan.

Since it's at Fidelity, I am thinking of telling her to put it 80/20 in FZROX/FZILX.
 
Brat said:
Total Stock Market Index VTI and Vanguard's International Growth Fund VWIGX.

Fidelity charges $75 per purchase of Vanguard International Growth so I would spend all the current account holdings on that fund, then buy Vanguard's Total Stock Market ETF VTI for all additions to the account. I wouldn't rebalance until the share of VWIGX drops below 20%. Target balance 70% VTI, 30% VWIGX.
Click to expand...

Thank you for these suggestions. This is very helpful. Actually most of her money is at Vanguard right now, with only the 401k at Fidelity. I think she could buy the Vanguard funds in the two Vanguard accounts, and buy similar Fidelity funds in the 401k, saving the purchase fees.
 
cathy63 said:
I understand your point, and I did try that, but right now she just really wants some concrete instructions. Everything she looked at before she decided to email me for advice told her things like "a good stock market index fund", "100 minus your age in bonds", "some international stock". After talking to her for a while, I can now see why that sort of advice is very difficult for someone who's trying to figure out how to get started. The choices are endless and there's no way to tell what are the right ones. That's how she ended up with 50% of her investable savings in cash instead of investments.
Click to expand...
OK, easy. 100% in VTWAX or VT. Look at account statements no more than once a year. Better, once every five years.

Try to coax her into the Schultheis book.
 
I would never tell someone in their 20's, with 40 years of working life ahead of them, to put ALL THEIR MONEY in a total index fund. That is financial malpractice, IMO.

Furthermore, this idea that a total market index fund is the answer for just about anyone, in any life situation, is also wrong. Common sense alone should tell you that a one sized fits all solution cannot be the correct one.

Your young friend has an opportunity to really accumulate wealth. If you are going to advise her to go with index funds, I implore you to have her put $5K of the $7.5K in the Fidelity 401k account in the Fidelity Blue Chip Growth Stock fund, FBGRX. Let her put ongoing contributions into the index fund if she must, but at least give her a chance to exceed mediocre returns. And yes, investing in a total world index fund in your 20's is a recipe for a mediocrity of returns over your lifetime. You are literally aspiring to be the most average investor possible.

One thing for sure, she doesn't need to be in bond or bond funds at her age. 100% equities is the way to go. Be aggressive early on when youth is on her side and she has years to overcome any market crashes. As she gets older she can get more conservative in her investing approach, shifting her allocations to index funds and bond funds.

Both my kids are in their early 20's now. Back in 2014 they inherited $11,000 from grandma. I opened an investment account for each of them that summer. When the oldest one turned 21 his account held over $21,000. He was gifted this money in December 2018 and January 2019. My youngest son's account now holds $28,400. I put their money in a large cap fund, mid cap fund, small cap fund, and a small amount in an all-sector income fund.
 
Qs Laptop said:
... investing in a total world index fund in your 20's is a recipe for a mediocrity of returns over your lifetime. ...
Click to expand...
Actually there is at least a half-century of data that says that broad low cost index funds beat about 95% of investors over periods like five and ten years. Even looking at just one year, broad low cost index funds beat well over half of stock picker funds. If you have actual data to the contrary, I'm sure the S&P folks that prepare the SPIVA and Manager Persistence reports will be very interested to see it, since it would contradict everything they have published over the 20 years they've been studying this subject.

Granted, there are always a few percent of winners and it is easy to pick the winners by looking in the rear-view mirror. The problem is picking them through the windshield. For example, Nobel winner Eugene Fama and his research partner Kenneth French: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx
 
OldShooter said:
Actually there is at least a half-century of data that says that broad low cost index funds beat about 95% of investors over periods like five and ten years.
Click to expand...

It's great to be in that 5%, I can tell you that!

Even looking at just one year, broad low cost index funds beat well over half of stock picker funds. If you have actual data to the contrary, I'm sure the S&P folks that prepare the SPIVA and Manager Persistence reports will be very interested to see it, since it would contradict everything they have published over the 20 years they've been studying this subject.
Click to expand...

FBGRX, CPOAX, WAMCX, FOCPX, FKDNX, PRDMX, etc. etc.

Granted, there are always a few percent of winners and it is easy to pick the winners by looking in the rear-view mirror. The problem is picking them through the windshield. For example, Nobel winner Eugene Fama and his research partner Kenneth French: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx
Click to expand...


Yeah, we know all about your appeal to authority and scholars.

The fact is that some funds put up index beating numbers for say, 7 out of 10 years, then lose to the index for a year or two. But those seven years they build up enough growth to weather the down years and still trounce the index.

The key is how they perform over the long haul, in the case of Cathy63's friend that would be the next 40 years.

Are you really suggesting a 25 year old invest all their money in a total world index fund?
 
Qs Laptop said:
... Yeah, we know all about your appeal to authority and scholars. ...
Click to expand...
Yup, guilty as charged. From a career in technology I have found that basing decisions on actual data and solid research is far superior to relying on anecdotes and fact-free arguments. Interestingly, my project customers at JPL, NASA, OSD/DoD, etc. all seemed to feel the same way.

Why don't you find that paper that Dr. French references (sorry I have lost the link)? It's 43 pages, published in the early 90s IIRC. You could study it and point out their errors to them. And as I already suggested, you could explain to the S&P researchers why their 20 years of results are also wrong.

Unless you bring some facts to support your arm waving I'm not going to engage you any more here.
 
OldShooter said:
Yup, guilty as charged. From a career in technology I have found that basing decisions on actual data and solid research is far superior to relying on anecdotes and fact-free arguments. Interestingly, my project customers at JPL, NASA, OSD/DoD, etc. all seemed to feel the same way.

Why don't you find that paper that Dr. French references (sorry I have lost the link)? It's 43 pages, published in the early 90s IIRC. You could study it and point out their errors to them. And as I already suggested, you could explain to the S&P researchers why their 20 years of results are also wrong.

Unless you bring some facts to support your arm waving I'm not going to engage you any more here.
Click to expand...

I've seen that article, you've posted it before. And I can name drop clients I've worked with in my previous career and they included all of the ones you named and then some. They liked the research work I did on solid state semiconductor materials. So what?

I would love to give you facts but you dismiss backtesting that would prove my position, so what's the point? You can take any of those ticker symbols I gave in a previous post and put it into the portfolio backtester,

https://www.portfoliovisualizer.com/backtest-portfolio

and test it against your beloved total world index fund. Go ahead and input any 3, 5 or 10, 15, 20 year period with whatever endpoints you want for dates and see what data it spits out.

Your position seems to be that backtesting is invalid, and since we can't know the future the best thing to do is to settle for the rock solid average of all average returns we can get--total market index fund.

Is that what they aspire to achieve at JPL and NASA? Total mediocrity?
 
maybe you two get a room...
 
If I were in my 20's I would be tempted to just stay in a target date fund at that age. VTTSX has low ER 0.15 and if re balance is needed that is done for you. A simple set it and let compounding and time do it's thing. I believe Fidelity has ER of 0 for some of their index funds so that may well be worth the time to check out.
 
VTWAX is a solid fund .As Jack Bogle has said numerous times "Dont spend time looking for the needle in the haystack buy the whole haystack" which is what a good no load low fee index fund is. Very Likely to beat 95% of the Wall Street hot shot fund managers and stock pickers in the long run
 
For someone in her 20s who has no interest in learning more and just wants to set it and forget it, I would just go with the Vanguard Target Date 2060 (VTTSX). Currently 90/10 equities bonds, with international being about 40% of the equities. It will rebalance without her having to think about it.
 
@cathy63, I used to make blanket recommendations to buy target funds but then I looked a little deeper:

Target funds from different companies vary quite a bit in the profile or glide slope. One I looked at stayed fixed at the same high equity percentage until near target, then it slid down fairly quickly to another fixed percentage with low equities. Others offered much smoother glide slopes. Not to say one approach is better, but they do differ quite a bit. Equity % at similar dates also varied quite a bit. Your friend is not getting married to a fund for life here, but given the whole point being fire-and-forget, you and she should probably at least look at the first ten or twenty years' proportions and make sure you like what's ahead.

Fees vary of course. Some target funds charge the fees on underlying mutual funds plus a "wrap" fee. Others charge a single fee.

Remember, too, that the "date" of the target date fund does not have to coincide with her planned retirement date. Pick an earlier date if you/she wants to be more conservative and a later date to be more aggressive.

Finally, an equity portion that is not based on a broad index can be risky:
Reuters/FIdelity: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI
 
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