T Nation

Young and Investing?

Hey guys, I saw a thread a while back on investing and saw some smart guys are out there.  I'm looking for some input on my plan....

I'm going to be a Junior Officer in the military in one year when I graduate college and get commissioned, which means I'll have a lot of money with nothing to spend it on.  I'd like to build some capital and I figure when I'm young is the time to take some risks with money.

I plan on going through USAA for my investing as they're my checking/savings, etc. and they have good rates on banking/investing for military members.

3-6 months Savings:
Money Market Fund (USAXX)

80% in Shorter Term:
25% - S&P 500 Index Fund Member Shares (USSPX)
25% - USAA Extended Market Index Fund (USMIX)
25% - USAA Income Fund (USAIX)
25% - USAA Total Return Strategy Fund (USTRX)

20% in Retirement:
40% - Aggressive Growth Fund (USAUX)
40% - Small Cap Stock Fund (USCAX)
30% - International Fund (USIFX)

Thanks guys,
Justin

Honestly, get a financial advisor.

Maybe you know someone that can recommend one, otherwise look around.

I have been working for ricedelman.com as a temp and he seems to run a highly regarded financial advising business.

One more thing, you are right about getting started early, look at this quote from Ric Edelman:

"consider the story of Jack and Jill. You know Jack fell down the hill, but you didn?t know that he suffered head injuries. As a result, Jack decided not to go to college. Instead, at age 18, he got a job, enabling him to contribute $4,000 to his IRA each year. After eight years, he stopped, having invested a total of $32,000.

Meanwhile, his sister Jill, inspired by Jack?s accident, went to medical school. At age 26, she began her practice and started contributing $4,000 to her IRA. And she did so for 40 years, from age 26 to 65. She invested a total of $160,000 and she put her money into the same investment as her brother Jack. Thus, Jill started investing the same year Jack stopped, and she saved for 40 years compared to just eight years for her brother.

By age 65, whose IRA account do you think was worth more money?

Assuming Jack and Jill each earned a 10% return, Jill accumulated $1,327,778 but Jack collected $1,552,739 ? $224,961 more than his sister!

While Jack had invested only $32,000 to Jill?s $160,000, his money earned interest for eight years longer than his sister. It wasn?t the money that made him successful ? it was the time value of money. Jack didn?t procrastinate, and by investing sooner than Jill, his account grew larger."

Pretty interesting stuff.

This is an old article that I like to re-post on threads like this one:

[i]This Time It’s Different?
No way. Don’t let the fear-mongerers fool you.

By James K. Glassman

“I am in a PANIC over this article, telling people to get out of stocks,” said an impassioned e-mail I received last week from a nice, intelligent professional woman who is a friend of a friend. “Is he right??? I am 52 years old, and I really hope to retire SOME day.” What upset her can be gleaned from this excerpt from the CBS MarketWatch website on March 24: “Listen closely: The next crash is coming. . . . It is coming! . . . Read my lips: The next crash is coming, and it could kill your retirement if you don’t start planning ahead now.” The main point of the author, Paul B. Farrell, is that there will be another big terrorist attack, which will not only kill lots of people but also have an adverse effect on stock prices. “The likely timing will coincide with a significant political event this year: the Fourth of July, a political convention, the 9/11 anniversary or the November presidential election.”

Farrell has other reasons for predicting a market collapse. He approvingly cites Richard Russell, a newsletter editor, who recently predicted, “We are coming into one of the worst bear markets in history,” plus Robert Prechter, who expounds a weird theory about Fibonacci cycles and says bluntly: “Get out of stocks and funds and park all your money in Treasurys and money markets. Cash out insurance policies.”

I do not know Farrell, but I do not like him. He scared this nice woman - and probably many others. Farrell claims to have predicted the market peak in March 2000. Let’s accept that. Maybe he is a genius or is psychic.

Still, he should be ignored.

Fear-mongers abound, as do stock touts and charlatans of all varieties. What investors need is a context in which to judge their proclamations, which are always made with the extreme confidence that the rest of us mortals lack. Context requires investor education, a buzz-phrase that was the subject of a Senate hearing last week. My view is that investor education doesn’t need to be complicated. It should be simple - and brief. If I were designing a curriculum, the course would last for five days, with each session running three hours. It would look like this:

Day 1. Lesson to learn: Your goals determine your investments.

To decide what to include in your portfolio (a process known as asset allocation), you need to decide why you are investing. A strategy for retirement is different from a strategy to save enough to buy a house in two years. Far-off goals (five years or more) require stocks. Medium-term goals (one to five years) are more appropriate for bonds, which are loans you make to businesses and government agencies. And for short-term needs, stick to cash, meaning money-market funds, savings accounts, or certificates of deposit.

History shows that stocks return far more than bonds: an annual average of about 10 percent, compared with a little over 5 percent for long-term Treasury bonds. But stocks are more volatile. They lose money in one out of every three or four years. Over the long term, however, that volatility evens out. U.S. stocks have lost money in only one out of every 10 five-year periods, and they have been profitable in every fifteen-year stretch in history.

Day 2. Lesson to learn: Markets are (mostly) efficient.

The price of a stock reflects the considered judgment of millions of investors who have their own hard-earned money at stake. These investors use all available knowledge about a company, the economy, the political situation, the weather - you name it - to reach their conclusions about the “right” price for a stock today. From today’s perspective, a stock price moves in what economists call a “random walk,” that is, a completely unpredictable pattern. Of course, as Warren Buffett points out, to say that markets are efficient
most of the time is not to say that markets are efficient all of the time. Sometimes stocks become expensive or cheap, and occasionally small investors can capitalize on such anomalies.

But it is a gigantic error of hubris to believe that you are smarter than the market as a whole. This is the error that Paul B. Farrell commits.

He says, first, that an attack is coming. Well, so do most Americans. They’ve believed, for the past 2 ? years, that a terrorist attack was imminent inthe United States. The most recent survey I could find on the subject, taken by the Harris Poll on Feb. 6, well before the Madrid bombing, found that 62 percent of respondents believe “a major terrorist attack [is] likely” in the next 12 months.

When that many people expect a calamity, their expectations tend to be reflected in the price of stocks - just as, for example, the price of Johnson & Johnson (JNJ) stock reflects the expectation that the company’s dividend will rise in 2004, as it has for the previous 42 years in a row. In fact, you might argue that the belief that terrorists will strike here has depressed stock prices severely since Sept. 11, 2001. At any rate, it’shard to credit Farrell with a profitable insight if his view on terrorism is shared by nearly two-thirds of the public. It is likely that such an attack is already “discounted” in stock prices. In other words, an attack may come, but that doesn’t mean that a stock market crash - or, more important toinvestors, a prolonged downturn - will result.

There are other conclusions to draw from the lesson of efficient markets. One is that, as a long-term investor, you shouldn’t worry too much about whether the stocks you pick are cheap or expensive. The market has determined that their prices are “right” at any given moment. The market may be wrong, but the default position is that it is correct.

Had a big winner lately? Don’t flatter yourself. It was probably just luck. Searching for undervalued stocks is great sport, and you should never deprive yourself of the pleasure, but it’s a mistake to believe you can make brilliant selections with any consistency.

Day 3. Lesson to learn: Diversify for protection.

Own one stock, and you are vulnerable to disaster. Own 40 stocks in different sectors, and your portfolio is more likely to perform about the same as the market as a whole. It’s the same with bonds. Own a single corporate or municipal bond, and you could lose everything you have in a default. U.S. Treasurys won’t default, but owning just one, with a single maturity date, is also risky. A sharp rise in interest rates could leave you with a bond you will have to sell at a loss.

The easiest way to diversify with stocks is through mutual funds or exchange-traded funds (ETFs, like mutual funds, are portfolios of stocks, but ETFs are pegged to indexes and trade as though they were individual companies). Because stocks are efficient, smart investors are not outsmarters, but partakers; instead of trying to beat the market, they join it. How? By owning index funds like Vanguard Index 500 (VFINX), which reflects the Standard & Poor’s 500-stock index, the largest listed U.S. companies, which together account for more than four-fifths of the value of the entire stock market.

But managed (or human-run) mutual funds can be an even better choice. On Thursday, I used a screening tool on the Morningstar website http://www.morningstar.com/ and specified that I wanted to find all U.S. domestic-stock large-cap growth funds that had a manager with at least a five-year tenure; required a minimum investment of no more than $2,000; had turnover of 100 percent or less (that is, the average stock was held for one year or more); had a rating of five stars (tops); and had beaten the S&Pover the past one-, three- and ten-year periods.

The computer spat out only two funds, and they are both terrific: SmithBarney Aggressive Growth (SHRAX), managed by Richie Freeman since its inception in 1983, and American Funds Growth Fund (AGTHX), run by a six-person team with an average of twenty-eight years of experience.

Day 4. Lesson to learn: The little things count.

The little things, in this case, mount up, thanks to the power of compounding over long periods. But the little things also include taxes, inflation, and expenses. Gross returns mean nothing. The question is how much you can put in your pocket at the end of the day.

Here are the high points:

Taxes: The recent cut in taxes on dividends to 15 percent means that income-producing stocks can be much more profitable than bonds, whose interest is still taxed at ordinary-income rates of as high as 35 percent. Also, remember that holding stocks for a year or more qualifies the gains for a much lower tax rate.

Inflation: The rate today is below 2 percent, but the average for the past thirty years has been 5 percent. At that pace, during a human lifetime, the purchasing power of a dollar will diminish to about 3 cents. Inflation is bad for nearly all investments. An exception is a new type of bond - Treasury Inflation-Protection Securities, or TIPS, introduced in 1997. The value of these bonds rises with the consumer price index. Stocks do better in inflationary times than conventional bonds, since companies can raise their prices while bond yields (interest payments) are fixed.

Expenses: The average expenses that investors pay to mutual funds amount to about 1.25 percent annually (not including the fund’s costs of buying and selling stocks, which can be another 0.3 percent or so). This may not sound like much, but, as the value of your holdings rises, the amount of dollars you pay in expenses soars. Assume an initial investment of $10,000 and an annual rate of return averaging 11 percent for thirty years. According to a calculator I used on the Securities and Exchange Commission website <“http://www.sec.gov/”>, total expenses over that time for a fund that charges 1.5 percent annually would come to $83,000; for a fund that charges 0.8 percent, $34,000. Among the 8,000 mutual funds on offer, expenses varywidely, so pay attention.

Day 5. Lesson to learn: Know what you don’t know.

It’s your money, so it’s understandable that you worry about the many
things that can affect it. The lesson here is: Don’t.

The economy, for example, has its ups and downs, but over long periods - and, if you are a stock investor you should be investing only for long periods - the trajectory has been up. After each bear market, for instance, stocks move to a new, higher level.

“In the last 50 years,” writes Peter Lynch, the former manager of the Fidelity Magellan fund and one of the greatest investors of all time, “we have had many periods of economic prosperity and many periods of uncertainty. Despite nine recessions, three wars, two Presidents shot (one died and one survived), one President resigned, one impeached, and the Cuban Missile crisis [I would add a period of runaway inflation, a one-day crash that depleted the market by 22 percent and an attack that killed nearly 3,000 Americans], . . . stocks have been a great place to be.”

Indeed, stocks have doubled in purchasing power roughly every 10 years.

Farrell, after quoting Lynch, writes, “This time it is different.”

Those are the five most dangerous words for investors. We could be hit by a meteor tomorrow. But the final lesson is that intelligent investors don’t jeopardize their nest eggs by making such guesses.

Again, Peter Lynch: “Betting against America was a bad bet in the past. It’ll be a bad bet in the future.”

Investing is hard, but it is not hard in the way that most people think.

Benjamin Graham, who was Buffett’s mentor, wrote more than sixty years ago, “The investor’s chief problem - even his worst enemy - is likely to be himself.”

In addition, of course, there are a lot of people encouraging the investor to be his own worst enemy by making him panic.

In the end, the best qualities for investors are the same ones Aristotle admired: moderation, common sense, restraint, modesty, and integrity.

Maybe, instead of five days of investor education, we should all sit down and read five days’ worth of the ancient Greeks.

[quote]JKThreeEleven17 wrote:

3-6 months Savings:
Money Market Fund (USAXX)

80% in Shorter Term:
25% - S&P 500 Index Fund Member Shares (USSPX)
25% - USAA Extended Market Index Fund (USMIX)
25% - USAA Income Fund (USAIX)
25% - USAA Total Return Strategy Fund (USTRX)

20% in Retirement:
40% - Aggressive Growth Fund (USAUX)
40% - Small Cap Stock Fund (USCAX)
30% - International Fund (USIFX)

Thanks guys,
Justin[/quote]

Two things.

First, even though USAA is your broker, you don’t need to buy their funds exclusively, and generally I like Vanguard funds or ETFs better due to lower costs - unless USAA is giving you a special deal or something.

I like this mix for an initial, diversified stock group:

Total domestic stock fund: iShares Russell 3,000 (IWV), iShares S&P 1,500 (ISI), Dow Jones Total Market Index (IYY) or Vanguard Vipers Total Market Index (VTI).

Treasury inflation-protected securities fund: iShares Lehman TIPS (TIP).

International large caps: iShares Morgan Stanley EAFE (EFA)

Second, and as you can see above, even at your age, I think you should go with some bonds for diversification. Even in your retirement account. The flipside to the Jack & Jill story above is that if the market has a 4-year bear run in the middle of Jack’s 8 years and really wipes him out, he is super screwed. Losses in the early years are as powerful as gains, and holding some bonds can smooth things out without sacrificing risk-adjusted return – and you can probably cover some of the return just by minimizing fees and transaction costs.

good info, fellas

You have the right idea. But you need to know what your investment goals are. Same as with lifting.

Here’s what I would do if I were in your shoes. I’d max out my contributions to a Roth IRA. That’s $4,000 this year. Put it in a 3-5 of index funds on varying degrees of risk. For sure, I’d put 20% in an international fund and 20% in tech. The other 60% would be in lower-volatility funds like the S&P 500. Don’t figit with this investment very often. This is your retirement money.

Then take whatever other money you have and put it in other investments. What other investments? That is for you to decide. If you are clueless about the markets, the smartest thing you can do is let someone else invest for you. By this I mean, put your money in index funds. Do research on all of the index funds USAA has.

Right now I have a lot of money in international funds - especially in Latin America. They have been doing well, but who knows how they’ll be doing in another three years? You still have to keep an eye out for market conditions when investing in an index fund.

BTW, USAA is who I had my Roth IRA through. Call them up. Chat with them. They are good peeps.

Just don’t be in a hurry. Wealth is accumulated over time - a lot of time. If you get greedy or only look to the short term, you’ll almost certainly lose all of your money.

Good luck.

[quote]CaliforniaLaw wrote:
You have the right idea. But you need to know what your investment goals are. Same as with lifting.

[/quote]

Absolutely! That’s the best advice so far.
What do you want? In what time frame? and that’ll help you with your planning.
Don’t expect anything in less than 10 years.

And you will do your self an enormous favour if you spend a lot of time understanding COMPOUND GROWTH… learn it, understand it, use it, and you will be rich.

Thanks so much for the good info BostonBarrister and CaliforniaLaw, I’ve been doing some reading and I definitely want to have a good plan ready for one year from now. I know starting young will pay off in the long run. As of now, my goals are long term, as I plan to be single for a while, in the Navy and all. So I plan on my portfolio reflecting that, putting as much as I can into an IRA.

Let me add my two cents to the already generally good advice above:

First thing you need to do is assemble an emergency fund, which should have 3-6 months of living expenses. This is less pressing for you than the average person, as you?re not likely to suddenly be fired from your job and find yourself in need of living expenses, but you should get it together nonetheless so you?ll have it for the future. Better than borrowing at 18% from your credit cards if you were to ever find yourself in such a situation. Put this money in an easily accessible place (e.g., not locked up in a CD). With the returns you can get from high-interest internet savings accounts (HSBC, ING Direct, etc), this is probably the best choice. Get the money together, let it sit there for a rainy day.

Second, max out your IRA, as discussed above.

Third, assuming your time frame is long (I?m assuming retirement or, at the very least, 5 years) you should invest the remainder of your money in passively managed index funds. The lower fee, the better. Vanguard is the conventional wisdom. Don?t bother trying to pick stocks?you won?t be able to beat the market, so don?t bother trying. Similarly, very few professional money managers will be able to beat the market (in the sense that the returns they will get for you will exceed their fees and taxes), and you won?t be able to pick who they are, so don?t bother with actively managed funds. Put the money in index funds, reinvest the returns, leave it alone. Market crashes, market goes crazy, whatever, you just leave the money in there until you need it for whatever you are investing for.

Fourth, and this is the only really complicated part, you need to diversify your portfolio. The simplest rule of thumb is that your stock allocation percentage should equal 100 minus your age. Thus, if you were 30, you should have 70% of your portfolio in stocks and 30% in bonds. (The theory being that as you approach retirement, you should move progressively more of your money into safer bonds investments, so you are not wiped out immediately before retirement). This is the bare minimum level of diversification. You should really have some money in small cap index funds, some in large cap, some international, etc, etc?.

If you really just want to be done with it with no additional research, just dump the money into a ?life cycle fund?, which will itself provide a pretty decent allocation. If you want to slightly put more work into it, you should consult a financial advisor and have him put together a more elaborate, personalized diversification strategy for you. This can probably be done for less than 100 bucks. Just make sure you stick to passively managed index funds.

Again, the worst possible thing you could do is to just start watching Mad Money and picking stocks through an e-trade account or whatever. To make money doing this (after taking into account transaction costs and taxes), you will need to beat professional money managers who do nothing but manage money 16 hours a day.

Great resource.

look in to IRA’s and long term annuities, but talk to a financial advisor. edward jones is pretty good.

After the IRA is fully funded, just find a good mutual fund with a solid ten year history. Invest a lump sum or do a direct deposit monthly or whenever you get paid and just leave it alone for at least 5 years.

Look at Money magazine for their list of good funds. or at money.com

I think your plan is solid for now. Once you’ve built up a nice little nest egg (>100k), take some big risks on start-up company seed money, real estate (rental properties, development if you can), bankrupt equities, etc. This is where you make the gobs of $$$. You will also lose some, that’s why you get your base built up around safer investments.

DB

get a financial advisor and start an IRA like others have said. I have some other investments that I put money into when I have the extra cash, but I never miss an IRA payment, and since I started it in '05 I have maxed it out each year.

[quote]DK wrote:

Great resource.[/quote]

Fuck them. I interviewed there for a position and they asked me what I would do regarding their inflated cancelation rates. I said the first thing I would do is implement a call to cancel requiremnent, rather than accept email cancellation.

The interviewer said this was the first time she had heard of this and asked me to tell her more. I spelled out a call to cancel program and how to manage it in terms of staffing/training/handling customer objections/ etc.

I went for my third interview and was told that one of the interviewing managers, coincidentally the same one i told about the call to cancel idea in my first inteview, had recently (since my interview) came up with a call to cancel idea and how I felt about it. Not realising the connection and wanting the job I again explained how to manage implementing such a facet into their business model, staffing/training/call volume/average speed of answer/handling customer objections etc.

I didnt get the job, but they took an idea from me and implemented it as their own. Instead of hiring the person with ideas, they hired someone they knew for the position. That type of business model is bound to fail and I give them as much credit as I do what I flush. I will never, ever help that company again.

Fuck fool.com.

You can give your money to a professional now and do a virtual market thing, like Marketocracy (marketocracy.com) for now. Later on if you get good you could invest yourself.

[quote]Chris4x4 wrote:
After the IRA is fully funded, just find a good mutual fund with a solid ten year history. Invest a lump sum or do a direct deposit monthly or whenever you get paid and just leave it alone for at least 5 years.[/quote]

This is what I want (/need) because when I go on deployment I won’t be able to be checking stocks and whatnot constantly. I just want to “set it… and forget it!” (cheese infomercial joke).

And is “Total Expense Ratio” what I want to be looking at when choosing between similar funds?

[quote]Petedacook wrote:
DK wrote:

Great resource.

Fuck them. I interviewed there for a position and they asked me what I would do regarding their inflated cancelation rates. I said the first thing I would do is implement a call to cancel requiremnent, rather than accept email cancellation.

The interviewer said this was the first time she had heard of this and asked me to tell her more. I spelled out a call to cancel program and how to manage it in terms of staffing/training/handling customer objections/ etc.

I went for my third interview and was told that one of the interviewing managers, coincidentally the same one i told about the call to cancel idea in my first inteview, had recently (since my interview) came up with a call to cancel idea and how I felt about it. Not realising the connection and wanting the job I again explained how to manage implementing such a facet into their business model, staffing/training/call volume/average speed of answer/handling customer objections etc.

I didnt get the job, but they took an idea from me and implemented it as their own. Instead of hiring the person with ideas, they hired someone they knew for the position. That type of business model is bound to fail and I give them as much credit as I do what I flush. I will never, ever help that company again.

Fuck fool.com.

[/quote]

You made a foolish decision in giving them everything you had before they were paying you. Isn’t there some old saying about why buy the cow when the milk is free? Original meaning may have been different, but the point remains the same.