Investing

I'm looking for advice from GFFers who have investing experience. I know this is a gaming forum, but I want to get a wide variety of opinions. I'm looking more for general advice like what my options are instead of asking for what stocks I should buy. Here's my situation.

I have money in a low-interest savings account that has been sitting there since I opened it when I was 14 or so. That was almost 10 years ago, and as expected from that type of account, it hasn't grown much at all. I didn't open it with the intent of making money from interest so it's not a big deal. However, I've recently decided to put my money to work, but I'm not too sure where to begin. I began researching intestment opportunities for someone my age (23) and the most attractive option to me was opening a Roth IRA and investing it in an index fund. The problem with this is that money put into a Roth IRA needs to be from income; the money I'm looking to invest isn't.

I looked at buying stocks using a discount broker (etrade or a similar website), but I didn't want to go into the market without doing a little bit more research. I signed up for the investopedia stock simulator and invested the fictional $100,000 on stocks I would've invested in if I were to go into it. Currently, I'm down $23,000. It's obviously not a good time to invest with the steady decline the market is currently experiencing. So what are my other options?

Here are some more details about me that might help.
Age: 23
Occupation: 4th year college student (graduating Spring 2009)
Amount to Invest: $4000
Debt: none
Investment Plan: long term
Risk Tolerance: low-medium (from some website I can't remember at the moment)

I'm still doing research by reading books and articles online, but I thought it'd be a good idea to ask those who've had experience and maybe those who are in a similar situation as me.

Jam it back in, in the dark.

You say long-term, but how long-term are we talking here? You thinking that this will be the start of a retirement fund, or something else?

There's nowhere I can't reach.

Uh, why not talk to an investment specialist at your bank and see how it goes from there?

This thing is sticky, and I don't like it. I don't appreciate it.

Originally Posted by lord-of-shadow

You say long-term, but how long-term are we talking here? You thinking that this will be the start of a retirement fund, or something else?

Yeah pretty much. Was looking to start an IRA, but since I can't at the moment, I'm looking for other options.

Originally Posted by Terminus

Uh, why not talk to an investment specialist at your bank and see how it goes from there?

Like I said, I'm doing a wide variety of research so I also want to hear people's personal experience with investing. Maybe someone on here is/was in a similar situation and could give me some pointers. Also, banks are no good since usually, they will try to get you to put your money in their bank and my bank's investment options aren't attractive to me. But yeah, I'm looking around for a financial planner.

I am a dolphin, do you want me on your body?

Since my employer doesn't withhold my taxes, I'm responsible for keeping track of them. I created a ING Direct bank account which automatically debits from my checking account (where my paycheck is automatically deposited every month) roughly what I have to pay for taxes. I try to lump the savings into various CDs that will all mature during tax season, so I'll be earning an extra 0.5%-1.0% over what I'd earn in my normal ING Direct savings account (which is also higher than what I get at my local bank).

I'm in a fairly similar situation to you with some other money I've been sacking away, though, and I'm not quite sure what to do with it.

I was speaking idiomatically.

It comes down to when you're planning to withdraw the funds really. Since you say you're a college student, I'm going to assume that this is all for retirement purposes which means somewhere around a 30-year investment time horizon.

If this is the case, I'd suggest doing what you've initially thought: put that money into an index fund (like a Vanguard Mutual Fund or an ETF) and let it sit there. Traditionally, the market index has been returning on average 8-10% compounded each year even after all the wild market swings are taken into account so if you're looking 30 years ahead, it shouldn't be a major issue if you're willing to drop it the money there and leave it alone.

You can also invest in individual stocks if you so choose, but that's going to depend on how much research you're willing to do. I personally do a mix of both by putting large amounts of my money into mutual funds (including one that invests in bonds) and keep a sizable amount in stocks that I think have decent prospects for growth or are solidly entrenched companies.

How ya doing, buddy?

Investing in individual stocks is a bad idea at the moment, with the economy going into recession, so the risks are too big, and the profits you make will be too small. I'd only invest if you know the company, have seen year reports and are sure that they will be able to keep up with a crisis.

Also, why the hell would a college student want to put money away for RETIREMENT? You don't want to start paying for that until you're 35 or older (at least that's how people around here do it). I think that students need to invest some of their money on a shorter term, to be able to use it to buy a house in the near future or some other big expense that you find necessary to make. The safest option is probably government bonds, you can find them for various periods, and they come with a fixed return, so if you have no experience with the financial market, this may be right for you.

Another option is a "savings insurance" (I don't know what it's called in the US. TAK 21 accounts in Belgium). You basically put your money into an account for a fixed period (usually eight years here, then you don't have to pay taxes on the return), and the compound interest combines a small fixed percentage, and a variable return that depends on the market (the bank will invest the money for you in specific funds, so this can fluctuate, but is usually around 4-5%). The nice thing about these accounts is that you you always get your investment back (guaranteed by the contract), and in the case of your death, your heirs will receive a 130% return (the insurance bit).

FELIPE NO

Originally Posted by Peter

Also, why the hell would a college student want to put money away for RETIREMENT? You don't want to start paying for that until you're 35 or older (at least that's how people around here do it).

Because of the power of compounding returns? The later you start, the more you have to square away to reach that retirement goal, whatever monetary amount it may be. But the sooner you start, the more time you have to let your contributions grow and the less you have to contribute later on to reach that goal.

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I was in Vietnam and saw a TV advertisement regarding investment. It said something about investing 100 dollars and then you would gain more money. It had an url, but I forgot it.

Does anybody know about these kinds of investments? (i'm not sure what they are called either).

Jam it back in, in the dark.

Originally Posted by zzeroparticle

Because of the power of compounding returns? The later you start, the more you have to square away to reach that retirement goal, whatever monetary amount it may be. But the sooner you start, the more time you have to let your contributions grow and the less you have to contribute later on to reach that goal.

So you'd rather live like a poor sap NOW, to have 10000 dollars extra in FORTY YEARS? I'd prefer living a carefree life now and start putting some money aside later on, when I can afford it without affecting my lifestyle. Why would anyone want to set a part of a starters wage aside, or even worse, money that you have as a STUDENT (through a student job or parents) when you have much more room to save later on. There's nothing wrong with thinking of the long term, but you also have to able to live the way you want now.

There's nowhere I can't reach.

If you have money to invest, then obviously you aren't a poor sap currently.

Quote:

I'd prefer living a carefree life now and start putting some money aside later on, when I can afford it without affecting my lifestyle.

What happens if you start having financial difficulty later on and never quite manage to find time to put money aside? It's much easier to budget your finances when you're single than once you have a spouse, kids, and all of their arbitrary demands for money.

This thing is sticky, and I don't like it. I don't appreciate it.

If you have money to invest but you choose to save everything and live like a monk, then yes, you are a poor sap. I'm not talking about spending everything, you obviously need to put some savings aside, but investing in a RETIREMENT PLAN at 23 is just silly to me, you won't even know if you will get the chance to be old enough to profit from your savings. Even if you encounter hardship in your thirties or forties, most retirement funds are for a fixed period, so the money would be no good for you anyway since you can't touch it.

I am a dolphin, do you want me on your body?

Originally Posted by Peter

Also, why the hell would a college student want to put money away for RETIREMENT? You don't want to start paying for that until you're 35 or older (at least that's how people around here do it).

Your mentality, which you share with a majority of the people in this world, is why people don't reach financial independence. And no, I'm not putting all my money into a retirement account. I'm putting $4000 in which is about 5% of my current savings account. I'm probably going to put more than $4000 since having it sit in savings isn't productive at all. Also, I live quite comfortably with zero debt and just having bought a new car so I'm certainly living the "carefree" life you're talking about.

I'm actually LATE in starting a retirement account. Most of my friends started theirs in highschool. But then again I come from an affluent area of California where people know how to handle their money. It may sound like I'm stroking my e-penis, but I'm simply doing this to show you how wrong you are with your assumptions. You obviously don't understand compound interest if you think a difference of 13 years of compounding interest equates to $10,000. Here's a calculation for you:

Assuming a retirement age of 55, and a yearly addition of $4000 (easily done if you know how to handle your paychecks), here are two scenarios. The first being what you suggested; starting a retirement fund at 35. The second is what you SHOULD do; starting a retirement fund in your late teens or early twenties.

Retirement Fund started at age 35
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 20
Interest Rate: 8% compounded annually
Account Size at 55: $216,335

Retirement Fund started at age 21
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 34
Interest Rate: 8% compounded annually
Account Size at 55: $740,027

That's almost a 350% increase with only an extra $56,000 invested. Are you telling me you wouldn't save $56,000 over 14 years to get a 350% increase? And yeah, who knows if you'll live long enough, but that goes with everything in life. No one's saying you have to live like a monk if you start an investment fund. The best time to invest is always when you're young. The second best time is now. I can afford to save $4000 per year while being able to live in a very nice area so why shouldn't I start saving now? If others can't save that much, then save less. Compound interest is one of the most powerful tools people can use to get wealthy. The only thing is, it takes time.

I was speaking idiomatically.

Originally Posted by RacinReaver

What happens if you start having financial difficulty later on and never quite manage to find time to put money aside? It's much easier to budget your finances when you're single than once you have a spouse, kids, and all of their arbitrary demands for money.

This.

I find that when you're living single, you really don't have much in the way of expenses aside from rent, utilities, meals, clothing, and whatever you do for entertainment. Maybe a car payment and insurance if you have that. What that translates to is being able to save more and if you're not doing anything with the money anyways, why not put it into an investment account or retirement?

As RR points out, your expenses tend to increase as you get older and in my case, I have no illusions about my paycheck being able to keep up with new expenses like mortgage payments and property taxes once I get a house. Add to that unexpected expenses that pop up (like medical bills) and spending on kids means you're not going to be left with a whole lot for retirement.

No one said you have to live like a monk and equating saving money to living a spartan lifestyle is just absurd.

What kind of toxic man-thing is happening now?

Quote:

The best investment for younger people is cash... The last thing you want is to have your funds tied up in some long term investment when an emergency comes up and you need the money.

*Advice from a representative of Merrill Lynch who was a guest speaker at my school a while back.

The only reason someone should start saving that early in their life (20s) is if they have dreams of retiring at 40 or becoming a millionaire by age 65. As for those numbers (starting investing at 21 vs. 35) although they may seem impressive at first glance (even I was inspired when initially hearing similar figures from my finance professors) you need to take into consideration that the likelihood of being able to invest year after year like that is extremely slim. Paying for your children's education, medical bills, or any other number of unexpected events that are bound to happen will inevitably eat into your disposable income and possibly even your savings.

FELIPE NO

Something could go wrong, I guess I just won't bother then!

Contingencies? What's that?

How ya doing, buddy?

Originally Posted by yevheniy

*Advice from a representative of Merrill Lynch who was a guest speaker at my school a while back.

The only reason someone should start saving that early in their life (20s) is if they have dreams of retiring at 40 or becoming a millionaire by age 65. As for those numbers (starting investing at 21 vs. 35) although they may seem impressive at first glance (even I was inspired when initially hearing similar figures from my finance professors) you need to take into consideration that the likelihood of being able to invest year after year like that is extremely slim. Paying for your children's education, medical bills, or any other number of unexpected events that are bound to happen will inevitably eat into your disposable income and possibly even your savings.

Again, $4000 is not a lot for me and I'll likely be able to invest more than that every year. I'm not saying that to brag. It's just that some of you don't seem to understand even after I explained it in my last post. I have a few different sources of cashflow and I don't even have a job yet. I imagine I'd be able to invest a lot more once I get my degree and get a job. I'm planning on investing a pretty small percentage of my income and the rest (after expenses) is going into my savings account.

Here's what I'm planning to do using percentages.
Annual Income: 100%
Amount to Investments: 5-15%
Amount to Savings: 35%
Estimated Expenses: 50%

Yes this is overly simplified and doesn't account for emergencies and unexpected occurrences, but this is to keep it simple. You can see that I'm planning on spending a very little amount of my money on investments.

As for children, I don't plan on having any any time soon. It confuses me why people have children when they can barely support themselves. But anyway, this thread wasn't meant to discuss if I should invest or not. I have the means to. I know it sounds like I'm investing a lot of money, but relative to my financial situation, it's not draining my cash like some of you are thinking. I appreciate all your suggestions though. Hopefully someone will be able to give more options rather than try to convince me not to invest.

Jam it back in, in the dark.

Originally Posted by Peter

I'd prefer living a carefree life now and start putting some money aside later on, when I can afford it without affecting my lifestyle.

I think it is this kind of mentality that gets people into situations where something terrible happens and they find themselves terribly short on cash and eventually find themselves up to their eyes in debt and will be working full time until 60 and beyond. It may also explain why our national savings ratio is negative.

There's nowhere I can't reach.

Quote:

The only reason someone should start saving that early in their life (20s) is if they have dreams of retiring at 40 or becoming a millionaire by age 65. As for those numbers (starting investing at 21 vs. 35) although they may seem impressive at first glance (even I was inspired when initially hearing similar figures from my finance professors) you need to take into consideration that the likelihood of being able to invest year after year like that is extremely slim. Paying for your children's education, medical bills, or any other number of unexpected events that are bound to happen will inevitably eat into your disposable income and possibly even your savings.

Costs like kid's college and medical bills will hit you regardless. If you've started saving for your retirement early, then you can absorb those loses more easily. If not, then it'll prevent you from ever retiring in a timely fashion, and you'll end up like one of those sad 60 or 70 year olds, who cannot retire and end up stuck working thankless menial labor jobs until they die.

I know which route I would prefer.

This thing is sticky, and I don't like it. I don't appreciate it.

If you have freakin' $200,000 (at 23? Hot dang) in your bank account, look into real estate or something. The market sucks right now, so you'll make tons when it goes back up. Or at least that's what I'm told.

I am a dolphin, do you want me on your body?

I'm not terribly sure how this'd work out for a guy who makes enough money that $4k is "not a lot for him," but it's a plan.

If you have a 401k plan with your company, continue with that. You can't touch it until retirement, so you may as well put aside the max in that vein.

At the same time, mimic the 401k plan on your own terms in a high interest account. (I use ING like RR) Of course, you won't have your investment matched or anything, but each month, you'd be setting aside some cash in a high investment account. When I opened my ING account, I think I was getting something like 5.2%. Not anymore. ;_; There are other places that have a minimum balance requirement, but offer excellent rates considering.

As for the $4k you have on hand now, I'd throw that in a high interest account, too. I guess I'm a boring gal. I did something similar at the beginning of 08 when I had a hefty amount of cash in my checking account and wanted to see a return with minimal risk. Unfortunately, times are getting tough for myself and everyone around me. The savings will be tapped in the near future. ;_;

I was speaking idiomatically.

Sass, I actually found out that Washington Mutual now offers an online-only savings account that has to be linked to your checking account with them (if you have one). They currently offer 3.3% interest no matter how little you have in the account, which is a little better than ING's current offering a 3.0%. Their CDs are also a percent or so higher, but they only offer them in 8+ month styles.

Also, if you're decent about saving, you can save up a few thousand without a terrible amount of trouble. I make around $24,000 a year and have been able to set aside a few hundred dollars every month into savings after all of my expenses. That includes small vacations like visiting my girlfriend for a week, flying home to stay with my parents occasionally, going on roadtrips and staying at Motel 8s instead of Holiday Inns and packing lunch while on vacation instead of eating out every meal.

I'm actually pretty annoyed my school doesn't do any sort of 401k plan or matching to retirement investments for their grad students, since I'd be happy to put away $200 a month and have that matched 50% or 100% by them. Instead I'm stuck just doing my ING thing.

Edit: Also, aren't there certain retirement programs which let you borrow against them in order to finance buying a house or other large life expenses? Not to mention if you wait until you're 35 to start saving for retirement, you're also going to have to be saving to pay off your mortgage, your kids' education, cars, and all of those other wonderful things that come with age.

Here's a question for some of you guys. What do you do first, concentrate on investing in long-term returns, or pay off student loans ASAP? After finishing undergrad, I had a loan that was around 6.5% and unsubsidized, so I took all the money I had saved working for the 9 months after graduating and prior to going to grad school, and paid off that loan right away, even avoiding the fees for taking out the loan. I still have a few others lingering around, but they're subsidized and I won't have to pay them until I finish grad school (another 4 or so years ago). After that, my loans should only be ~20-30% of my total income, so I'm thinking about scrimping the first year and trying to pay them off right away so I won't have to deal with any interest.

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Originally Posted by RacinReaver

Edit: Also, aren't there certain retirement programs which let you borrow against them in order to finance buying a house or other large life expenses? Not to mention if you wait until you're 35 to start saving for retirement, you're also going to have to be saving to pay off your mortgage, your kids' education, cars, and all of those other wonderful things that come with age.

Unless my memory's off, I do believe that you can borrow against your IRA (or Roth IRA if you've held it for 5 years) if your goal is to purchase a home. You can also borrow from your 401(k) as well if the plan you're on gives you that option (and I think most do).

FELIPE NO

Depends on the interest rate. Definitely, the really expensive loans should be taken care of ASAP. Since money now is more valuable than the same amount in the future, paying loans normally in installments is preferred if you can put it in something that gives you an interest rate equal or greater than the loan.

Spike, I'd set up an automatic debit facility that takes out 50% of whatever comes into my pay account, and shunts it off into a special savings account. You can then split the funds in the special account among stocks, bonds, and TD instruments, depending on your risk appetite and investment horizon.

If you're going for stocks, then yeah, I'd say indexed funds are safer than putting it all on a single company. As a general rule (there are exceptions), derivatives > stocks > bonds > deposits, both in terms of volatility and potential returns.

What, you don't want my bikini-clad body?

Originally Posted by Spike

I'm actually LATE in starting a retirement account. Most of my friends started theirs in highschool. But then again I come from an affluent area of California where people know how to handle their money. It may sound like I'm stroking my e-penis, but I'm simply doing this to show you how wrong you are with your assumptions. You obviously don't understand compound interest if you think a difference of 13 years of compounding interest equates to $10,000. Here's a calculation for you:

Assuming a retirement age of 55, and a yearly addition of $4000 (easily done if you know how to handle your paychecks), here are two scenarios. The first being what you suggested; starting a retirement fund at 35. The second is what you SHOULD do; starting a retirement fund in your late teens or early twenties.

Retirement Fund started at age 35
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 20
Interest Rate: 8% compounded annually
Account Size at 55: $216,335

Retirement Fund started at age 21
Initial Principal: $4000
Annual Addition: $4000
Years to Grow: 34
Interest Rate: 8% compounded annually
Account Size at 55: $740,027

That's almost a 350% increase with only an extra $56,000 invested. Are you telling me you wouldn't save $56,000 over 14 years to get a 350% increase? And yeah, who knows if you'll live long enough, but that goes with everything in life. No one's saying you have to live like a monk if you start an investment fund. The best time to invest is always when you're young. The second best time is now. I can afford to save $4000 per year while being able to live in a very nice area so why shouldn't I start saving now? If others can't save that much, then save less. Compound interest is one of the most powerful tools people can use to get wealthy. The only thing is, it takes time.

Actually, your calculations are too simplified, since you don't take into account the ACTUAL value of those admittedly huge amounts of money. You als have to take inflation and the market rates. Say that you take a current market rate 5% into your calculation (which is, given the current circumstances a rather generous guess), lets see what the actual value of your savings will be using annuity calculus*.

If you invest for 20 years :

4000 x a20┐0,05 = 49,848 USD

If you invest for 34 years :

4000 x a34┐0,05 = 64,771 USD

So my rough estimate wasn't so far off it seems...

*The more exact formula being A x [1-(1/1+i)³]/i
With A being the amount of money you put aside, i being the rate, and the 3 representing the number of years.

Jam it back in, in the dark.