Investment Options

In My Humble Opinion
1

Recently I inherited a small chunk of cash (say, between 10 and 50 thousand dollars). Not a massive amount of money as money goes, but certainly more than I’ve ever had at one time (and larger than the total value of my assets at any point).

Never having had this kind of money, I really have no idea as to the best way to get it to work for me. Of course, I’m going to take some of it right away and pay off a few lingering debts, but aside from that, what does a person do with money?

I’m 27 years old with no savings to speak of. I don’t need immediate access to the money, so I’m ok with putting it where I can’t easily get at it for a few years, though it might make a nice down payment on property at some point down the road.

CDs? Money Market? Aside from a checking and a savings account, and a 401(k), the world of money management is completely new to me. I can open a Money Market account that will pay me 4.2% annually. Is that good? Is there a relatively safe way to bump up an annual return to something like 7%? Should I put it all in one place, or should I split it up into different investment types? Help!

2

The best advice for someone who comes into control of a significant cash windfall, and isn’t knowledgable about investing, is to lock it up, for six months to a year, and spend that time educating yourself. A CD or treasury instrument can provide the best parking place. Treasury instruments can be purchased through Treasury Direct to avoid brokerage fees.
Your local library will have a good selection of basic investment primers and that’s where I recommend that you start.
There are no easy, universal, answers to your question, except to learn about investing.

3

I’d recommend contributing the maximum $4,000 each year to a Roth IRA, perhaps investing in something like the Vanguard Target Retirement 2045 Fund. The advantage of a “lifestyle fund” such as this is that the fund managers will gradually increase the percentage invested in bond funds as the target date approaches (since 2045 is when you’ll turn 65) and the advantage of the Roth IRA is that the contributions are made with after-tax money but the withdrawals will be tax-free.

4

Since you laid out a short-term horrizon (3 years is very short in investment terms, unless you’re a permabull or market timer), I would stay away from stocks, especially if you plan to use it as a downpayment for property or such. The exception to this rule IMO would be to fund a Roth if you’re eligible and place that portion into a 90/10, or 80/20* asset allocation target retirement fund with Vanguard, Fidelity, or T. Rowe for the long term. Maybe a more conservative 70/30 or 60/40 if you wanted to dip into it for a downpayment. As for the rest, if you still plan to not touch if for 3 years, Penfed.org (needs military membership or similar, but $20 gets you in if you join a “NMFA membership” through them) is offering a 6% CD for 3 years as we speak. And I don’t want to time the market interest rates as of now, but IMO, rates may or may not be as good as 6% in three years. If they do get better, you could then exchange that for a better rate in the future. If it goes down, you’re still good, CD rates are locked - but usually have a penalty for early withdrawl.

  • 90/10 type figures are percentages of stocks/bonds in a portfolio or fund. 90/10 is aggresive (better for long term), 60/40 is conservative. Could be 30/70 if you wanted, which is very conservative.

And as already stated…

And with that note, http://www.diehards.org/forum/index.php is a great place to start with topics such as these.

5

If you can become a member at the Dope, you can set up an account at treasury direct.

www.treasurydirect.gov

You can buy T-bills backed by the US government there. You won’t get 7%. But, you’ll do better than a CD or MM.

Also, it’s nice to get used to the feeling of “that’s my invested money. I’ve survived so far without it, so I’m just going to invest it and let it grow.” Keep living on what you’re living on. Don’t use the windfall for a car, or toys, or anything.

That said, look into opening up a Roth IRA. If you’re 27, at least invest a bunch of it in funds, and let it start growing. You can’t touch that money until you’re 60, but it will GROW and when you take it out, it will be tax free.

6

Pay off any high interest debt.

Put the rest in a money market fund for now.

Plan on putting $4k into a Roth before April 15th.

Spend the next “some amount of time” thinking about what you want to do with it and reading. I like Eric Tyson’s “Personal Finance for Dummies” which will give you a very basic overview of savings and investing. If you are going to use it in the next three years, you probably don’t want stocks. If you want to use some of it in the next three-five years, put the rest of it in a mutual fund.

7

Put it into a discount brokerage account and do some trading for a few month. Read the Financial sections in the paper and don’t do anything too crazy. At the end, you might be a little ahead or a little behind, but now you know how an open-outcry market works, and you’ll know more about the economy and the markets than 90% of the proles out there.

Nothing beats actual experience, you can learn now with $10k or learn later with $100k. It will be fun, too! Yeah, you can do it with a simulator, but real money keeps you sharp and makes it memorable.

8

[QUOTE=Throatwarbler Mangrove]
Put it into a discount brokerage account and do some trading for a few month. Read the Financial sections in the paper and don’t do anything too crazy. At the end, you might be a little ahead or a little behind, but now you know how an open-outcry market works, and you’ll know more about the economy and the markets than 90% of the proles out there.

Nothing beats actual experience, you can learn now with $10k or learn later with $100k. It will be fun, too! Yeah, you can do it with a simulator, but real money keeps you sharp and makes it memorable.
[/QUOTE]
I kind of like that advice.

If for no other reason than because I went through it and learned a lot of good lessons without costing myself too much money in the long run.

Most of the conservative stuff people here are telling you is probably because they got dinged at some time in the past by doing dumber stuff.

9

[QUOTE=Dangerosa]
Pay off any high interest debt.

Put the rest in a money market fund for now.

Plan on putting $4k into a Roth before April 15th.
[/QUOTE]

Only thing to add, if you have kids, set up a Section 529 savings account for their college education. Between the Roth or a traditional IRA and a section 529 plan, you can see significant saving on your taxes.

10

[QUOTE=Throatwarbler Mangrove]
Put it into a discount brokerage account and do some trading for a few month. Read the Financial sections in the paper and don’t do anything too crazy. At the end, you might be a little ahead or a little behind, but now you know how an open-outcry market works, and you’ll know more about the economy and the markets than 90% of the proles out there.

Nothing beats actual experience, you can learn now with $10k or learn later with $100k. It will be fun, too! Yeah, you can do it with a simulator, but real money keeps you sharp and makes it memorable.
[/QUOTE]

I don’t like this advice. And it has nothing to do with getting “dinged” or bing conservative… and everything to do with avoiding market timing, avoiding paying outrages fees, and not having enough diversification. And when someone says “I really have no idea as to the best way to get it to work for me.”, that’s the last person to test $10,000 with by buying stocks with a brokerage for a few months. With luck, he’ll be paying taxes out the ass. In reality, he’ll be doing tax loss harvesting next April. He doesn’t even have to do anything “too crazy” for the reality scenario.

Before paying any outrages fees for a stock trade in which you’re[generic] new to the game, you’re better off getting a copy of this book. Once you’ve read it, you’ll realize how silly buying individual stocks can be. If you want to invest in the stock market, go with low cost index funds with an asset allocation you’re comfortable with, and stay the course. If you want to save it with little risk; do CD’s, high yield savings account, or a MM(A)account/MM(F)und with FDIC insurance in the 5% range being offered today.

Or as others have suggested, you can do the hybrid Roth/Savings. First kill off any high interest debt, Fund a Roth IRA ($4k max for 2007) in a low cost (meaning no more then a .50% expense ratio) AND no load index fund such as a “lifestyle fund”, and plan to hold until retirement (no matter what; including you needing it, or the market tanks, hold if you can!). Then line up a few months worth of emergency expenses (car repairs, housing costs in case of job loss, etc…) Put the rest in high yield savings.

Going this route, you won’t even have to know more about the economy then the top 3% of economists who do know (or think they know), much less then 90% of those who don’t know diddley squat! The biggest secret in investing, is that nobody knows what’s going to happen. It can be predicted, but it’s no different then placing a bet on red vs. black. This includes advice from Alan Greenspan to the pundits on CNBC, and from MBA’s to factory workers. Nobody knows. Hence, you stay the course and tune out the noise.

11

[QUOTE=ParentalAdvisory]
I don’t like this advice. And it has nothing to do with getting “dinged” or bing conservative… and everything to do with avoiding market timing, avoiding paying outrages fees, and not having enough diversification. And when someone says “I really have no idea as to the best way to get it to work for me.”, that’s the last person to test $10,000 with by buying stocks with a brokerage for a few months. With luck, he’ll be paying taxes out the ass. In reality, he’ll be doing tax loss harvesting next April. He doesn’t even have to do anything “too crazy” for the reality scenario.

Before paying any outrages fees for a stock trade in which you’re[generic] new to the game, you’re better off getting a copy of this book. Once you’ve read it, you’ll realize how silly buying individual stocks can be. If you want to invest in the stock market, go with low cost index funds with an asset allocation you’re comfortable with, and stay the course. If you want to save it with little risk; do CD’s, high yield savings account, or a MM(A)account/MM(F)und with FDIC insurance in the 5% range being offered today.

Or as others have suggested, you can do the hybrid Roth/Savings. First kill off any high interest debt, Fund a Roth IRA ($4k max for 2007) in a low cost (meaning no more then a .50% expense ratio) AND no load index fund such as a “lifestyle fund”, and plan to hold until retirement (no matter what; including you needing it, or the market tanks, hold if you can!). Then line up a few months worth of emergency expenses (car repairs, housing costs in case of job loss, etc…) Put the rest in high yield savings.

Going this route, you won’t even have to know more about the economy then the top 3% of economists who do know (or think they know), much less then 90% of those who don’t know diddley squat! The biggest secret in investing, is that nobody knows what’s going to happen. It can be predicted, but it’s no different then placing a bet on red vs. black. This includes advice from Alan Greenspan to the pundits on CNBC, and from MBA’s to factory workers. Nobody knows. Hence, you stay the course and tune out the noise.
[/QUOTE]

I heartily agree. Jumping into the equity market, especially buying in individual companies, is terrible advice. I would suggest that investing, on the level we’re discussing here, would be best seen as a hobby. It can be interesting, fun and profitable at the same time. I suggested visiting the library because it’s cheaper than buying books, gives you a wider selection and using a book takes you one step at a time. Doing research on the internet will not be a progressive education and is likely to skip the basics.
I jumped into the market like that, back in the 70’s, did pretty well to, especially w/ Holiday Inns, which was growing rapidly back then. But that was a simpler time and I had a bit of good fortune. I also ended up sharing a significant amount of my profits w/ a broker. It’s not something I would recommend today.

12

The only case that could be made is if you are interested in the “hobby-business” of stock investing, AND you have an extra $10k to play with.

Investing in individual stocks is a little like raising horses - its possible to make a lot of money if you have a lot of money - its also possible to lose a lot of money - but you can enjoy doing it win or lose as a hobby. Or it can just be a hell of a lot of work and you can see your $10k be worth $2k in a year.

13

[QUOTE=ParentalAdvisory]
I don’t like this advice.
[/QUOTE]

I don’t think that Throatwarbler and certainly not I were advocating that as some sort of long term investment strategy.

I have the bogleheads guide and I live by it, but the main thing that makes that easier to do was the fact that I lost a couple of thousand bucks in my 20’s thinking I was smarter than everyone else.

It’s still FUN for some people to play the markets, and I have probably about 2% of my portfolio dedicated to completely fucking around.

It’s not going to kill the OP to mess around with a few bucks as long as he wisely invests the rest of it.

14

I used the “hobby” analogy in the sense that it be something your interested in and will spend some time involved w/ on a regular basis. The “buy, hold and forget” method isn’t advisable in most cases. I guess it can have some success if you buy wisely in the beginning, but it only works well w/ safe, low yeild investments, like CD’s, treasury instrument, bonds, or maybe indexed mutuals. The more successful investment strategies require regular stewardship, which your more likely to provide if you find it an interesting pastime.

15

[QUOTE=A.R. Cane]
The more successful investment strategies require regular stewardship
[/QUOTE]
That is not true.

It’s been well established that indexed, set-it-and-forget-it investing is superior to actively managed investing (both professional management, and personal management).

The commonly reported statistic is that an index beats 2/3rds of all actively managed mutual funds when you take into account fees, even accounting for survivorship bias.

16

[QUOTE=Trunk]
That is not true.

It’s been well established that indexed, set-it-and-forget-it investing is superior to actively managed investing (both professional management, and personal management).

The commonly reported statistic is that an index beats 2/3rds of all actively managed mutual funds when you take into account fees, even accounting for survivorship bias.
[/QUOTE]

Did you read the entire post, or just pick out something to object to? :dubious:
Either way, I do not agree w/ set it and forget it investing and I’m sure you can find someone to agree w/ anything you come up with, if you look hard enough.
I’m sure you’ve heard that you can place all the economists end to end and they still wouldn’t reach a conclusion!

17

Your whole post said the same thing, just phrased differently, but just for completeness. . .

[QUOTE=A.R. Cane]
I used the “hobby” analogy in the sense that it be something your interested in and will spend some time involved w/ on a regular basis.
[/quote]

Even if you make it your hobby, to many people and corporations, it’s a job that requires training, information, and tools and you will never make money from it whether it’s your hobby or not. . .or at least not as much money as you will make through low cost indexed funds. What you want to buy, they want to sell and what you want to sell, they want to buy.

It’s advisable in almost all cases for individual investors. Especially investors who do things like buy stocks when it seems like everyone is making money (buy high), or sell stocks when it looks like the market is a terrible investment (sell low). Which is a lot of them.

“maybe indexed mutuals”? Maybe? Show me investors who outpace indexed mutuals by making investing their “hobby”. Shit, show me professional money managers or mutual fund advisers or hedge fund managers who can consistently beat the market in the long run after figuring in fees. How on earth do you lump “indexed mutuals” in with CD’s, and treasury bonds? They’re diversified investments in a wide range of securities, and maybe have a large amount of risk associated with them.

Still not true.

18

[QUOTE=Trunk]
I don’t think that Throatwarbler and certainly not I were advocating that as some sort of long term investment strategy.
[/QUOTE]

I just cringe at the thought of doing it at all. But as mentioned, if one wants to gamble with a small portion of their portfolio with 2-5%, there’s nothing wrong with that as a little hobby. But the OP said something between $10-50k and never having had that kind of money before. Any portion of that amount shouldn’t go to an individual stock short term or long term IMO as a first time experience. He doesn’t need to learn it first hand, he can go by your example of losing a couple thousand in your 20’s. Because that is what happens. If he risks $10,000, he’s risking too much. If he risks $500, it’s not enough to profit from, and is a tax headache and not worth it. To each there own I guess.

But if the OP wanted to fuck around with a few bucks, what ever that number would be, no - it wouldn’t kill him I suppose. It also depends on the emotions of the OP and money. If money is stressful, and or emotional, I recommend a set it and forget it index investing (as I do for anyone actually). If nonchalant about it, 2-5% max towards stock picking at the most and see what you get with it and he can draw his own conclusions. If the OP went that route, at least try to hold the stock for a year. Capital gains taxes are less if held for more then a year. Plus, watching the stock daily, watching CNBC, and reading the wall street journal and/or checking your PDA every hour is all part of the financial porn that the industry wants you to use to maintain your stocks. Don’t fall for the hype, buy and hold for at least one year, and don’t “watch it”. You’ll drive yourself crazy.

I like A.R. Cane’s advice about putting it in savings and getting educated first before doing anything you’re not familiar with.

19

[QUOTE=Trunk]

The commonly reported statistic is that an index beats 2/3rds of all actively managed mutual funds when you take into account fees, even accounting for survivorship bias.
[/QUOTE]

Your being generous. Index funds typically outperform 90% of all available mutual funds.
Making it your hobby to figure out which 10% of funds are the good ones is a daunting and risky task.

20

[QUOTE=Trunk]

“maybe indexed mutuals”? Maybe? Show me investors who outpace indexed mutuals by making investing their “hobby”. Shit, show me professional money managers or mutual fund advisers or hedge fund managers who can consistently beat the market in the long run after figuring in fees. How on earth do you lump “indexed mutuals” in with CD’s, and treasury bonds? They’re diversified investments in a wide range of securities, and maybe have a large amount of risk associated with them.
Still not true.
[/QUOTE]

OK, you must be right! :rolleyes:
BTW, had your BP checked lately?