What investing should I consider?

These past two years, I’ve had the longest stretch of full-time employment (albeit contract) that I’ve had in quite a while. As such, my savings has grown quite substantially, such that my total net worth is more now than it’s ever been. I have an IRA and such, but I’m looking for other places to put my extra cash savings, especially since my current contract may very well become full-time soon.

It’ll be about $15-20K. I’m multiple decades away from retirement age. The only thing that I’ve heard of so far that I can recall off the top of my head are index funds, but I know little about them.

Any suggestions or resources for suggestions? Obviously, I’ll be doing due diligence before putting a penny into anything suggested on a public message board, but hey, go ahead and suggest that penny stock or African gold mine so I can laugh. :slight_smile: Besides, a good starting point is always appreciated.

Thanks in advance.

Basically you need to decide if you believe in the “Efficient Market Hypothesis”. Petty much all the research says it is more or less true (for the average investor).

Basically stocks are worth the current price they are selling at - meaning you have just as good a chance of guessing as by trying to use skill. This is where the index funds come in. They are a group of stocks - sold as a mutual fund or ETF that replicate an index (like the S&P 500). Since there is no picking of the stock (they more or less buy everything in the index) they don’t have to pay lots of fund managers - meaning lower costs - meaning more money for you.

I recommend the following books:
A Random Walk Down Wall Street
Common Sense on Mutual Funds

Vanguard has a pretty good selection of low cost index funds

It really depends upon your investment strategy, IE how much risk do you have appetite for?

It sounds like this is for retirement savings, which personally I would gear towards being on the low side when it comes to risk profile. In which case I would go with the Index fund as mentioned, or investigate a good managed fund (which could allow you to be invested across a few asset classes), or if you want to invest directly yourself, perhaps select a small group of Blue Chip stocks.

A great and short book on mutual funds:

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

It’s written by John Bogle, founder of Vanguard Investments and a big proponent of index funds.

Two key benefits of index funds:

-since the array of stocks that comprise the fund is dictated by the index that it follows, there’s far less management effort involved, which means a much lower expense ratio. Whereas a typical managed mutual fund has an expense ratio of over 1%, index funds are down around 0.1%. That makes a big difference in the long run. If two funds both return 8% annually before expense ratio, then here’s what happens to an initial investment of $10,000 after thirty years:

Managed fund: $10,000 * (1.08 - .01)[sup]30[/sup] = $76,123

Index fund: $10,000 * (1.08 - 0.001)[sup]30[/sup] = $97,868

-an index fund has less turnover/churn. In a managed fund, the manager regularly tweaks the portfolio, selling some stocks and buying others. You end up paying capital gains tax every time one of those component stocks gets sold.

www.morningstar.com is a good site to go to check out the history of any mutual fund you’re considering. You can visit investment company’s websites to read more detail about any given fund (and find the symbol associated with that fund).

Wife and I have considerable investment in VFINX, Vanguard’s S&P500 index fund. It’s done well.

If you want to learn more about general investment strategy, I recommend another book:

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk

The author provides coin toss examples (and historic stock price data) that show why stocks are a smart investment for the long haul, and he also explains why diversifying your portfolio into uncorrelated investments is helpful. On the latter point, he particularly recomments investing in real estate investment trusts (REITs); in addition to VFINX, we have been putting money into Neuberger-Berman’s NBRFX, a mutual fund that invests exclusively in REITs. The share price does OK, but it pays out quite a bit in dividends, which account for a significant portion of the ROI.

I work in pensions and investments, albeit in the UK, so I can’t go into specifics. But I would say if someone is investing for their retirement which is “multiple decades away”, they go for as high a risk as they feel comfortable with. Why? Because if it is money you are not going to touch for 30+ years, it matters very little how it performs in the short term, long-term performance is the main objective and over long periods, the higher the risk, the higher the potential return. This is even more true if you are able to add small regular payments to the fund, as you will then benefit from dollar cost averaging. Of course, it will depend on your personal preference as well to some extent but that is the general rule.

Now, if you are looking to put savings away in order to buy a new car (or whatever) in 1-2 years’ time, the opposite is true - you don’t want the possibility of it dropping by 10%-30% in that time, so you should be much more conservative. As I read your OP, I infer you already have substantial cash savings (it’s really great, if achievable, to have 6 months’ worth of expenses as cash savings in case you are out of work) and are now looking to get better returns on the excess above that. Index funds or mutual funds could be a good way to achieve that. Again, if you can (without too much extra cost) I would recommend drip-feeding your cash into funds as this will reduce the effects of any short-term fluctuations (particularly as the US stockmarket is at an all-time high right now - ot could keep on going up, in which case you want your money to be invested, but it could also fall back, in which case you want some of your money still on the sidelines to take advantage of any dips).

In response to Machine Elf, I must declare a bias in that my company is generally in favour of managed funds over index funds. This is because with an index fund, you are only ever going to get whatever the index gives you (minus a bit for management charges). With a managed fund, the management charges will be higher, but the best fund managers (and granted, this is only a small proportion of the overall total) are able to consistently outperform the index. The book recommended by Machine Elf will naturally be biased the other way, as it is written by the founder of one of the biggest index fund companies. Again, it’s really a matter of personal preference and whose marketing you believe. There’s no reason you can’t split your money half and half between mutual funds and index funds and see which suit you better.