Beginner Investing/What to invest in?
QUESTION: Hi Paul,
I am in my late 40's and saved 20k in cash that sits in a coffee can. I am not sure where to invest the cash.
I have two teaching retirement accounts that I cannot contribute cash to unless its direct deposit from work.
I opened up a Vanguard IRA account last year (with two mutual funds in mind)thinking I could park my cash there. However the Vanguard prices hasn't moved in a year. So no gains there.
I am thinking of keeping the cash in a coffee can and leaving it there -- since I wont be losing money.
Any ideas on where to invest 20k cash safely and make a profit?
I am a beginning investor and banks and the stock market these days seem unsafe.
Thank you for your question!
I would suggest a few things for your situation.
First, is that IRA you set up a standard IRA or ROTH IRA? you will want to consider a ROTH IRA if you don't already have one. There is significant tax differences.
For a standard IRA, you can tax deduct your contributions each year. But, when you retire, your withdrawls are taxed.
For a ROTH IRA, you can't tax deduct your contributions each year. But, when you retire it is all yours. No income tax. A BIG difference!
Keep in mind there is a maximum amount you can deposit into either a standard or ROTH IRA account each year. Don't go over that, or there are hefty penalties.
Think of either type of IRA as an overall account structure, not an investment itself. You can then buy or sell a wide variety of investments within the IRA account. For example, stocks, mutual funds, ETF's (Exchange Traded Funds), bonds, treasuries, and other investments.
So after you take a look at establishing a ROTH IRA if you don't already have one, then think about what to invest the money in. If you have 20k, it will take several years to deposit into the IRA account due to the maximum annual contribution.
Choosing the investment for the account entirely depends on what kind of person you are, and how much risk you want. The general guideline is to take 100, subtract your age, and put that percentage in stocks, and the rest in safer investments such as bonds or treasuries. This would mean that roughly 50% in stocks, and 50% in bonds for you. You can of course change that percentage if you want more stability.
I would suggest a general aggregate ETF (exchange traded fund) that tracks a major stock index for your stock investments. This means you do not have to actively manage it, your investment will always roughly match general stock market performance. The S&P500 is the index that is most stable and commonly used for this. Check out ticker symbol SPY, it is an ETF (similar to a mutual fund but lower fees) that tracks this index. You can simply buy that ticker for your stock allocation.
For bonds, you can do the same thing. Ticker AGG is a general aggregate bond fund, so again you can purchase this ticker and let it sit. If you want a more conservative portfolio, look at putting more into the bond fund and less into the stock fund.
This is a very simple, and effective way to get started. The key is don't wait. Your returns compound over time, so the longer you wait the shorter the time period your investments will have to work for you.
There will always be times of negative performance, where the value of your investments will fall. However, there will be positive times as well, and over time the positive outweighs the negative and begins to build your retirement nest egg.
Most active investors (professionals included) do not out perform average market performance with all of their activity and research. Unless you plan to spend a few hours every week, or hire a financial advisor that will charge you additional fees, this sort of approach will serve you well. If you want to get more involved, you can always start with the above, then research more about investing and adjust your holdings in the future as you see fit. The above suggestions means that you should not withdraw the investments before you are 50 and 1/2 years old or you will be assessed penalties (because they are retirement accounts), but you can buy and sell the investments within an IRA account at any time.
I hope this helps gets you started, please do not hesitate to follow up with me with any questions or details on the above.
---------- FOLLOW-UP ----------
QUESTION: Hi Paul,
I will get the IRA Roth through my bank and start investing now.
I was going to invest in an index fund, ETF such as SPY, and some bonds.
However, which mutual funds? These are two mutual funds I picked last year:
-Life strategy growth fund 0122 - 80% stocks, 20% bonds Performance. priced at $27.99
-Vanguard Target Retirement fund 2035 both stocks, bonds. (12-2-13 priced at $17.20
Also which stocks? McDonalds? Exxon?
Thank you for your follow up question!
Yes, those two mutual funds you mention in your question are good. They should serve you well over time, but will have periods of poor performance, and periods of much better performance. Think long term.
For stocks, I would be very careful. I would say that you should invest 10% or less of your funds directly into stocks. Yes, larger companies are more stable and better investments, I would say large companies that pay a dividend. McDonalds perhaps, I like energy stocks. Exxon is good, so large oil or natural gas companies.
I ran a quick screen and here are some ticker symbols for large companies that pay a decent dividend that my research company believes are buy rated:
Keep in mind that if you do buy individual stocks, you need to check on things periodically. The overall state of the economy, and the individual company, can change over time. That is why index mutual funds or ETF's are safer, they spread the risk out as you are buying into an entire portfolio or index, rather than a single stock.
I tried to select the above suggestions from different industries.
I hope this helps, please do not hesitate to follow up if I can offer anything additional.
---------- FOLLOW-UP ----------
QUESTION: Hi Paul,
You pointed me in the right direction.
I am going to invest in mutual funds, ETF's and bond investments rather than single stocks because it spreads out the risk. I agree with you.
The stocks that pay dividends are decent investments, however due to the state of the economy its risky. I will keep your stock recommendations on my stock page to watch them. I may jump into stocks later on when the economy improves.
Thank you for the follow up! Yes, I agree with you and think you have a good handle on it. It is risky to invest in individual stocks when markets are at all time highs, with still some questionable things going on in the overall economy. If the market takes a step back, that would be the time to invest in individual stocks.
The stocks my research company likes change over time, so if a few weeks or months go by before you want to pull the trigger on some individual stocks, please do not hesitate to send me a new inquiry. I'd be happy to give you some updated suggestions.