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I am new to investing but want to start soon, after being able to save some money and doing some research for the past few days. Here are some basic info about myself and my goals:

  • Mid twenties
  • Only debt is student loans (under $20k)
  • No mortgage yet
  • Have about $10k for investments
  • Open to medium risk
  • Looking to invest passively for short term (2-5 years tentative)
  • Plan to make future periodic contributions during investment term
  • May occasionally withdraw contributions for emergencies/ventures (ex: invest in real estate or down pay on home)

I want to keep this simple so I was looking at index funds and ETFs and seems like all the hype is about ETFs these days. I do not plan to trade so from an expense perspective, would ETFs be the better route if looking at the same fund between an index and ETF? Specifically, I was looking at the Bill Schultheis' Coffeehouse portfolio with this allocation structure:

IRA Account:      30% Vanguard Total Bond Market ETF 
Roth IRA Account: 35% Vanguard Total Stock Market ETF
Taxable Account:  35% Vanguard Total International Stock ETF

Does that generally seem appropriate for my situation? Are there any other considerations I should be factoring in? When dealing with index or ETFs, does the saying "buy low sell high" greatly apply or is it best to just acquire asap regardless of price?

What about suggestions for other fund sources? Any other advice?

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What's the interest rate on your student loan? Putting money into repaying that is a no-risk investment with a guranteed return of interest. –  Lagerbaer Feb 28 '13 at 21:53
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Why might you only be investing for a 2-5 year time frame? That's too short a time frame if you'll be putting any money into equity markets, unless you have a very high risk tolerance. –  Chris W. Rea Feb 28 '13 at 22:19
    
You're putting money into retirement savings accounts (IRA, Roth IRA), I hope you don't plan to use that in 5 years. Also, since that money will not be touched for at least 40 years I would be significantly more risky than bond funds. Though I'm not sure I'd put money into bond funds right now anyway... –  C. Ross Mar 1 '13 at 0:38
    
@Lagerbaer - I have multiple loans with interest rates ranging from 3.25% to 6.55% all fixed. So you think focusing primarily on repaying the loans would be the wiser option in the long run? –  justWired Mar 1 '13 at 1:14
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I understand that there are tax implications to having / not having a student loan, but if we ignore these, then repaying a loan is a wise option if their rate exceeds what you can reasonably expect to earn elsewhere at low risk. –  Lagerbaer Mar 4 '13 at 16:02
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1 Answer

up vote 5 down vote accepted

Some thoughts:

1) Do you have a significant emergency fund (3-6 months of after-tax living expenses)? If not, you stand to take a significant loss if you have an unexpected need for cash that is tied up in investments. What if you lose/hate your job or your car breaks down? What if a you want to spend some time with a relative or significant other who learns they only have a few months to live? Having a dedicated emergency fund is an important way to avoid downside risk.

2) Lagerbaer has a good suggestion. Given that if you'd reinvested your dividends, the S&P 500 has returned about 3.5% over the last 5 years, you may be able to get a very nice risk-free return.

3) Do you have access to employer matching funds, such as in a 401(k) at work? If you get a dollar-for-dollar match, that is a risk-free pre-tax 100% return and should be a high priority.

4) What do you mean by "medium" volatility? Given that you are considering a 2/3 equity allocation, it would not be at all out of the realm of possibility that your balance could fall by 15% or more in any given year and take several years to recover. If that would spook you, you may want to consider lowering your equity weights. A high quality bond fund may be a good fit.

5) Personally, I would avoid putting money into stocks that I didn't need back for 10 years. If you only want to tie your money up for 2-5 years, you are taking a significant risk that if prices fall, you won't have time to recover before you need your money back. The portfolio you described would be appropriate for someone with a long-term investment horizon and significant risk tolerance, which is usually the case for young people saving for retirement. However, if your goals are to invest for 2-5 years only, your situation would be significantly different.

6) You can often borrow from an investment account to purchase a primary residence, but you must pay that amount back in order to avoid significant taxes and fees, unless you plan to liquidate assets. If you plan to buy a house, saving enough to avoid PMI is a good risk-free return on your money.

7) In general, and ETF or index fund is a good idea, the key being to minimize the compound effect of expenses over the long term. There are many good choices a la Vanguard here to choose from.

8) Don't worry about "Buy low, sell high". Don't be a speculator, be an investor (that's my version of Anthony Bourdain's, "don't be a tourist, be a traveler"). A speculator wants to sell shares at a higher price than they were purchased at. An investor wants to share in the profits of a company as a part-owner. If you can consistently beat the market by trying to time your transactions, good for you - you can move to Wall Street and make millions. However, almost no one can do this consistently, and it doesn't seem worth it to me to try.

I don't mean to discourage you from investing, just make sure you have your bases covered so that you don't have to cash out at a bad time. Best of luck!

Edit Response to additional questions below.

1) Emergency fund. I would recommend not investing in anything other than cash equivalents (money market, short-term CDs, etc.) until you've built up an emergency fund. It makes sense to want to make the "best" use of your money, but you also have to account for risk. My concern is that if you were to experience one or more adverse life events, that you could lose a lot of money, or need to pay a lot in interest on credit card debt, and it would be prudent to self-insure against some of those risks. I would also recommend against using an investment account as an emergency fund account. Taking money out of investment accounts is inefficient because the commissions/taxes/fees can easily eat up a significant portion of your returns. Ideally, you would want to put money in and not touch it for a long time in order to take advantage of compounding returns. There are also high penalties for early disbursements from retirement funds. Just like you need enough money in your checking account to buy food and pay the rent every month, you need enough money in an emergency fund to pay for things that are a real possibility, even if they are less common. Using a credit card or an investment account is a relatively expensive way to do this.

2) Invest at all? I would recommend starting an emergency fund, and then beginning to invest for retirement. Once your retirement savings are on track, you can begin saving for whatever other goals you may have

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1) I kinda expected someone was going to ask this. Answer is no. This may sound reckless but I thought about using credit cards or a personal line of credit for emergencies until I have a legitimate emergency fund. If you think this is stupid, please bluntly say so. Alternatively, I thought about opening up a Roth IRA and using it as an emergency fund, withdrawing only contributions and not qualified distributions if necessary. Thoughts? 3) At the moment, no. I'm working for a small startup but it has been growing fast. 401(k) have been mentioned and hopefully will come soon. –  justWired Mar 1 '13 at 2:00
    
4)I meant my risk tolerance is medium or little above. 5)Should I even consider any type of investments at this point? I’m beginning to think I may have approached this wrongly. 8)duly noted. Right now, I have most of my funds in an online savings with lousy returns (0.75% APY). I can’t help but to think that it could be put to better use. –  justWired Mar 1 '13 at 2:05
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