What percentage of my money should I invest?

Question

I am looking to begin investing some of my money, as I have been fortunate enough thus far to be able to save a decent amount. My trouble is, I don't know how much of it I should invest. I have read a lot of different information about how much of one's savings should be invested, and have stumbled across many rules-of-thumb such as the 100 rule or the 50/20/30 rule, but I don't know how to interpret these in terms of general savings vs. stocks vs. other types of investments. I have also read a lot of information about how younger people should initially invest more, and take higher risk portfolios, because they have more time to wait, eventually garnering the higher reward despite enduring larger fluctuations earlier on.

My personal situation is basically this: I am three-quarters of the way through my bachelor's degree in engineering. I am extremely lucky and grateful that my parents are in such a financial position that they are able to provide me with my education, and so I don't have tuition costs or student loans. My monthly expenses are minimal, mainly just groceries and household stuff. I am in a co-op program, which means every other term I work full time as a software developer. As a result of this, I currently have saved around $70,000.

Once I graduate, I will be paying my own way with regards to rent and any further education I wish to take. I am not sure if I will do a Masters' degree but I haven't ruled it out, so I would need to have funds available to pay for that if I decide to do it.

My parents' investment advisors are willing to take me on as a client under the family account; they just need to know how much I am willing to invest. I already told them I am happy to take on a more high-risk portfolio, due to my age, but based on all of this information, could anyone offer some advice as to how much (percentage-wise) of my current savings I should be investing?

Answer 1

You should not be looking at percentages. You should be looking at an absolute value for your emergency fund. I suspect way more than half of your money will end up going to the all-stocks high risk portfolio, but that's secondary. The correct formula is:

Investments = Total Funds - Emergency Fund

Even though your parents are currently paying your education, this might not be the case in the future. Any sort of thing that would impair your parents' ability to pay your education would hurt you directly. You don't want to end up in a situation where you have high expenses, yet the value of your investments has crashed.

So, calculate how much expenses you have for the next year. If the tuition for the next year has already been paid, don't consider that as an expense; otherwise do consider it too. Create an emergency fund of one years' expenses.

If you haven't decided yet on the master's degree, but you estimate the probability that you will start a master's degree is 50%, you can think of it like this: pay 50% of it from the emergency fund and the rest by selling stock investments. So if you see a master's degree as likely, you must be able to fund it somehow. If you expect to receive the $30000, perhaps that could be part of funding the master's degree?

With the rest, go all in to a well diversified low cost stock portfolio. Don't just blindly trust the investment advisor. There are several questions you should ask: (1) how high are the investment advisor fees, (2) how high are the fees of the investments such as mutual funds, (3) is the investment advisor an independent advisor or do they recommend some products of their own (that often have high fees). It would be hard to justify more than 0.5% total expense ratio in investments as typical returns before tax are 8% for a stock portfolio in normal 2% inflation environment, and 0.5% although it may sound small is actually 6.25% of the 8% return and 8.33% of the 6% real return after inflation!

Definitely select an all-stocks portfolio consisting of widely diversified index funds. If that's what the investment advisor is offering you at a low cost, then it's your decision whether to select the investment advisor. If not, you need to learn how to be your own investment advisor.

Also, as a last note, currently the market is quite volatile. You may not want to go all in to stocks at once. Especially if you expect to receive another $30000, at least that part should be invested when received, not in advance. It might make sense to diversify based on time investing the $70000 minus emergency fund too. Don't just start delaying the investment decision forever based on the observation that "the market looks expensive now"; if you delay investing, you can easily end up delaying it forever.