Safe-ish investment options for a young, well-compensated couple

Question

I'm definitely late in learning this stuff and have gone through the top questions on this site like

1. I'm 23 and was given $50k. What should I do?
2. Oversimplify it for me: the correct order of investing
3. Best way to start investing, for a young person just starting their career?

These were very helpful and I've done them. I'm 30, make about US$150,000 per year, my 401k contribution is set to my company's very generous match and the website says I'm on track to retire at 80+% of my salary. I have a large savings I need to find something to do with, and I have no debt besides a cheap mortgage that I'm overpaying and will be paid off before I'm 40. Now the "problem" (I'm very grateful to be in this position):

My wife is in graduate school (no loans fortunately) and about to graduate. Her employment will definitely put us over the contribution limit for an IRA which eliminates the most common investment advice I've seen. Our expected household income is US$220,000+ in the next two years. Based on the general advice I've seen on here, Investopedia, and from friends, my best options are

1. Funnel a bunch more money into 401k even if it exceeds the tax-free limit. Is this a dumb idea? My 401k has a 20% return over the last three years, so I kind of just want to put a bunch in there and twiddle the riskiness knobs
2. Do my own stock trading. I won't to do this as I lack the interest and risk tolerance
3. Buy into an index fund. I would have to research this more.
4. Pay off the house even sooner, but this is only a temporary fix. I am looking for something I can do long term.
5. Hire a financial advisor or similar and let them have at it.
6. Get a second mortgage and dump everything into Dogecoin. Duh.

Do any of these stand out to you or are there other things/caveats I should consider? I'm looking for general advice, links, or reading material. I honestly find this stuff super boring, so if I have to read a book I will, but I'd rather not.

Answer 1

Your best bet is probably to open a regular brokerage account with a low-fee provider (such as Vanguard) and buy some ETFs (Exchange Traded Funds).

ETFs are useful since they have very low fees, track whatever index you want to track and you can buy & sell them immediately (if you need to).

It's probably best to diversify across volatility (stocks vs bonds) and location (US, Developed Markets, Emerging Markets) and maybe throw in some commodities and/or real estate in there as well.

Websites like these can make suggestions for different diversifications and you can research the individual asset classes.

Once you have done your initial investment, just let it sit. You can consider rebalancing maybe once a year, but large changes generally are not a great idea, especially if you have a long time horizon and can sit through some slumps.

Answer 2

Anyone who tells you the best way to invest is merely projecting their own circumstances on you so I'll only offer generic advice.

Determine your timeline, your investment goals, and how much risk is acceptable. Make sure that you understand each type of security (stocks, bonds, ETFs).

You need to become financially literate. That takes time and effort. There are lots of web sites that will assist you in this and if you really want to go deep, books!

Answer 3

A cheap S&P 500 index fund such as Vanguard (symbol VOO). Not as aggressive as some. But for that to go broke, the top 500 companies in the US would have to go broke.

Answer 4

Here's the thing, I'm a bit of a heretic when it comes to personal finance. However, what I will say is option 1 and option 3 aren't horrible, though I think you will be disappointed if you do this. The problem is that over the last 10 years the market has absolutely crushed every expectation that I've had. There is a lot of reason to think that in real terms (that means inflation adjusted), the market is likely to have low or even negative returns over the next 10 years.

I'm not saying to try to time the market. I want that to be clear. But there is a lot of risk in the market at the moment, more than usual anyway.

I would advise you against hiring a financial advisor. Fees are not my thing, and all that an advisor would do is charge you money to do what you could've done on your own if you had enough time and energy.

So what would I do if I were you?

The 401k issue

I would pick an index fund, whether it is in your 401k or in a taxable account won't really matter all that much because you aren't going to be jumping in and out, so you won't be triggering any taxes. Plus I would suspect that your 401k has a bunch of hidden fees that would gobble up your investments at roughly the same rate that Uncle Sam would outside of your 401k. To me, without digging into your particular 401k plan, let's assume that it will be a wash between the benefits and costs either way.

Depending on how bad the fees are in your 401k (not just the mutual fund fees but the hidden fees you pay to the company running your 401k), investing in a taxable account might make you better off than the 401k. Because you won't be paying those fees all along the way, and then have everything taxed as ordinary income when you retire. Like I said, I'm a bit of a heretic.

The only reason to put money in your traditional 401k, at least in my opinion, is to pick up your company's match. Again, I am assuming that not paying taxes will roughly cancel out with the hidden fees. Roth 401ks are a little bit different, but yeah, that's a story for another day. Consider them out of scope for now, because there is so much there that you would need to dig into to know whether that is a good place to stick your money. IRAs are okay, but you can only put so much in them, so I kind of ignore them for now. Look into them if you wish.

The House Issue

Pay off your house. Pay off your house. Please pay off your house. Here's the deal, your house provides you with a virtual income, i.e. the rent that you don't have to pay to someone else. The only problem is that typically, people have to pay a mortgage payment. If you could purchase the house across the street and rent it out for 5 to 6% annually for the purchase price, that is what your house is "yielding" as an investment to you. Throw another 2 to 3% on top of that for the interest that you are paying, and you've got an investment that by paying it off is going to pay you a guaranteed 7 to 9% per year.

I really can't see anywhere else that you can get a guaranteed 7% per year return on your money. I know some people might argue with my math on this one, especially since you already own your home, but really, it is just a back of the envelope calculation, don't hate too hard on my 7% number. You definitely get the 2 to 3% from the interest rate, risk free. I include the phantom rent because of the income you don't have to earn, and pay income taxes on, etc. to stay in your home, but I'd be willing to negotiate that with a critic, but I am not interested in doing so here. Anyway, then on top of that you can have any appreciation of your home. Just go payoff your house, you will be far far wealthier than you would be even by mucking about and continuing to borrow on it and so on. If you can do it, you should do it. End of story.

The security you should buy

Since you have no interest in doing research and figuring out what to buy, you have only one mission. Do not make any critical errors. Therefore, you should diversify as much as possible. This will prevent you from making any systematic errors. I would suggest an index fund. I would go broader than an S&P 500 index fund though, I would go for something like a Russel 2000 index fund. The difference is that the former invests you into 500 companies while the latter will invest you into 2000 companies. Again, diversification is your friend do it as much as you can. That will diversify across the space of different securities.

Now, I mentioned that you will probably be disappointed if you tossed your nest egg into the market right now. This is because that would be implicitly concentrating or making a large bet at one point in time. Just like you need to diversify across a bunch of different securities, you need to diversify by investing at a lot of different times. I would set a percentage of your remaining nest egg that you will invest each month. Say 1 to 5% of the balance of your nest egg each month. Pick that percentage and stick with it, every month, you shave off 1 to 5% of the remaining balance and toss it into the market.

Then any extra money that you save, just toss it on top of your cash pile to be invested. This will make you feel much more comfortable, because by adding to your cash pile and investing a percentage of the balance, you will always have a pile of cash and you will be buying your index fund every month. In good times, your money will buy fewer shares, and in bad times your money will buy more shares.

Over time, things will balance out and you will get the long-run market average of 8 to 10% per year. Plus you will have a pile of cash that will give you great comfort when the market crashes.

Last bit of advice Don't get suckered in to the hot next thing. Crypto currency, nope, you buy index funds. Real estate seminar, nope, you buy index funds. Someone tries to sell you cash value life insurance, nope, you buy index funds. How about annuities, nope, your strategy is to buy index funds.

No matter what it is, stay the course. Investing should be downright boring. If it feels like you are watching paint dry, you are probably doing it right.

Answer 5

Based on the general advice I've seen on here, investopedia, and from friends, my best options are

1. Funnel a bunch more money into 401k even if it exceeds the tax-free limit. Is this a dumb idea? My 401k has a 20% return over the last 3 years so I kind of just want to put a bunch in there and twiddle the riskiness knobs

Based on the line "my 401k contribution is set to my company's very generous match and the website says I'm on track to retire at 80+% of my salary"

That sounds great but if that still means that you have room to put additional money into the 401(k). It isn't clear if you are doing traditional or Roth 401(k).

Your salary of $150K does impact you ability to have deductible 401()k) contributions unless you have been told you are considered a highly compensated employee.

2. Do my own stock trading. I won't to do this as I lack the interest and risk tolerance

No Comment

3. Buy into an index fund. I would have to research this more.

This statement confuses me. Your 401(k) or IRA money could be index fund already. So could money you have invested in a 529 plan, or an HSA. So could a taxable investment account.

4. Pay off the house even sooner but this is only a temporary fix. Looking for something I can do long term

Some people see paying off the house early as the number 1 goal. Others will want to keep a mortgage right into retirement.

5. Hire a financial advisor or similar and let them have at it.

If you do this make sure you get a planer with a flat fee, and not one where they make money of the commissions for the investments they want you to buy.

6. Get a second mortgage and dump everything into Dogecoin. Duh.

No comment

Things I would suggest.

1. If you haven't reached the annual maximum on your 401(K) contribution, then raise your contribution level to get to the maximum each year.

2. if your company offers it, a high deductible health insurance plan with a Health savings account. The maximum contribution you can make under a family plan in 2021 is $7,200. In the next few weeks the limit for 2022 will be announced. These plans generally offer the ability to save the funds in a mutual fund.

3. I know you said $220,000 a year within the next two years. But if you can still be under the limits in 2021 you have until April 15th 2022 to make a 2021 contribution.

4. It isn't clear what type of job your spouse will have, so in a few years you could also be able to save money through their 401(k).

5. It also isn't clear if your spouse is contributing to a IRA. They may be able to do so.

6. Back door Roth. Other answers have discussed this option.

While you are in great shape to pay off the mortgage early, and have enough money to retire, the fact is that small changes now can have a big impact going forward due to the number of years involved.

If you have children the added costs could make it harder to save and invest aggressively in the future. You also might have a need for a 529 plan, and can open one once the first child arrives.

Answer 6

Your question uses the term "safe-ish" and says you're currently putting all your money in a 401(k). You don't say how much safety you mean by this, and you don't say what the money in the 401(k) is in. You contrast the 401(k) with an index fund as if the index fund were some other option. Actually, an index fund is a common thing to have your 401(k) in.

You're young and make a lot of money, so most people in your shoes would be very risk-tolerant and invest mostly in stocks. That may be what you're already doing, if that's what your 401(k) is in. If you work for another 30 years, then you don't care that much if the market goes up and down between now and then. Stocks have historically had the highest average returns over time. So since you don't know much about this stuff and express a desire not to spend a lot of time messing with it, the simplest thing to do would be to start just putting that money in an index fund.

Using some of your income to pay off your mortgage more rapidly, as you've been doing, has the effect of reducing your risk (because it leaves you with less money to put in stocks). However, the home mortgage tax deduction in the US is a strong incentive not to pay off your mortgage.

If just putting all your money is stocks sounds too risky to you, then put some of it into lower-risk investments.

Answer 7

You seem to be in a wonderful situation, it almost seems too good to be true.

If you're already financially comfortable, you don't have any large expenses to save for (you already own a home, that's usually the biggest hurdle), and you're decades away from retirement, you can afford to invest this extra money aggressively. I understand that you're just starting out, so you want to tread lightly, but I suggest you consider jumping in head-first.

If you haven't maxed out your 401k contributions (you're only contributing enough to get the full employer match), I think you should increase your percentage. If you're currently investing it in a conservative fund (e.g. S&P 500 Index), consider putting some of the additional contribution into a long-term growth fund (if you still want to follow an index, try the Russell 2000). It will occasionally have some larger downturns, but it will make it up in the long term; since you have more than 4 decades before retirement, you'll almost certainly come out ahead.

The important thing is to not get skittish when there's a big dip. Time is on your side.

I first started investing in the mid-80's, when I was about your age; I was in reasonable financial shape, but not as good as you. I was still renting an apartment, and making a decent salary for someone a few years out of college (I think it would be about $80-90k in today's dollars), but my parents had paid for most of my school costs so I had little debt. 401k's were still fairly new and my employer hadn't implemented one yet, so I was investing on my own. I picked up Kiplinger's annual ranking of mutual funds, and invested in the top 2 or 3 in a couple of different categories. The bulk was in Fidelity Magellan, arguably the most successful mutual fund in the industry during the 80's and 90's. While "past performance is no guarantee of future growth", there's usually not much else to go on than history, so you might as well pick one with a good record.

So if you don't want to do extensive research, I suggest you find a mutual fund ranking website, and pick a fund with a top 5- or 10-year return. Maybe split your investment between that and a more safe S&P 500 index fund.

Answer 8

Ask your university how they invest their endowment.

(well, ask a smaller university. You can't do what the biggest ones do).

Really, financial investment isn't that hard. The only problem is, you have a lot of salespeople trying to divert you into overly complex "products" whose complexity is basically an obfuscation, to hide expensive overhead and fees. These complex products perform much worse than the market.

An endowment is a large block of capital, which must grow. The corpus lasts forever, and the income funds a university program or another. So it is invested on a very long-term timeframe to provide passive income.

They are closely watched by regulators, and must be invested correctly - no gambling! "Correctly" is a gold standard. If you manage an endowment and your portfolio is (very coarsely) 70% in a wide diversification of domestic stocks (e.g. an index fund), 10% in foreign stocks, 10% into bonds and 10% into more speculative things... that's pretty much the gold standard. Nobody who does that is going to jail.

And when invested this way, it will reliably earn 4-7% per year after inflation, over a long term average, and that's the key. The market goes up, it goes down. This is called "Volatility" and it is a matched set with "growth". Any high-growth investment is high-volatility. Nature of the beast. But if your planning horizon is very long, the volatility averages out. Experience has shown it beats inflation by 4-7% per hear. Hence, an annual profit-taking of this amount is presumed to be prudent.

That's not so hard, is it?

The income limits for an IRA aren't a problem.

First, you can always save more into the 401K.

But if you want to do an IRA, it's pretty straightforward.

1. Do a Non-Deductible Traditional IRA. It's just a regular IRA, and you don't get to take the tax deduction. So you are paying the trad IRA with already-taxed money.

2. (optional) Immediately convert the IRA to Roth IRA.

• If you don't have any other IRAs, this just happens. Boom! The money is in a Roth IRA even though you thought you were above the income limit for a Roth. This is called the "Roth Backdoor" and Congress definitely intends it to exist, and both Congress and IRS have now admitted this in written documents.

• If you have existing IRAs and can convert ALL OF IT NOW, then simply do so. Here's the rule: You only need to pay tax on the money that was never taxed. So if you have $20,000 of appreciated value in a Trad IRA and you contribute $5000 to NDIRA and convert it all to Roth, you pay taxes on the $20,000, not $25,000.

• If you have existing IRAs and you don't want to convert all of it now, then you have to tally up all the money you already paid taxes on ($5000) and the money you haven't yet paid taxes on ($20,000). You have to convert that money in proportion, which in this example is 20%/80%. So if you convert $10,000 to Roth, you are converting $2000 of the already-taxed money, and $8000 of untaxed money, so you pay taxes on $8000. And then $3000 of already-taxed NDIRA money remains in the IRA to be apportioned later.

By the way, that complicated "apportioning" tax paperwork is something you'll be stuck with anytime you have NDIRA that has not yet been converted to Roth. As such, my recommendation is "don't do that" :)

Why would you convert to Roth instead of stay in traditional, given the spirited debate on the so-called equivalency? A dozen reasons, but here's #1: You have to pay tax on the contrib either way. If you stay in traditional, your growth will be taxed. If you convert to Roth, your growth will not be taxed. So in that case, it really is that simple: "not taxed" is better than "taxed".

Run that by me again? You contributed $5000 and paid tax on it this year, because it's an NDIRA. If a Traditional grows to $200,000 by age 80, you withdraw and pay tax on $195,000. If a Roth grows to $200,000 by age 80, you pay tax on $0.