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I have been fortunate enough to learn the skills necessary for a decent paying job at a fairly young age in computer engineering. I have $25k in my checking account, and I need a sensible means of investing it. Normally money like this would go towards paying for college, but I currently go to a cheap state school and my parents have agreed to pay what is not covered by scholarship. I work during the summer and the school year, and I have never spent more than I have earned in a month. Because my expenses are low, I would feel comfortable putting a decent amount of this money away for an extended period of time.

My original plan was to wait for the next economic downturn and invest in index funds. These funds have historically yielded 6-7% annually when entered at any given time, but maybe around 8-9% annually when entered during a recession. These numbers have been adjusted for inflation. Questions or comments on this strategy?

What about a Roth IRA? Mutual fund?

What should I do with my money until the market hits another recession?

  • the market can stay irrational longer than you can remain solvent. if you want to play around in the capital markets (as a long term investment), I would consider putting some in at an interval (not necessarily dollar cost averaging, just an interval) and in selloffs add in a lot more of your nest egg. – CQM Mar 14 '14 at 12:52
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    CQM - I love that quote. Your comment has the start of a great answer. That I'm looking forward to reading. – JoeTaxpayer Mar 14 '14 at 14:01
  • Read this: modernluxury.com/san-francisco/story/… I feel it is relevant to you since you are a young computer engineer. Maybe not software, but the advice applies to you I think. I say invest it all now in a target retirement fund such as Vanguard or Schwab. It is automated passive investing. Set aside what you need to live plus any near term (e.g. within next 5 years) such as vacation, automobile, down payment on home, etc. Invest the rest in funds. Give away some to charity if your heart so desires. – Sun Aug 21 '14 at 22:12
  • Total sidebar - if you're not done with school yet, try to get into a co-op program. If your school doesn't have an official one, find a local company willing to work with you and take off a semester here and there. Best thing I did (CompEng as well) because you'll come out with experience and the degree, breaking the Catch-22 cycle of needing experience to get experience. – Aaron D. Marasco Aug 21 '14 at 23:06
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My original plan was to wait for the next economic downturn and invest in index funds. These funds have historically yielded 6-7% annually when entered at any given time, but maybe around 8-9% annually when entered during a recession. These numbers have been adjusted for inflation. Questions or comments on this strategy?

Educate yourself as index funds are merely a strategy that could be applied to various asset classes such as US Large-cap value stocks, Emerging Market stocks, Real Estate Investment Trusts, US Health Care stocks, Short-term bonds, and many other possibilities. Could you be more specific about which funds you meant as there is some great work by Fama and French on the returns of various asset classes over time.

What about a Roth IRA? Mutual fund?

Roth IRA is a type of account and not an investment in itself, so while I think it is a good idea to have Roth IRA, I would highly advise researching the ins and outs of this before assuming you can invest in one.

You do realize that index funds are just a special type of mutual fund, right? It is also worth noting that there are a few kinds of mutual funds: Open-end, exchange-traded and closed-end. Which kind did you mean?

What should I do with my money until the market hits another recession?

Economies have recessions, markets have ups and downs. I'd highly consider forming a real strategy rather than think, "Oh let's toss it into an index fund until I need the money," as that seems like a recipe for disaster. Figure out what long-term financial goals do you have in mind, how OK are you with risk as if the market goes down for more than a few years straight, are you OK with seeing those savings be cut in half or worse?

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    I think you said it indirectly, but I will say it directly. At such a young age, learn the tools of the market and get started investing. The first thing the poster you learn about is how being invested in the market for 40 years is pretty consistently a good idea. – MrChrister Mar 14 '14 at 14:13
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TL;DR

I don't like your strategy. Don't wait. Open an investment account today with a low cost providers and put those funds into a low cost investment that represents as much of the market as you can find.

Details

I am going to start by assuming you are a really smart person. With that assumption I am going to assume you can see details and trends and read into the lines. As a computer programmer I am going to assume you are pretty task oriented, and that you look for optimal solutions.

Now I am going to ask you to step back. You are clearly very good at managing your money, but I believe you are over-thinking your opportunity.

Reading your question, you need a starting place (and some managed expectations), so here is your plan:

  • Don't carry unsecured debt DONE
  • Have a budget and spend less than you earn DONE
  • Create an emergency fund DONE (to excess)
  • Take advantage of any matching retirement funds you might have at work
  • Create a personal retirement account with a low cost provider (Roth or Traditional IRA)
  • Every paycheck, starting as soon as you can, put some money into the retirement account
  • As your budget allows, increase your retirement contributions to max allowed by law

Now that you have a personal retirement account (IRA, Roth IRA, MyRA?) and perhaps a 401(k) (or equivalent) at work, you can start to select which investments go into that account. I know that was your question, but things you said in your question made me wonder if you had all of that clear in your head.

The key point here is don't wait.

You won't be able to time the market; certainly not consistently. Get in NOW and stay in. You adjust your investments based on your risk tolerance as you age, and you adjust your investments based on your wealth and needs. But get in NOW.

Over the course of 40 years you are likely to be working, sometimes the market will be up, and sometimes the market will be down; but keep buying in. Because every day you are in, you money can grow; and over 40 years the chances that you will grow substantially is pretty high. No need to wait, start growing today.

Things I didn't discuss but are important to you:

  • Are you a saver or investor?
  • Your goals (car, travel, house, extended education, family?)
  • You will want to save some, invest some, be charitable with some, and spend some of your money. You'll have to figure out the proportions.
  • Eligibility for various retirement accounts
  • What you should invest in (which is what you asked, but the exposition of your question made me tell you all this)
  • Investing outside of a retirement account
  • Evaluating the cost of an investing in your account
  • Technical investors believe you can time the market; I don't. But you can find their opinions and ideas on this site as well. I'd suggest reading both to help you decide
  • As long as we are talking opinions, I also believe the US will be a going concern in 40 years and our markets will not have collapsed.
  • My personal plan is just as I described. I don't pick stocks or watch the markets. I use target retirement investments and let somebody else worry about re-balancing, value investing and tax advantaged investments.
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Waiting for the next economic downturn probably isn't the best plan at this point. While it could happen tomorrow, you may end up waiting a long time.

If you would prefer not to think much about your investment and just let them grow then mutual funds are a really good option. Make sure you research them before you buy into any and make sure to diversify, as in buy into a lot of different mutual funds that cover different parts of the market.

If you want to be more active in investing then start researching the market and stick to industries you have very good understanding of. It's tough to invest in a market you know nothing about.

I'd suggest putting at least some of that into a retirement savings account for long term growth. Make sure you look at both your short term and long term goals. Letting an investment mature from age 20 through to retirement will net you plenty of compound interest but don't forget about your short term goals like possible cars, houses and families.

Do as much research as you can and you will be fine!

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Investing is really about learning your own comfort level. You will make money and lose money. You will make mistakes but you will also learn a great deal. First off, invest in your own financial knowledge, this doesn't require capital at all but a commitment. No one will watch or care for your own money better than yourself. Read books, and follow some companies in a Google Finance virtual portfolio. Track how they're doing over time - you can do this as a virtual portfolio without actually spending or losing money.

Have you ever invested before? What is your knowledge level? Investing long term is about trying to balance risk while reducing losses and trying not to get screwed along the way (by people).

My personal advice:

Go to an independent financial planner, go to one that charges you per hour only. Financial planners that don't charge you hourly get paid in commissions. They will be biased to sell you what puts the most money in their pockets. Do not go to the banks investment people, they are employed by the banks who have sales and quota requirements to have you invest and push their own investment vehicles like mutual funds.

Take $15k to the financial planner and see what they suggest. Keep the other $5K in something slow and boring and $1k under your mattress in actual cash as an emergency.

While you're young, compound interest is the magic that will make that $25k increase hand over fist in time. But you need to have it consistently make money. I'm young too and more risk tolerant because I have time. While I get older I can start to scale back my risk because I'm nearing retirement and preserve instead of try to make returns.

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I recommend a Roth IRA. At your age you could turn 25K into a million and never pay taxes on these earnings. Of course there are yearly limits (5.5k) on the amount your can contribute to a Roth IRA account. If you haven't filed your taxes this year yet ... you can contribute 5.5K for last year and 5.5K for this year.

Open two accounts at a discount brokerage firm. Trades should be about $10 or less per. Account one ... Roth IRA. Account two a brokerage account for the excess funds that can't be placed in the Roth IRA. Each year it will be easy transfer money into the Roth from this account. Be aware that you can't transfer stocks from brokerage acct to Roth IRA ... only cash. You can sell some stocks in brokerage and turn that into cash to transfer. This means settling up with the IRS on any gains/losses on that sale. Given your situation you'd likely have new cash to bring to table for the Roth IRA anyway.

Invest in stocks and hold them for the long term. Do a google search for "motley fool stock advisor" and join. This is a premium service that picks two stocks to invest in each month. Invest small amounts (say $750) in each stock that they say you should buy. They will also tell you when to sell. They also give insights into why they selected the stock and why they are selling (aka learning experience). They pick quality companies. So if the economy is down you will still own a quality company that will make it through the storm. Avoid the temptation to load up on one stock. Follow the small amount rule mentioned above per stock.

Good luck, and get in the market.

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