Senior in College, need advice on my investing plan

Question

I am a rising senior in college and saved up $3,000 dollars from my summer internship. I have done a lot of research online about investment options for my age and I decided that opening a Roth IRA seems like the best choice for me. Specifically an index fund ROTH IRA. I plan to max out my ROTH this year ($5,500). However I also will be having a part-time job during both semesters. I calculated that by the end of my senior year (may 2015) I will have saved up an additional $5,000.

This is where I am stuck. where do I invest $5,000? Do I Invest in individual stocks since I am young and can handle the risk? or do I invest in a general account index fund that is taxable on capital gains? Or do I pick a sector specific index fund such as the healthcare sector? I was looking at small-cap value index funds since they are diversified but also are aggressive in growth as well as risk.

Pretty much I am looking for advice/ suggestions on what to do with the $5,000. And no I do not have any debt or student loans.

I am sorry but I forgot to mention this. I will graduate with $10,000 leftover in my college fund that my parents have for me. So i am not worried about keeping the $5,000 as a liquid emergency fund in my bank account. If i get a job out of college and they have a 401(k) then does it make much sense to have a roth as well? or shoud i use that money and invest in something other then retirement? All of thise advice is great and just wanted to thank you guys for your input.

Answer 1

You can invest another $5,500 in your Roth IRA each year, so you can invest up to $11,000 between the two tax years. Additionally you can make investments for the previous year up until 15 April the following year. In your case that will be close to graduation time, and you may decide to max out the contribution for 2014, but wait until you are settled into a new job before setting those savings aside long-term.

When you start your first job, there will likely also be an option to invest in a 401k. You can still have the advantages of a Roth, but you will be limited to the investments available in the plan. Most employers I've seen today still offer a low-cost index fund, but you may have to speak up at a company meeting to pressure them to include one of those options in the plan. With a 401k your limit increases to $17,500/year.

Make sure that the index fund you invest in has the lowest possible expense ratio. I use VOO. Depending on trading fees, etc., you might pick something else.

Answer 2

You may want to hold onto the $5000 and keep it in savings. Interest rates are for crap, even in "high yield" accounts, so you can rightly not consider it investing. You should be graduating college soon. It would suck if an emergency crops up to prevent you from graduating.

I assume that you are going into a high paying career given your nice income from internships.

Your best investment is yourself at this point. Completing your education, and obtaining your degree trumps all. You could use that extra 5000 as a hedge/insurance policy/emergency fund to help insure you graduate.

Also you are likely to have some moving expenses once you graduate. That 5K could be used to help cover those costs.

The worst case is you graduate with no emergencies, you get a nice signing bonus and relocation package, and you still have the $5000. Well you still have until 15 April 2015 to put money in your ROTH for 2014. This holds true for every tax year.

Given your current financial status, you are likely to find yourself soon contributing the max to your 401K and ROTH. Once that happens, money beyond that can be invested into mutual funds stocks that are not tax advantaged, real estate, or some other choices. Well then you have some things to think about.

Answer 3

Before going into specific investments, I think it would be a good idea to assess how "free" is that $5000. How much do you have to rely on it in emergency? You always want to buy low and sell high. However, if you need to make unplanned withdraw from an investment, you risk unfavorable market conditions at the time when you need the money, and lose money that way.

One common suggestion is to keep 3-6 months living expense in checking/saving/very, very liquid/short term investments. After that, you can invest the rest in more profitable ventures.

Assuming that you are all set in that regard, next consideration is whether you have any goal for the money besides generating the maximum return. Is this for retirement, buying a house/apartment a few year down the road, graduate school, emergency cash store for the time between graduation and getting a job, or traveling a year in Europe after graduation? There are myriad of other possible goals. Knowing that you get a better idea of the time frame involved in the investment, and what you need to do with your money.

If this is for retirement, you just need to generate the highest possible return for 40-50 years, while minimize taxes when you have to withdraw that money (there are more nuanced concerns, but large idea-wise that's what you need to do). If you want it for a trip to an exotic location in 2 year, then your primary goal will be to preserve the value of your capital, while assessing whether you need to manage foreign-exchange risk.

The time frame also rule in or rule out certain types of investments. If you are planning to use the money to purchase a house in 5 years, IRAs probably would not be what you are looking for. If you are planning to retirement, short term CD would not be the most effective way. After figuring out a bit of what you are trying to do with the money, I think how you want to invest it will be much more clear to you.

In case of retirement, people seem to generally recommend no load index funds, and mid-cap growth funds. Nothing is really off the table, since your investment time frame is so long, and you can tolerate risk. You might also be interested to check out https://www.wealthfront.com/ (I have no relation with them). A friend recommended it to me, and I think their pitch make sense.

In other cases, it really is case dependent, and there might have more than one solution to any case.

There is just one more potential investment venture that people you might not immediately thinking of, and that might be of interest to you. That is to use the $5000 as your own budget to build/maintain connections with people and network. Use it to take professors out to a meal to pick their brain, travel to keep in touch with old friends, network with potential future employers and peers to improve job prospect, or get opportunities to meet interesting people.

I hope this helps.

Answer 4

That's great that you have saved up money. You are ahead of your peers.

I would advise against investing in an index fund. The attraction of the idea is that you will get the same return as the base item. For example, an index fund of gold would supposedly give you the same return as if you bought gold. In reality this is not true. The return of an index fund is always significantly below the return of the underlying commodity.

Your best strategy is to invest in something you know and understand. There are two books that can help you learn how to do this: "One Up on Wall Street" by Peter Lynch and "The Intelligent Investor" by Benjamin Graham. Buying, reading and following the guidance in these two books is your best investment of time and money.