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The ultimate first-world problem
July 24, 2012 3:03 PM   Subscribe

I'm a young person with no debt and a pile of money to invest. The catch: I'm not real confident about the long-term health of the US economy.

I'm 24 years old and live in a large American city. I've had the incredible fortune to "start on third base," as it were: I have a small inheritance, my parents paid for college, and I landed a decent white-collar job right out of school. I don't earn a ton of money - around $40,000 a year plus benefits - but I live extremely frugally (shared low-rent apartment, no car, don't eat out much) to the point that I make more than I spend. As it stands, I have around $65,000 in the bank, and that number is growing.

I've read some old AskMe threads and the wisdom seems to be: pay off debts, max out your IRA, talk to a financial advisor, invest in low-fee index funds. That's all well and good, but I'm under the impression that this path assumes that the economy of the US will basically grow forever, with maybe some minor setbacks along the way.

I'm not a doomsday prepper or Alex Jones fan - I'm not expecting a sudden collapse of civilization due to nukes/plague/Mayan prophecy/Obamacare. (In case I'm wrong, I don't think any investment plan would help much.) I can't predict the future, but I believe that there will be (at the very least) more 2008-size crashes in the next decade or two, and (more pessimistically) either an overall global slowdown or a cataclysmic economic disaster. To put it another way, I'm not super pleased about tying the rest of my life to the fortunes of the S&P 500.

I did talk to a financial advisor a while ago and got the basic "increase your contributions and put it in a mutual fund" spiel. I know the "correct" thing to do, but I'm also looking for perspectives from people less bound to the American investment banking system.

I know gold is a popular choice, but I'm wary of anything that advertises heavily to the Coast to Coast AM set. If there's a strong case for investing in metals though I'm happy to listen.
posted by anonymous to Work & Money (25 answers total) 41 users marked this as a favorite
 
I tend to figure gold isn't going to be much of a help if any of the disasters you've worried about actually happen.

Have you thought about 1) real estate or 2) spending more money?

Real estate would give you a place to live and stretch out and land is an actual thing that there is a finite amount of, and will be useful to you in the event of a disaster (i.e. it's shelter).

Spending more money - on travel, or nice things, or whatever - gives you pleasure now, which you might not be able to get later (again, in the event of a disaster). I'm not suggesting you blow through all your money, but maybe relax and have some fun.

Do all that while also maxing out at least your IRA. :)

Or, hell, invest it through microloans and do the world some good.
posted by dpx.mfx at 3:08 PM on July 24, 2012 [2 favorites]


I did what everyone said not to do and put money into low return CDs. Outcome: I still have all my money and then some after various financial crashes.

I also got a 10 year mortgage on my house. The money saved on interest paid on a 10 year mortgage vs a 30 year mortgage is a greater return than most anything I can think of.

As soon as you close on a house be sure to put enough money away to replace the roof.
posted by andreap at 3:08 PM on July 24, 2012 [7 favorites]


If you're looking for something safe in terms of mutual funds, look at Canadian index or bond funds. You may want to consider ETFs over mutual funds, as well.
posted by matlock expressway at 3:11 PM on July 24, 2012


Sure the US looks bad, but what are your alternatives?

Japan-radioactive and old...
Europe-In a bad way thanks to the Euro...
China-bubbles always burst...

So that leaves Brazil and India and I think Indian corruption isnt going away anytime soon.
posted by Chekhovian at 3:31 PM on July 24, 2012


I know gold is a popular choice...

Long term gold just tracks inflation. It's not an investment, just a hedge. So you could invest in Art. A lot of rich people are doing that these days...
posted by Chekhovian at 3:33 PM on July 24, 2012 [1 favorite]


I wouldn't recommend investing in Canada as their economy is strongly linked to America's, but there are plenty of places in the world you can reasonably invest in. You can also get internationally diversified investment funds that invest all over the world.


Gold is a reasonable hedge but it will never multiply your money, unless we go to a gold-standard.
posted by drethelin at 3:33 PM on July 24, 2012


If you're worried about risk, then spread the risk. Put some money into European stocks, some into US stocks, some into Canadian bonds, etc. This will diminish your upside and your downside.

The world economy is so tightly linked, however, that anything that sinks the US economy will also drag down the rest of the world, and vice versa.

Putting your money in a single commodity (gold) is potentially quite risky. Suppose someone invents a cheap way of precipitating the gold out of seawater? Then everyone's gold holdings tank. Same goes for diamonds and other precious gems.

Most experts seem to feel the economy is, on the whole, recovering, albeit slowly. Real estate is probably undervalued right now. But if you think there's another 2008-style crash coming, then real estate isn't a good bet either.

Bear in mind, though, that the market itself factors in far more information than you possibly can know. The current price of stocks already reflects thousands of people's guesses about the likelihood of a 2008-style meltdown. It also reflects thousands of guesses about the possibility of a US-Iran war, China putting another million cars on the road, and solar energy becoming cheaper than coal. It can, of course, be wrong about those things, especially when crooks are involved. (E.g. Enron, LIBOR, junk bonds, and the mortgage debacle.) But it is not ignoring those possibilities.

My feeling would be that your long-term best bet is to throw your money into an index fund. A market meltdown will lose you some money. But in the run-up to the meltdown, you may make more money than you lose. Had you started investing in 1998, when the DJIA was 8,300, you would have lost only about 20% in 2008 at the worst of the crash; and you'd be up by almost 50% by now.

If the market takes a bigger hit than that, you might be better off stockpiling flour and cooking oil...
posted by musofire at 3:46 PM on July 24, 2012 [2 favorites]


If you're concerned about bubbles bursting, and not end-of-the-world type scenarios, buy some property, preferably property you can rent out to people. You'd be surprised as how the economics of buying a duplex can improve your quality of life, and change the neighborhoods you have access to live in.

If the city you are in is an inflated market (NYC, SF, LA, etc) Why not consider purchasing a small farm or cottage outside of the city? Or even another country? Personally, I found great solace in getting away to beach-rentals and countryside cabins when the 2008 style crash came, and if I could afford it, I'd totally set up a little farm/cabin/beach-house somewhere close-ish by. Some people however, do not share this predilection.
posted by furnace.heart at 3:46 PM on July 24, 2012 [1 favorite]


My three cents:

1. Go travel (and form long-term memories no one can take away from you) or invest in yourself in some other way that won't lose value (to you) regardless of economic circumstances.

2. You're in a good place now, but you might not always be. Tuck 5-10k away in an emergency fund (e.g. a high-yield FDIC insured savings account). It won't make much money, but that money will be about as safe as it can be, and it could protect you from having to raid some long term investment when the market's down.

Also, if you buy real estate, consider getting a 30 year loan, but pay it off at an accelerated rate, so it's gone in 10-15 years. That will give you some extra flexibility if your circumstances get worse. I think it costs about the same to do that as it does to get a shorter term loan, but take that with a grain of salt. I own no real estate, and I haven't done the math myself. I just know a couple people who've gotten burned, so I'd want to take as many precautions as I can.

3. Just diversify the heck out of your other investments, and invest at a low fee company like Vanguard (they're a cooperative, so there are no shareholders profiting on you!). I think they have an all world index fund. I'm pretty skeptical of the US economy myself (and most others too), but I'm not savvy enough to pick winners (or losers!), and I'm even more skeptical of people who claim have that ability.

Hope this helps. I'm really interested in hearing the other answers.
posted by cosmic.osmo at 3:54 PM on July 24, 2012 [3 favorites]


[Gold is risky...] Same goes for diamonds and other precious gems [as an investment].

I've read that diamonds are a horrible investments, almost a scam. Their prices are high because a cartel (De Beers) controls most of the world diamond production. Also, they're not really fungible, and often people get them at retail prices, only to sell them at (much lower) wholesale prices.
posted by cosmic.osmo at 4:01 PM on July 24, 2012 [2 favorites]


My two cents: First of all, you're 24 fer chrisake. Relax.

Second, max out you 401k & IRA whenever possible, but dont just buy all stocks. Invest some in bond funds, many of which tend to do shockingly well in bad times and are refreshingly boring and reliable during the boom times. At 24 you can afford some/a lot of risk.

Also, and this is based on nothing besides trends I have noticed by being alive for a long time, the world is not going to end. The next five to ten years are going to be tough, no doubt, but eventually things will get better.

Diversify. Stocks, bonds, real estate, etc. They all have their good and bad points. You can get a lot of diversity through many of the large mutual fund companies out there. I personally think Vanguard is the best because of it's low costs.

I could go on and on, but those are the basics in my opinion.
posted by freakazoid at 4:19 PM on July 24, 2012 [4 favorites]


1- I disagree about crashes like that happening more in the near future. But even if more happen just like that, don't worry: my retirement money was in a 401k at the time, and it lost 17% in one day. About 40% overall, if I remember correctly. And I was back to even within 9 months of the bottom, and I've more than doubled my money since then. But the trick was that I did not do anything with the money- I just let it ride. The people who lost their shirts were the ones who tried to game the market, or who panicked and sold. So, if there are crashes, let your investments ride. Unless you can pick out the tops and bottoms before anyone else can.

2- The trick to investing is not just to "make money", but to simply make your $X today worth more than some other jerk's $X. It's all relative. The idea is to at least maintain the purchasing power of that money, but preferably increase the purchasing power of it. So the US economy might not grow spectacularly well in real GDP in the next 5 years. That's probably true. But some sectors of the economy will. And if all the other countries are dropping, breaking even is a win.

2.5- Diversify. But don't over-diversify. There is a thing that can happen where you get so diversified (via funds of funds), you own a tiny piece of so many companies that any gain in one place is offset by losses elsewhere and you never actually get any traction.

3- (Confidential to someone upthread: travel is not an investment. You can't eat memories.)
posted by gjc at 5:19 PM on July 24, 2012 [1 favorite]


If I were you?

Buy a piece of cheap land, somewhere you can build a shack so you can always have somewhere to go.
posted by dunkadunc at 5:28 PM on July 24, 2012 [1 favorite]


If you're 24, it means that you expect to invest for roughly the next 40 years (I'm guessing) before you retire and possibly another 30 years in retirement. That's 70 years. Historically, during your investing lifetime you can expect at least 3 major downturns in the US stock market and at least 3 major bull markets.

So it's not just that there might be a big recession or depression in your investing lifetime, there _will_ be. I guarantee it. How do you deal with this knowledge, though? You could stay out of the market this year. What if it goes up? You could stay out of the market next year. What if it goes up again? What if it goes up for five straight years and you've sat on the sidelines with your money in cash (because it would, for sure go down)? What if it goes up for ten straight years? If your money hasn't been invested, or has all been invested in 'riskless' investments, you may not have lost nominal dollars, but you've lost real dollars-- buying power when accounting for inflation.

Books like "A Random Walk Down Wall Street" quickly taught me that people tend to be really, really bad at predicting the ups and downs of the stock market as a whole, or of individual stocks in particular. People who think the economy is headed downhill will stay on the sidelines for decades. Think about investing in 2008/2009, when stocks were historically quite cheap-- it was a scary thing. Sure, things were cheap-- but who knew how far down the stock market was going to go? There is never a good time to get in. On the other hand, people convinced of a company's greatness will continue to pour money into the investment way after it's peaked, convinced they're just seeing a temporary setback.

Yes, there's a ton of worry in the markets right now, and yes, a lot of that is justified. I would advise you to stay diversified (The US is half of the global market-- there's no reason why it has to be 100% of your portfolio) by investing in international stocks as well as US stocks, and bonds as well as stocks. IMHO gold/precious metals are a bad investment-- when you invest in a company, you're investing in something that can grow and gain value. When you're investing in gold, you're just investing in something that can become more or less scarce.

Two quotes that have served me well:

From Warren Buffet-- "Be fearful when others are greedy and greedy when others are fearful".

One more (unnatributed)-- "The market climbs a wall of worry".
posted by matcha action at 5:57 PM on July 24, 2012 [3 favorites]


I nth a Vanguard bond fund, although my personal opinion is that is way too little risk given your young age (you've got tons of time to weather market downturns!), if you don't mind hugely sacrificing potential future returns in exchange for being confident you won't see the numbers drop in a downturn, you're better off with something conservative. I'm more than 5 years older than you, started investing for retirement in college and I'm still 100% in stocks and planning to stay that way for quite some time. But that's my risk tolerance, not yours.

I suggest you do a little reading before changing your investments and creating a new strategy. There are lots of good books and blogs out there that can detail how various degrees of risk tolerance should affect investments and what that will mean.
posted by treehorn+bunny at 6:56 PM on July 24, 2012


Vanguard has a number of no-load funds based on various international stock indices (other fund families may as well) - there's no contradiction between the standard AskMe advice and your desire to diversify your investments outside America.
posted by janewman at 7:15 PM on July 24, 2012


Just to nth some advice above.

1) Look to index ETFs with low fees - vanguard has a good selection and you can buy them in a vanguard brokerage account with no commission.

2) Don't think about longer term bond funds as being inherently safe. Bond yields are historically low right now, when the yields start to go up (which will happen sometime in the next 40 years) principle in bond funds will go down. Short term and money market funds are relatively safe but the yields are very low at the moment.

3) Get money into tax advantaged investments IRA & 401k while you are young and below the income thresholds where this starts becoming more difficult.

4) You have a very long time horizon this is your greatest asset. Get the money in the market and let it ride. I wouldn't do it all at once (although in reality this is more a psychological rather than a techinical issue) just invest it in small chunks on a regular basis - dollar cost average in - or if you feel lucky buy on large market dips. Given the current swings it's not hard to pick a limit price which will trigger on a market dip. You may not get the bottom, but you will also not get in at the top...

5) Invest a diversified portfolio. Some in international, some in US, some in emerging markets. Right now the US is a great buy...it is very possible it could lose 20% or more over the next year - but when looking over the next 20 years it hard to imagine that today's prices won't be considered very cheap. If we are still at the same point in 20 years we will all have bigger problems to deal with...you need to ride out the dips. History says you will be rewarded. Take a look at the S&P 500 index through the last dips and the value of a regular investment over that time period...

6) This is my opinion. Forget about real estate, gold, diamonds, plastics, anything else someone says is the right place to put your money. These are all too narrow in my opinion. Lots of money can be made for sure if you are lucky - but I think lots of luck in involved. Investing in index ETFs with low expense ratios linked to broad market indices relies much less on luck and have a much better long term track record.
posted by NoDef at 7:50 PM on July 24, 2012


You have a very long time frame.This is a huge advantage. The market has always trended upward over the long term. If you believe now that this will not be the case over the next 40 years then gold isn't going to be any better for you than anything else. If you are really that risk averse then you might as well just keep all your money in cash or cd's but even of you do that the value will be eroded by inflation over time.

If you are conservative and really looking at investing your money for the long term you would be best putting it into an appropriate mix of stock and bond index funds or etf's. At the moment, the US is still the best investment around. The rest of the world is piling into US Treasuries at record rates. US companies are very healthy, with a ton of cash on their balance sheets. The Eurozone is a mess, emerging markets are still volatile and carry higher risk, as do commodities. You should not put all your money into gold, just as you should not put all your money into any one investment. Unless you are doing it purely as a speculative play, which it doesn't sound like you are. Art, antiques, wine and other non-traditional investments are also much higher risk, speculative investments. I am not saying yay or nay on whether these would be appropriate for any individual person's overall mix of investments but if you are looking to avoid risk and you don't already have a well-diversified portfolio, these are really not the things for you.

Don't think about longer term bond funds as being inherently safe

That's true, longer term bonds are more risky. Don't start to distinguish between short, intermediate or long term bonds unless you really understand bonds and how duration works. You can find general bond funds that invest over a range of maturities that will be fine.
posted by triggerfinger at 8:17 PM on July 24, 2012


An alternative angle:

Given your expectation of a much weaker U.S. economy in the long-term,

1) What skills or resources do you believe will be valuable in that Bleak Future?

2) What do you want to be doing in that Bleak Future?

3) Intersecting 1) and 2), what can you educate yourself about now, so as to operate from a position of strength in that future?

Put another way: Given your expectations, how can you best leverage your youth and cash on hand-- investing in yourself-- so as to be maximally ready for the future?
posted by darth_tedious at 9:20 PM on July 24, 2012 [2 favorites]


darth_tedious is right. You have the luxury of time to learn, and the resources to do just that.

More specifically, is it possible for you to augment your current education with an MBA program? You wouldn't need to borrow money to do it - it might even be sponsored by your work place in an "MBA after hours" type program. You could focus on business or finance, and learn the things you need to know to invest your finances with more confidence. It will also improve your lifetime earning potential, and enhance any other degrees you have earned.

The one thing that fluctuations in the market cannot take away from you is knowledge.

In the meantime, hire yourself a really good CPA. Get recommendations from friends and relatives. This is one of those situations where it's probably better to go with someone with snow on the roof, rather than youthful enthusiasm. Someone who has been on the front line through the past thirty years or so. Before you think you can't afford it, mine charges $50 a month for the basic stuff, and he's really, really good. He's also really, really good at telling me what to stay well away from.

The other benefit is that he works with other, more high-powered clients and helps them to make big investment decisions based on solid performance instead of glossy, high-pressure sales brochures, and I get some of that trickle-down knowledge. He's not on commission, like a broker. He looks out for our personal interests instead of the interests of the shareholders of an investment firm.

tl;dr - I'm not religious, but we have historical texts that tell us that seven years of feast followed by seven years of famine have been recorded for nearly 3,700 years. Treat that like the REALLY big picture, and plan your life accordingly. Wars, disasters and pestilence happen, but humanity recovers and goes on.
posted by halfbuckaroo at 4:26 AM on July 25, 2012


Social bonds. Allia is a good one in Europe (UK) to start with, and I am sure you can find ones in America. They are usually £1,000 bonds that pay a 10% rate.

For example, (from their website) Investor A puts £1,000 in a Charitable Bond and chooses to receive 0% return. Her chosen cause receives £140 when the bonds are issued and she receives her £1,000 back in five years’ time. Investor B puts £1,000 in a Charitable Bond and chooses to receive 10%. His cause receives £56 when the bonds are issued and he receives his £1,000 back in five years’ time plus £100 of gross interest.
posted by parmanparman at 5:14 AM on July 25, 2012


Watch out for tax headaches if you jump into commodities like metals, especially commodity ETFs. Gold and silver are taxed as regular income, and certain partnership structures can leave you with a nightmarish K-1 to file.
posted by Hollywood Upstairs Medical College at 8:14 AM on July 25, 2012


Gold is in an enormous price bubble. In the last 10 years, gold went from $300 per ounce to $1,600 per ounce, more than a five-fold increase. In the 20 years prior to that, gold's price was flat. Does this sound familiar at all?

Buy low, sell high. Not the opposite.
posted by cnc at 11:47 AM on July 25, 2012


Buy a house. Have a Real Estate agent show you several foreclosed properties and low ball an offer. Get rejected and low ball another one. Repeat until you have one accepted. You can have a room-mate(s) and charge them rent and split utilities. You can save the money you pay in rent now and you can save the money the room-mate(s) pay to rent from you. You will have an asset that will grow in value as you put sweat equity in it.
posted by Mhead at 2:21 PM on July 25, 2012


Consider a dividend-based investment plan. You mention not wanting to live the rest of your life tied to the fortunes of the S & P, and who can blame you? Investing for the long term in dividend-yielding companies, especially companies that increase their dividend every year, provides steady cash flow plus a hedge on inflation (as dividends + capital gains often grow faster than the rate of inflation), regardless of stock price fluctuations. The danger of course is that sometimes companies slash their dividends (as many did during the 2008 downturn), but if you have a portfolio diversified across several sectors and countries, you can mitigate against this risk.

The Dividend Aristocrat Index & The Dividend Champion Index are good places to start your hunt for companies that have raised their dividends consistently every year for at least 25 years.

As dividends rise, your yield-on-cost increases. With every dividend increase, you earn a greater return on your money-- without you having to do anything but hold the stock.

If you reinvest those dividends, your money compounds dramatically. Consider from January 1950 until April 2012 the return was 8,182.464% for the index price and a whopping 66226.545% for the dividends reinvested index. In short? Since 1950, roughly 89% of your gains would have come from reinvesting your dividends.

You're 24 now-- reinvested dividends compounded over time should pay off quite nicely.

(As always, do your own due diligence. Good luck!)
posted by Fuzzy Monster at 7:58 PM on July 25, 2012


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