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Investing for Beginners?
April 23, 2014 1:16 AM   Subscribe

My brother and I recently found out that we are collectively receiving $220,000 from our father's estate (he passed away four years ago when we were both in our early 20s). We were advised to invest in some more profitable stocks and were given a list by a financial advisor, but neither of us have a clue how to begin making these types of decisions. Does anyone know any good (free) online resources to start learning the basics of investing and choosing a diverse portfolio? I've been wanting to develop financial acumen for some time now and I guess this is a good opportunity to start, but I don't want to make any mistakes. Any advice? Many thanks!
posted by desert_laundry to Work & Money (35 answers total) 40 users marked this as a favorite
 
There will be much more investment-savvy answers coming along soon I'm sure, but the first thing I'd do is stop working with that particular financial adviser, because I think it was irresponsible of them to suggest that you pick particular stocks this way.
posted by jon1270 at 1:38 AM on April 23 [37 favorites]


Bogleheads.
posted by professor plum with a rope at 1:59 AM on April 23 [7 favorites]


Picking stocks would be your second mistake, after trusting that advisor. Put the money in whichever Vanguard index fund will best allocate it for you based on your goals and your appetite for risk; there are calculators at their site that will help you decide.
posted by nicwolff at 2:55 AM on April 23 [22 favorites]


Pay down any high interest debt you have first and create a cash 3-6 month's living expense safety net if you don't have one already.

Basic index funds almost always beat individual stock picks or actively managed funds when looked at over a long time frame. You have more than enough money to get Vanguard's Admiral shares which are some of the best and lowest cost funds in existence. There are other worthwhile index funds, just pay attention to what their expense ratio is compared to Vanguard. Trying to pick specific stocks without a lot of knowledge right now is a sucker's game. Don't be the kid wandering up to a professional poker table with a wallet full of 20s.

Talk with an accountant about the tax implications of your windfall and whether a mutual fund or ETF based index fund solution best matches the rest of your finances. Then divide the money into four or five pools and set and forget until you need the money. What that balance should be depends on how soon you will need access to the money (buying a house?) and how risk averse you are.

Something that matches the S&P 500 (e.g. VOO)
Something small cap focused (e.g. VB or VBK)
Something international (e.g. VEU, VXUS, or VGK)
Something bond related (e.g. BND)

If your current income does not let you maximize your tax sheltered retirement plans and you do not need the money for other things, take money out of your taxable Vanguard (or whatever you go with) account each year and put it in a tax sheltered plan (unless you only have access to a terrible 401(k) or similar).
posted by Candleman at 2:55 AM on April 23 [13 favorites]


Holy butterballs and salmon, that adviser should be run out of town. Barring exceptional circumstances and a very deep knowledge, you should never buy individual stocks with that kind of money.

Nthing vanguard index, it will probably be one of the lowest fee, highest interest I I options available.
posted by smoke at 3:30 AM on April 23 [2 favorites]


I have no answers, but as someone in a very similar situation (although it's my Mom and I, and it's more money) I'm eagerly waiting to see what everyone says. One of the biggest frustrations I have is that all "how to start investing" guides assume that you're starting out with very little money: if you're inheriting a substantial amount, you have a very different set of problems. We have a well trusted investment advisor, who is being very very conservative: but I suspect a little too conservative, as I think this much money does not belong mostly in mutual funds and REITS. And I have no idea how to judge what this person is doing or how to change it.
posted by jrochest at 3:38 AM on April 23


Came in to say a Vanguard index fund, but apparently other people beat me to it. Your advisor is giving you scarily bad advice.

Also, if you're in Canada I would max out your RRSP contributions (which can be invested in a vanguard index fund) and then every year take your income tax return and put it in to a Tax Free Savings account.
posted by PuppetMcSockerson at 4:16 AM on April 23


I suspect a little too conservative, as I think this much money does not belong mostly in mutual funds and REITS.

These are not conservative investments; CDs and government bonds are conservative. Many people make the mistaken assumption that there is some "secret" out there that rich people and their financial planners know, that allows them to get much better returns than the rest of us. This is not true, though financial planners want you to believe it. People like Bernie Madoff exist because people want to believe it.

The main advantage rich investors have over the rest of us is access to advice about how to manage the tax implications of their investments. But they need this information more because they are subject to more taxes (in particular, inheritance tax).

If you're young, you can put a portion of your money in higher risk, higher yield mutual funds, and in REITs, and see how that goes. But stock-picking is a way for your broker to make commissions.
posted by mr vino at 4:22 AM on April 23 [5 favorites]


Many people make the mistaken assumption that there is some "secret" out there that rich people and their financial planners know, that allows them to get much better returns than the rest of us.

This is very very true. This may sound obvious, but getting a 2℅ return on 220,000 is absolutely more than getting 2% on 17,000. This is the "secret sauce" of being rich in the financially-independent sense. Also consider that the person with 17k savings is highly more likely to not be able to just reinvest the return. This makes even very small returns much more profitable in an absolute sense for the high-dollar investor. Being able to invest 224400 in year two jumps you ahead significantly.

In short, fire anyone who promises you above-market returns due to their secret strategy. Invest in boring things and reinvest as close to 100% as possible.
posted by odinsdream at 4:36 AM on April 23 [5 favorites]


I would read a book called, A Random Walk Down Wall Street. Here's an excerpt from an excellent review:
Oh, but [investing] seems so complicated, you say. How can you ever outsmart the wily foxes on Wall Street who are out to rip off the common folk? It seems like doing even reasonably well at investing should take constant research, studying, working, reading, learning. All those Annual Reports. And you'll have to subscribe to all kinds of dense boring newspapers with columns and columns of tiny print.

What if I told you that you could read one book and know everything you are going to need to know about managing your investments? And I mean, everything. Well, it's true. And this is the book. If you can't be bothered to read anything else about investing, read this one book.
posted by alex1965 at 4:40 AM on April 23


Pay off debt, invest tax efficiently (401k, ISA, etc.)
posted by devnull at 5:02 AM on April 23


Adding to the pile on for Vanguard. With that kind of sum to invest one of their advisors will probably be available to offer some free advice.
posted by COD at 5:08 AM on April 23


set and forget

Quoting myself, but I wanted to emphasize this more than I did - an important part of smart index fund investing is not panicking if there's a downturn in the market. Trying to time the market, especially selling during a downturn, is an excellent way to lose money. Keep money that you need within one to five years out of the stock market and trust that in time the money you have invested in stocks will recover. The most you should do is periodically rebalance - as a simple example, keeping 50% in VOO and 50% in BND and rebalancing twice a year. Every six months you would sell enough of whichever fund had done better to buy enough of the weaker performing fund to even it out. Alternatively, you can do it when the ratio reaches a certain threshold. The big thing is to do it dispassionately.

if you're inheriting a substantial amount, you have a very different set of problems

What problems do you think you're facing?

Having more money means you can be less risk averse in hopes of better performance in stocks, but you're still gambling compared to index funds.

There's various things you can do with hundreds of thousands of dollars like starting your own business, buying your own rental property, etc., but they all involve either a substantial investment of your own time and/or high chance of loss.
posted by Candleman at 5:21 AM on April 23 [1 favorite]


Seconding Bogleheads and A Random Walk Down Wall Street. You could get both books (and the forum for Bogleheads is free) for as little as $12 bucks and they will be the best financial advice you'll ever get.
posted by rippersid at 5:27 AM on April 23 [1 favorite]


and rebalancing twice a year. Every six months you would sell enough of whichever fund had done better to buy enough of the weaker performing fund to even it out.

Just as a clarification, the Vanguard target retirement funds have built-in balancing, not exactly of the sort based on performance directly, but rather a risk profile. So, let's say you are going want to retire in 2060. You buy the Vanguard fund with that target date, and it starts out today with a higher-risk mix of investments. As 2060 approaches these are rebalanced towards lower risk investments automatically without you doing anything.
posted by odinsdream at 5:28 AM on April 23 [2 favorites]


if you're inheriting a substantial amount, you have a very different set of problems. We have a well trusted investment advisor, who is being very very conservative: but I suspect a little too conservative, as I think this much money does not belong mostly in mutual funds and REITS. And I have no idea how to judge what this person is doing or how to change it.

I know you said your own case had more money involved than this, but when it comes to investment, $200K is really not all that much money. I mean, yes, it matters a lot for the average person, but it's not even remotely enough to get into the territory where the sheer mass of dollars makes decision-making different. At a certain point, you start to get into the territory where you can acquire controlling interest in a company, or take huge gambles with nontrivial amounts of money while preserving the bulk in the hopes of making huge returns (ie, venture capitalism, buying real estate yourself, etc), or parking the entire thing in hyper-conservative areas and still earning solid returns for a modest lifestyle. A couple or a few hundred thousand is not that kind of money.

If you have money measured in hundreds of thousands, it's easier to "see" your various options, because a really diversified investment strategy involves "real" amounts of money in each of the areas you invest (mutual funds, REITs, etc), whereas smaller sums can feel silly if you have, say, $2K in an REIT and $1K each in a few mutual funds. Nevertheless, in an investment world where much of the "interesting" stuff is really built to maximize returns on sums measured in millions, the long-term investment strategies for $400, $4K, and $400K are not all that different.
posted by Tomorrowful at 5:37 AM on April 23 [4 favorites]


MeFi user Mutant's profile is a good thing to resource for information about how markets work.
posted by ocherdraco at 5:45 AM on April 23 [4 favorites]


My husband and I obtained financial advising services through Vanguard and were extremely happy with the results. There's more information on that option here. I think we paid $250 for a one-time consultation/one-off financial plan, though I am sure the rates drop or disappear as the amount you have ready to invest goes up.
posted by whitewall at 6:26 AM on April 23 [2 favorites]


Echoing what everyone else said about getting a new, fee-based financial advisor, and just buy an index fund. If you want to pick stocks with some of the money, you can, but it's basically playing blackjack if you don't know what you're doing (if you're asking here, you don't). If you're going to be playing the market (picking stocks) with real money, you should think about it as a full time job and get all the training you'd get to prepare for any new career.
posted by empath at 6:26 AM on April 23


And you should decide what you want to get out of investing it -- do you want to buy a house? Retire early? Pay for your kids school? All of those things require different investment strategies.
posted by empath at 6:28 AM on April 23


With that amount of money, Fidelity total market index may actually have a lower fee (probably 0.7%) than the Vanguard total market index.

Jrochest - going heavy on REITS is not conservative.
posted by Dansaman at 6:30 AM on April 23


You may already be aware, but just in case:

A mutual fund is a pool of money compiled from many individual investors and managed by a fund company, which is used to buy individual stocks and/or bonds. By compiling money from many investors the fund manager can compile a diverse portfolio within the fund, and execute various investment strategies which would be difficult for an individual investor to pull off.

Two common orientations for funds are Growth (investing in young companies which have the chance of getting a lot bigger) and Value (investing in down-on-their-luck or otherwise out-of-favor companies which may actually be more profitable than most investors suspect).

There are also size groupings when it comes to funds, based on their market capitalization (aka market cap, cap) which can be part of the investment strategy. Companies worth billions of dollars, your Coca-Colas and Proctor and Gambles of the world, are large-cap. Companies worth in the millions to tens of millions which are not yet household names are small cap. Large-Cap stocks are usually more steady, but unlikely to surprise you by growing a ton. Small cap stocks can have that ability, but they're also far more likely to crash and burn.

A third dimension to be aware of is active vs. passive management. An actively managed fund will have an actual guy or chick, the fund manager, who comes into work every day and decides what stocks the fund should buy and sell. A passively managed fund has some kind of "set it and forget it" strategy --- for example, attempting to buy a selection of stocks that will mimic the performance of the overall market, by for example buying a portion of every stock in the Down Jones or S&P 500 Index. This is known as an Index Fund.

All mutual funds charge investors a fee proportional to the amount of money they have invested in the fund, usually measured in basis points, or tenths of a percent. A 2% fee would be 200 basis points (200 b.p.s.). Actively managed funds charge much, much higher fees than index/passive funds, often somewhere in the 100-300 bps range. Index funds usually charge more like 15-90 bps. Active managers say that only with an active manager in place do you have a chance of out-performing the market. In general, however, it is very difficult to beat the market, and when you tack on the typical active management fees, it's very very rare to consistently do so. This is why everybody in this thread is advising you to get an index fund --- with an index fund, if they stock market goes up 5% this year, than so should your money, about. With an actively managed fund, your money could go up 7% in a year when the market only does 5% --- but minus a 2% fee and you're back on par with an index fund, and if it turns out that your fund manager is not in fact a genius you could end up with a 2% return or less in a year when the market goes up 5%.

For more on what funds to look into, try the website Morningstar.com. If you run across an investment concept you're not familiar with in your research, try Investopedia.
posted by Diablevert at 6:48 AM on April 23 [6 favorites]


Depending on where you are located - you should consider buying real estate.

Purchase rental property. Hire a property manager to run it. (Or, if you do not own your home, then buy a house for yourself.)

Real estate is at historically low numbers. In many areas, you can get foreclosures real cheap.
posted by Flood at 6:54 AM on April 23


Damn --- hundredths of a percent, it should say. 1 bps is .01%. My apologies.
posted by Diablevert at 6:55 AM on April 23


Depending on where you are located - you should consider buying real estate.

No. Don't do this. Buy index funds or ETFs that mirror the underlying index. Vanguard, Bogle, A Random Walk Down Wall Street, etc. are the correct advice.
posted by dfriedman at 7:04 AM on April 23 [2 favorites]


First you have to ask what kind of money you will inherit. If it is from your father's IRA it will have to be treated differently than if it is from insurance or bank account. The tax implications of IRA money make it worth looking into a chat with your favorite tax preparer.

Knowing that you really should invest in a good mix of no-load index funds. Domestic, and International.
posted by Gungho at 7:41 AM on April 23 [1 favorite]


In short, fire anyone who promises you above-market returns due to their secret strategy. Invest in boring things and reinvest as close to 100% as possible.

Nthing this. However, while your question was about investing, don't forget that your wealth is measured not by your income (from investments, work, etc) but by the relationship between your income and your expenditure. If you are able to live on no more than about 4% of the sum you have properly invested each year then you should be able to do so indefinitely. Many people who receive a windfall think about various luxuries that they can spend some of it on. Instead of that I'd say that your current position of strength is a great time to think about what spending you could cut down so that you could get nearer to this goal of financial independence. Have a look at Mr Money Mustache's blog.

The secret to overall success is keeping your investment strategy surprisingly hands-off and dull and your spending strategy surprisingly hands-on and frugal.
posted by rongorongo at 8:20 AM on April 23


First, I want to thank everyone for such thoughtful advice. I'm overwhelmed by the amount of expertise (at least from a layman's point of view) on the subject and am truly indebted to all who took the time to respond. To add a bit more depth to my original question, we are in the process of determining the actual status of the money (it's a combination of life insurance and personal savings). We won't be able to have legal access to the fund until my brother and I turn 30 (I'm 25 and he's 28) though there might be some wiggle room since the trust caretaker is a very close friend.

We were told by the financial advisor to look into the Wells Fargo DSIP plan and examine the stocks. Does anyone have any experience with this particular plan or would it still be better to pursue an option like Vanguard?

Again, so very appreciative. My apologies if I sound completely inept when it comes to these things, but I'm trying my best to wrap my head around the jargon!
posted by desert_laundry at 11:31 AM on April 23


Dump the financial advisor. He is giving you bad advice. You probably have a trust investment manager who is charging high fees to pick stocks. Get rid of them.

1. Have your trustee call up Vanguard and ask them about transferring your trust to Vanguard as a "self-managed" trust. It is important to use the term "self-managed" because Vanguard also has a separate service for which they will charge for investment advice. The self-managed trust is absolutely free -- no fees -- just like an IRA.

2. Have your trustee select one or two Vanguard index funds, either one Target Retirement fund or else a Total Stock Fund and a Bond Fund.

3. Sit back and do nothing else for years. That's it. You will earn your investment returns with no additional fees taken out by managers.
posted by JackFlash at 12:55 PM on April 23 [3 favorites]


Wells Fargo DSIP plan and examine the stocks.

Look, this is a managed plan, which means fees and commissions paid to this person advising you. The very first step you need to take is to internalize the concept that you are in charge, and you get to make the decisions. Seriously meditate on that for a bit. It can be very difficult to remove emotion from this process of picking based on what the math tells you is true, I still struggle with this, but this advisor is not working in your interest and you need to drop them as step 2.
posted by odinsdream at 3:46 PM on April 23 [2 favorites]


Solidly good advice in this thread. To reiterate what everyone said above:
posted by RedOrGreen at 4:12 PM on April 23 [2 favorites]


We were told by the financial advisor to look into the Wells Fargo DSIP plan and examine the stocks. Does anyone have any experience with this particular plan or would it still be better to pursue an option like Vanguard?

Wells Fargo doesn't seem to specify what their charge for the plan is (which is in and of itself a bad sign) but two forums I found said it's 1-1.1% yearly (plus a creation fee), which is ridiculous. VIG, which is a Vanguard ETF with the same basic theme (companies that raise their dividends), has an expense ratio of 0.10%. There also appears to be a high minimum investment that would limit your ability to diversify to other types of investment and scrambling to move money if you withdrew a substantial portion of it for buying a house.

As a bonus, you don't have to do the legwork of trying to pick and chose stocks.

Also, while dividend stocks (and specifically ones that raise their payments) tend to perform well, I would not want to put all of my financial eggs in that basket for reasons stated at the Motley Fool. I have substantial investments in VIG but I also have diversified investments in more general funds as well.
posted by Candleman at 4:35 PM on April 23


You have a lot of money coming to you and very little experience managing it. People are going to try and take it from you, and that includes your financial advisor. What he is advising you to do is essentially give him your money for absolutely nothing in return. Just buy an index fund.
posted by empath at 4:36 PM on April 23 [3 favorites]


If I could give you one powerful idea, it would be this: fees are INSANELY EXPENSIVE. You have no idea how much fees will eat up your money.

It's hard to understand, because in the first place, we're used to fees like $25 a month or $50 a month for a bank account. That's already ridiculously expensive ... but fees on investments can come to thousands of dollars a year.

In the second place, investment firms deliberately hide this info. It's nearly impossible (sometimes literally impossible) to find out how much the investment firm or your advisor (or both) took in fees from reading your statements. The info is deliberately omitted.

I know a couple who'd been using a nice advisor for years. When they started asking for dollar figures - "how much did we pay in fees on this fund last year? In DOLLARS, not percent?" - they were SHOCKED.

If you really want to investigate that Wells Fargo DSIP (which I, personally, wouldn't invest in), ask your advisor to give you a written letter spelling out ALL fees and costs, going to him, Wells Fargo, or any other party, in dollar amounts, including purchase costs, annual costs, and selling costs. IN DOLLARS. I bet it'll be a lot.

The Bogleheads wiki, recommended by professor plum with a rope way back at the start of this thread, is GREAT. Please, start with this paragraph on keeping costs low.

Two other general pieces of advice:

* You don't need to rush into anything. You really don't. Sitting on the money for a year while you become truly comfortable with your options is a much better plan than trying to buy something NOW. (Tax consequences MIGHT affect this; talk to an independent accountant who is not advising you on specific investments.)

* You WILL make mistakes. It's okay. The important thing is to try to make smallish mistakes, and to learn from them.
posted by kristi at 8:36 AM on April 25


I know you said your own case had more money involved than this, but when it comes to investment, $200K is really not all that much money. I mean, yes, it matters a lot for the average person, but it's not even remotely enough to get into the territory where the sheer mass of dollars makes decision-making different. At a certain point, you start to get into the territory where you can acquire controlling interest in a company, or take huge gambles with nontrivial amounts of money while preserving the bulk in the hopes of making huge returns (ie, venture capitalism, buying real estate yourself, etc), or parking the entire thing in hyper-conservative areas and still earning solid returns for a modest lifestyle. A couple or a few hundred thousand is not that kind of money.

But Mom's money is two and a half million. On top of paid off house(s) and my own investments, which are in the 300K range. No debt (of any kind) and maxed out RRSPs and TSFAs.

And as far as I can see it's not generating much at all.

So, would your advice be any different? Not being snarky, but seriously asking.
posted by jrochest at 11:50 AM on May 3


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