Beginning investor, seeking basic opinions and links for more research & self-teaching!

October 27, 2006 10:20 AM

Total beginner to investing and finance, researching how to start investing maybe $2K each year, mostly in socially responsible mutual funds -- and how a young, healthy person should balance retirement investment with other kinds of investments.

(I'm coming from a low-income background, so I haven't watched people invest or had people talk to me about it -- I'm very open to criticism if you see me missing important points.)

Quick background: U.S. citizen, female, almost 30, no medical issues at all (yet) and hoping to live 50+ more years. No existing investments now, and hopefully never a 401K (editorial/creative freelancer and totally in love with my work -- so I'm saving for "old age / medical care" rather than "sudden end of salary"). I have a simple standard of living (for an American) and want to live simply my whole life. I don't want kids. I have an emergency-fund in an account that earns close to 5% interest but is totally liquid. Other than that I have no savings or assets to speak of, but I'm debt-free. I'm hoping to spare maybe 2K/year, from now on, to invest.

So far, my research suggests I should have a Roth IRA. I want most of my Roth contributions to go in a socially responsible mutual fund (let's accept for this thread that I've done enough research to decide that "responsible" is more important to me than "highest interest regardless of sources"... if you're interested in debates on responsible investing, see here and here; chart of responsible funds and their relative performance here). So I'll need an account in a brokerage where I can do everything by myself online (possibly Scottrade or Ameritrade -- opinions?).

Once I have this account, can I also just buy individual stocks from any companies I like? Will it be clear in my account how to designate each new contribution as either part of my Roth IRA or part of a shorter-term investment? And actually, is it important to balance my Roth contributions with other shorter-term investments, or should all my $$ go into my Roth (since I could withdraw my original contributions from it in an emergency)? For stocks, are there databases where you can search stocks by, say, a combo such as industry type + price for one share + different performance indexes? Maybe even with flags (either self-applied or third-party) for "green"/"responsible"/etc.?

Thanks for any and all answers and/or suggestions re. where I should go to teach myself more!

posted by anonymous to work & money (10 comments total)

Clicking on your tags, if you haven't already done so, will yield a number of previous posts on these topics. After asking a similar question, I moved my IRAs to Fidelity and I've been delighted. They'll let you get started with $2K and you can move it among their thousands of mutual funds (both Fidelity-brand and "FundsNetwork" funds) without any fees, as long as you don't trade more than once a month or so. There are a few tobacco-free and socially responsible funds - I believe the Calvert funds are all accessible.

Stock trading is more expensive at Fidelity so if you're intending to trade a lot you should consider a discount broker instead.

I can't envision a situation where the Roth IRA shouldn't first be funded to its limit. You can always get the contributions out and the earnings grow tax-free. If you intend to buy a first home or incur catastrophic medical costs, sometimes part or all of the earnings can come out with no penalty too.
posted by ikkyu2 at 10:36 AM on October 27, 2006

Maybe a good place to start
posted by Sassyfras at 10:48 AM on October 27, 2006

As semi-relevant background, I give you (from Scott Adams) Dilbert's Unified Theory of Everything Financial:

1. Make a will

2 .Pay off your credit cards

3. Get term life insurance if you have a family to support

4. Fund your 401k to the maximum

5. Fund your IRA to the maximum

6. Buy a house if you want to live in a house and can afford it

7. Put six months worth of expenses in a money-market account

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement

9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio.
posted by nancoix at 11:05 AM on October 27, 2006 [5 favorites]

Check out The Wealthy Barber.
posted by yqxnflld at 11:58 AM on October 27, 2006

ikkyu2 is right, max out a Roth IRA before going into any other vehicles (since you don't have a 401k with employer match). Since your budget is $2k/yr, this falls into entirely Roth IRA territory ($4k/yr contribution limit). You can allocate your Roth into individual stocks or into funds. Index funds (Dow, S&P 500) are recommended for a young person hoping for the best gains, i.e. 8 to 11% average, over the long term. Picking individual stocks is a luxury you can afford once you have a bit of money already invested in more diverse funds.
posted by knave at 12:12 PM on October 27, 2006

Oh, I should also pimp out jdroth's site, Get Rich Slowly, as well as Ramit Sethi's I Will Teach You To be Rich. The latter has a huge archive of articles, some of which are very informative. jdroth's site is updated frequently and is extremely well written, as well as informative.
posted by knave at 12:16 PM on October 27, 2006

You are already so far ahead of the game by doing the research you have, and being debit free (congrats!). Keep it up, throughout your life, and you should be just fine managing your wealth.

As others have mentioned, you most likely want a Roth account. Part of managing risk is controlling factors that you know (such as your income and tax rate now) and marginalizing factors you don't (like your income and tax in 50+ years).

Whether you stick with Mutual Funds or individual securities is only a matter of how much you want to be involved. If you want to just put money away with minimal research, mutual funds are the way to go. Putting your money into an index fund will do well for you over time, the fees are nominal, and it is instant diversification.

There are many people who like to tell personal investors to leave stock picking up to professionals. I don't believe in this. There are several short books out there that can teach the average Joe to be a prudent and disciplined investor. If researching companies sounds fun to you, then, by all means, be your own portfolio manager. Should you chose this, however, always remember to diversify to minimize risk. This means it would be a good idea to keep at least some money in a mutual fund, government bonds, etc.

To steal the words of the rotisserie bbq guy, "set it and forget it." Don't check your prices everyday. Peter Lynch said checking in on your investments once a quarter is enough. I firmly subscribe to that statement. Believe in the long term.

But, since you've been reading, you probably already know this stuff :)
posted by blueplasticfish at 2:29 PM on October 27, 2006

Since you don't have a 401(k) you would also be eligible for a tax deductible traditional IRA. Whether the Roth or traditional is better depends on your assumptions about your tax rate now vs. when you retire. But the one advantage you pointed out is that you can withdraw your contributions from a Roth without penalty in an emergency.

$2000 per year may be all you can afford now, but you really need to eventually save at a much higher rate before your retirement. So try as quickly as possible to work toward making the maximum contribution to your Roth each year. The next step, assuming your income continues to rise during your career, is set up a SEP IRA that allows you to save up to 25% of your business income tax deductible.

As long as you have a 6-month cash emergency stash, all of your investments should go into your Roth. In your Roth account you can purchase mutual funds or individual stocks. Unless you are planning to spend your full time researching stocks - and I mean full time - don't invest in indidual stocks. You are betting that you are smarter than those who do work at it full time and are likely to fail.

If you do want to make investments outside of your Roth, (which I wouldn't recommend until you maximize your retirement accounts) your broker will set up separate accounts with different account numbers so that Roth and taxable investments are never mixed.

Scottrade, Etrade or Ameritrade will all do the job, but first call to make sure the mutual funds you have decided to purchase are available from that broker. Not all funds are carried by all brokers.

Your emergency funds should be kept in a safe high interest money market fund or 6-month CDs.

Of the socially responsible funds shown in your link, the two that stand out are TIAA-CREF and Vanguard. If you look in the right-most column you will see the annual expenses. These two funds have expense ratios that are 1/4 to 1/8 of all the others. Studies of actively managed funds show that, all other things being equal, the best predictor for investment return is a low ratio. Expenses seem like a small thing but can add up to hundreds of thousands of dollars over your lifetime.

Don't be swayed by the 3-year returns. Three years is much too short to indicate the quality of the fund. Even 10-year returns will only allow you to separate the real dogs from the average. I would go by expense ratio.
posted by JackFlash at 3:05 PM on October 27, 2006

I am still in the early phase of learning about finances and investments, but I can tell you that a fee-only financial planner who volunteers at my workplace says that a) if you choose a fund with a fee, you should choose the up-front fee over the annual percentage being taken off, and b) you should not buy individual stocks until you have reached $500k in net worth, because mutual funds are a much better risk for those of us who are relatively clueless.
posted by sally_jp at 9:54 AM on October 29, 2006 [1 favorite]

Just to throw my $.02 in. I use ShareBuilder for my Roth IRA, it allows you to control where the investment goes, whether into stocks or indexes. The price for trading is also lower if you use the scheduled trading.

One of the best sites for learning about investing is the Motley Fool (http://www.fool.com).
posted by paw at 9:11 PM on October 29, 2006