I've saved up $100k in my first year of work. I also have a Vanguard account. Now what?

June 13, 2012 2:21 PM

So, I've saved up $100k in my first year of work, and I just got myself a Vanguard.com account. Now what do I do?

I've just turned 24 and I've just realized my savings account's gone from $0 to at $100k (and counting) since I left college and started working, almost a year ago now. I don't want that money to just sit there and decay, so I'm reaching out to the green for some advice on this. I have no idea if I'm doing this right.

Despite having read anything and everything with John Bogle's name on it, I still don't know what the heck to do with this money. Most of the advice I've read, both on here and off, seems to be pre-08, but I don't know if that matters. So far, I've opened a Vanguard account and maxed out my Roth IRA, but that's just about it. If it's relevant, my job doesn't offer a 401(k) or anything like that (I think we have a defined benefit plan or something, actually, but I'll have to check). I also don't have any financial obligations or debt beyond a lease on an apartment in SF, if that counts. I have an emergency fund.

Anyway, this is what's on my mind right now, I guess:

1) is it still a reasonable idea to allocate part of my investments into a broad-based index fund or whatchamacallit or two, or into anything involving securities, really? The Bogleheads' wiki recommends investing in a mix of US and international indexes, for example, but specific allocations vary by portfolio.

I'm asking this because I have this fear, but I don't know if it's silly or not, that the markets are going to collapse at any moment and vacuum up all my hard-earned money. Maybe it's because I'm young and lived through 08-09, but that's how I feel. Part of me thinks the market (at least as it exists now) won't be around for much longer, although that's probably silly.

2) can anyone recommend a good financial planner in or around SF with whom I could talk this over with? I guess I'm kind of looking for someone competent who'd be able to assuage my anxieties vis-à-vis my concerns in 1) -- basically, a financial therapist.

Thanks a bunch, green!

posted by un petit cadeau to Work & Money (19 answers total)

Read The Best Financial Advice You'll Never Get.
posted by kdar at 2:27 PM on June 13, 2012 [3 favorites]

yes index funds are good, but with that amount of money you want to invest in a broad swath of investment vehicles. Safer bets are out there but they don't provide as high a return. (Basic rule of investing the higher the risk, the higher the return). Equities, like index funds, should only be a portion of your portfolio.

Honestly you want an investment adviser, if you're socking away 100k a year you need someone to actively manage that money.

BTW if I were you I'd look at using a portion of that for a the down payment on a condo or house in SF. Interest Rates are as low as they're going to get and the SF market is really starting to take off. I have a friend who's an SF Real Estate Agent who said they're not even using recently sold homes as comps for houses but using under-contract homes to get a better gauge, thats how fast the market is shifting.
posted by bitdamaged at 2:33 PM on June 13, 2012

I would invest some money into real estate, such as inexpensive rental houses for cash flow which can be sold for a profit if the market rises again. Probably not around SF. If your parents live in another city and one of them is handy, buy a house there (so you can write off visits) and maybe pay them or someone they know to keep an eye on it for you.
posted by msalt at 2:34 PM on June 13, 2012 [2 favorites]

if you're socking away 100k a year you need someone to actively manage that money.

Actually not so much actively manage it so much as someone to create a portfolio of investments for you tailored to your age and retirement goals. Most of which should not need to be actively managed.
posted by bitdamaged at 2:34 PM on June 13, 2012 [6 favorites]

I'm sorry, but msalt's advice is terrible. Real estate investment is a (potentially fulltime time) job. It requires a lot of knowledge and hard work to find "inexpensive rental houses for cash flow", and doing so out-of-town is a recipe for losing your shirt.

The Bogle is a good start, as is finding a CFP in your area. Look at Vanguard's age-based funds; a lot of Bogleheads love them for good reason.
posted by griseus at 2:52 PM on June 13, 2012 [4 favorites]

if you're socking away 100k a year you need someone to actively manage that money

I disagree, there's very little evidence that active management has a higher expected return index funds, and a fair amount of evidence to the contrary.

Regarding your fear, yes, the stock market could drop precipitously at any moment and erase a portion of your hard earned money. As for the market suddenly disappearing and taking all your money, that won't happen (barring some zombocalypse removing money entirely).

I'd suggest going with a percentage in their total bond index, total stock market, and total international. That's about as diversified as you need. You can adjust your percentages based on your risk tolerance, but more than 50% bonds seems overly conservative (some people say "your age in bonds" so 25% in bonds). There remains the risk of nominal gains but real losses due to inflation and stocks provide a hedge against that in the long run.
posted by justkevin at 2:59 PM on June 13, 2012 [5 favorites]

I'm asking this because I have this fear, but I don't know if it's silly or not, that the markets are going to collapse at any moment and vacuum up all my hard-earned money. Maybe it's because I'm young and lived through 08-09, but that's how I feel. Part of me thinks the market (at least as it exists now) won't be around for much longer, although that's probably silly.

The entire market completely collapsing would be unprecedented in the last 100 years or so. If you have a diversified portfolio and literally everything goes to zero that's basically the financial apocalypse and it's not something that you can realistically hedge against. It's like saying "Sure I own this big house, and I have fire insurance for it, but what if the entire country burns down at the same time including my insurance company's offices?" At that point you're going to have bigger problems than fire insurance.

is it still a reasonable idea to allocate part of my investments into a broad-based index fund or whatchamacallit or two, or into anything involving securities, really? The Bogleheads' wiki recommends investing in a mix of US and international indexes, for example, but specific allocations vary by portfolio

That's still pretty much the standard type of long-term investment that has reasonable protections around it and relatively predictable returns. Most of the "safer" investments people talk about like gold are pure speculation and have significantly more risk. People have been saying the sky is falling in every recession ever, if people had thought things could only get worse immediately after the Great Depression and failed to invest they would have lost an opportunity to make a lot of money.

Also, I don't know what your situation is but I have a feeling that if you lost the entire $100k tomorrow you'd still be okay. It's not money that you need in the sense that someone who lives paycheck to paycheck to feed their kids needs. Put it in a target retirement fund and hope that in 30 years or so it's worth more than it is now, but don't lose sleep over the fact that you might not always have a ridiculous amount of money.
posted by burnmp3s at 3:02 PM on June 13, 2012 [2 favorites]

If you're really concerned about the market cratering completely (a fear I share, deep down), then you should invest part of your nest egg in things that will hold value in that unlikely situation. For instance, a secure self-sufficient residence, or hard commodities like precious metals in your possession.

Some people will call you crazy for even thinking of these things, but if that unlikely scenario comes to pass, you won't be crazy, you'll be prudent and successful.

I can think of several scenarios that could irreparably take down the markets. And in the longview of history, it's not a question of if, but when this society will collapse. The people telling you that you will have bigger problems in that scenario are ignoring the fact that you can also actively plan for these bigger problems.

/no, I am not a survivalist wacko, but part of me wants to be...
posted by hamandcheese at 3:11 PM on June 13, 2012 [1 favorite]

First, put aside a rainy-day fund in a saving account. ING gives good rates, and transfers happen quickly.

Second, max out on 401k or retirement contribution. You can use some of these money later for a house down-payment. Consider increase your liability insurance. You don't want a person you hit with a car to wipe you out with a law suit.

Then, for investment, default to index fund + bond index. Don't worry about active investments for now; they rarely out-perform index, and make a headache at tax time. You can also reserve a portion for your own trading, to get your feet wet in the market. This is play money, if you so incline.

Real-estate can be a good active investment, but you will have to treat it like a second job: find someone to teach you the rope, then get in with eyes wide open. It's work, and it exposes you to some unique legal and financial consequences. However, it can yield decent return compare to other alternatives. Renting is fine; don't buy a house if you don't need one.

Regarding fear of another market downturn, you must consider the alternative: your bank account is currently depreciating at about 2%-3% right now (inflation). With index, you are essentially doing what the bank is doing, only not paying them the intermediary fees.
posted by curiousZ at 3:21 PM on June 13, 2012

There's a variety of strategies for investing; everyone seems to have one.

You want to balance risk and return. Most financial advisors will suggest equity-heavy portfolios at your age (switching to bond funds as time goes on...)

Balanced portfolio
25% Domestic equities (indices are fine)
25% Foreign equities (indices are fine)
25% Commodities (indices are fine)
25% Bond funds (municipal bonds are good; TIPS are interesting as well)

Optional: Rebalance annually in the same month. June seems to be common. Rebalancing means that your portfolio representations will change over the year. Each June (for example) you sell off over-weight investments (>25%) to purchase under-weight investments, thus each year on 1 June, you're sitting with four 25% segments. I know a few people who swear by this strategy; it's definitely a long-term strategy.

Or

More risk; more return
1/2 Equities
1/3 Bonds
1/6 Money market / cash (although yields are low right now)

Or

Highest risk; highest return
1/3 Equities
1/3 Bonds
1/3 Alternative assets (angel funding, crowd funded equity, etc.)

You're a bit green for investment properties. If you wanted to put it to a primary residence, that may be a good idea.
posted by nickrussell at 3:47 PM on June 13, 2012

First of all, if you really saved $100K in a single year, then your income must be substantially above $100K per year. And if your income is substantially above $100K per year, then you may not be eligible to contribute to a Roth. If nothing else you should speak to an accountant to run such questions to ground.

Second, assuming you want asset management advice rather than apocalypse theorizing, here are a couple things that may interest you with respect to Vanguard in particular.

1) They offer two California muni bond mutual funds that currently yield substantially more than savings accounts with the added benefit that any disbursements and capital gains on those funds are tax-free for you (as long as you live and file in California). Of course they are not guaranteed to maintain principal, but they are much more stable than most mutual funds.

2) They also offer Target Retirement Funds that invest in a blend of stock funds and bond funds that evolves over time to become "safer" as you get older. The idea being, you could buy, hold, and contribute to this single fund for your whole life and then draw on it when you retire, without having to do anything more active than that, and still get the benefits of international and asset-class diversification. Not everyone agrees that target-date retirement funds are a good idea, but often their criticisms involve high fees, and Vanguard fees are very low.

Anyway, there are some ideas. Happy investing.
posted by Joey Buttafoucault at 3:47 PM on June 13, 2012

I'm asking this because I have this fear, but I don't know if it's silly or not, that the markets are going to collapse at any moment and vacuum up all my hard-earned money.

If that happens, we're all fucked. I'd probably nth some kind of low-fee target fund, and try not to obsess about its week-to-week movements. Property as a hedge of sorts? Yes, but to own and live in yourself rather than as an "investment", and only if you're not likely to move in the next few years.
posted by holgate at 4:13 PM on June 13, 2012

Specifically for the stuff you put in Vanguard:

For many Vanguard fund types, there are actually two separate funds that are almost the same thing: "Investor Shares" and "Admiral Shares". They have the same investment goals as each other (for example, both might be "S&P tracking fund" or both might be "small cap growth fund") and seemingly even the same investment strategies (i.e. they seem to hold the same stocks and perform basically equally with each other) but:

(1) Investor Shares allow you to invest with a lower amount of money;

(2) Admiral Shares allow you to invest for less cost.

So, for example, there's VEIEX and VEMAX, both of which are "Vanguard Emerging Markets Stock Index Fund". If you look at the list of top 10 stocks in each (at the bottom of the respective pages), they're the same. If you look at the returns charts (in the middle of the respective pages), they sure look more or less the same to me (except that they didn't come into existence at the same time). They're basically the same thing, it seems to me. Except:

VEIEX is Investor Shares, and VEMAX is Admiral Shares. VEIEX requires a minimum investment of $3,000, and has an expense ratio of 0.33%. VEMAX requires a higher minimum ($10,000), but has a lower expense ratio (0.20%).

If a fund type that you invest in has both Investor and Admiral Shares, and you're currently invested in Investor Shares, you can easily switch to Admiral once you meet the minimum (no tax hassles - it doesn't trigger capital gains/losses as long as you're switching from an Investor fund to the related Admiral fund), but given the amount that you're looking to invest, I'd just plan my initial investments such that I'd be getting Admiral Shares from the get-go (on those fund types that have Admiral Shares in the first place).

Disclaimer: I'm not an investment pro or anything like that, and the information I've got about this stuff is just from Vanguard's propaganda, so maybe there's an actual reason (that I don't know) why it might be wise to buy Investor Shares even if the amount you're buying could buy Admiral Shares.
posted by Flunkie at 4:16 PM on June 13, 2012

Saving so much in your first year of work is amazing and reading everything by Bogle is a great start. At this point, one option would be to find a fee-only professional (careful, different than fee-based) and let them managed your life savings. The other option is to continue your financial education and managed the money yourself as the person with the most at stake. If you choose the latter route, I would start at the Bogleheads wiki. There you will find more book suggestions as well as instructions on how to format this same question for the Bogleheads forum. I strongly urge you to ask them this same question as (1) it's free and there is no conflict of interest, (2) they are very educated and helpful, probably more than many professionals, (3) they will teach you along the way, and (4) your situation is particularly sensitive because you will predominantly be investing outside of retirement accounts and subject to more taxes.

As the Bogleheads always remind people, don't rush into anything right now. Take 6 months or a year to figure this out. You have a lifetime of investing ahead of you. But do make sure you're eligible to contribute to a Roth.
posted by Durin's Bane at 4:35 PM on June 13, 2012 [1 favorite]

Real estate investment is a (potentially fulltime time) job. It requires a lot of knowledge and hard work to find "inexpensive rental houses for cash flow", and doing so out-of-town is a recipe for losing your shirt.

Real estate should be an element of a balanced portfolio IMIHO, especially given the state of the market right now. Property close to urban centers and in growing markets (esp. West Coast) has strong fundamentals and is priced relatively low; once the foreclosures are passed like a kidney stone, the market is poised for strong growth.

My heart is closest to DIY hands-on investments and that is your best ROI, but there are all sorts of ways to invest without putting your time in, from small limited partnerships to REITs. You could also buy a single property and just hire a property manager to handle it for you; this would work best if you have a friend or parent to help you choose the place in the first place.

It depends in part how you are making so much money at age 24. If you have an all-consuming job, you'll want someone else to hassle it out. But if you are, say, a musician or athlete whose career might be short lived, and you find real estate interesting, it might be a good investment hobby worth spending time on. There are many performers who have successfully transitioned to a second career in property investment.
posted by msalt at 6:17 PM on June 13, 2012

First of all, congratulation on your success! Saving so much first year out of college is an amazing accomplishment. Secondly, I'm glad you found Bogleheads investment philosophy even though you have expressed some skepticism whether passive index investing really work. Take a deep breathe and relax because you are doing amazingly well.

I have to second Durin's Bane's advices. Head over to Boglehead's forum lurk and start asking questions. I am a big fan of passive index investing. I also wrote about passive index investing in the past.

I don't want that money to just sit there and decay
I'm asking this because I have this fear, but I don't know if it's silly or not, that the markets are going to collapse at any moment and vacuum up all my hard-earned money.

There always risk associated with investment. Higher return is usually associated with higher risk. Ultimately, you need to decide whether you want to sleep better at night or earn more money through taking greater risk. Historically, taking higher portion of portfolio in equity is associated with higher return.

Questions you need to ask yourself is why do you need to invest? What are you saving for? Early retirement? Buying a house? Buy shiny new toys? Have a comfortable retirement at old age? Be financial independent? If you are not sure, read Your Money or Your Life. That book completely change my thinking about what I am saving for.

By all mean, do educate yourself about investing. If you don't want to spend the time or is not interested then fee-based adviser would also be good choice. I don't live in SF so I don't have any recommendation. Do ask your potential advisers questions and make sure there are no conflict of interests.
posted by Carius at 7:00 PM on June 13, 2012 [1 favorite]

Even with the big crash of 2008, the market is already back to 2006 levels and will probably creep back to the all-time high of 2007 before too long. You only lose money when you sell, so for the market to swallow all your money, you'd need to either sell at the bottom or be in a situation where a massive chunk of major public companies went bankrupt. At that point, nobody's money would likely be worth much at all, so I wouldn't consider that to be a risk worth sweating, at least in terms of investment strategies. It's like worrying that your car's scratch-resistant coating doesn't handle getting hit by freight trains very well.
posted by the jam at 8:24 PM on June 13, 2012

100k sounds like a pretty big chunk of change. A lot of people above talk about how to invest, but not why. Carius has it right though, you should contemplate what sort of plans you have for the money before you start putting it into any sorts of investments. If you're going to buy a home in the next year or two, you may not want to actually put all this money into a volatile investment like stocks. If you're planning on being able to retire early, then you need to make sure you don't put all your retirement savings in accounts that have minimum ages before withdrawal. Depending on how your future planning turns out, you may even discover that saving 100k a year is more than necessary to meet your goals, and you can spend more of that money throughout the year on yourself, your friends/family, or on charity.
posted by garlic at 7:45 AM on June 14, 2012

just curious: what kind of work are you doing right out of college to save 100K in a year?
posted by dougiedd at 12:54 AM on June 19, 2012 [1 favorite]