Advice for first time investor
September 16, 2013 6:27 AM   Subscribe

Changes in my career over the last couple of years have meant that I now find myself, for the first time, being in the position of having a significant amount of spare income at my disposal. Since I have recently entered my forties I plan to invest this in the financial markets, with a initial 15-20 year timescale in mind. I am looking at investing something like $1000 per month into a managed plan split over several funds. Given that I am a total newbie when it comes to investing, what advice can people give me on splitting my pot of money across low to high risk? What are classic first-time investor mistakes? I am currently thinking about something like 90% of my investment split across low to medium risk, with the rest reserved for high risk. Does that sound reasonable? Would I be shooting myself in the foot if all of my pots were in the same currency in the same geographic location or should I diversify as much as possible?

As a more general bonus question: given that I am now conceivably mid-way through my career, with no significant debt (other than a mortgage) and a company pension I have been paying into for 15+ years, what else should I be considering finance-wise? The next few years are likely to be spent globe-trotting and I ultimately plan to retire to the UK. I am married, with one child.

Thanks in advance!
posted by teselecta to Work & Money (7 answers total) 16 users marked this as a favorite
Where do you live now? You mention $ currency but mention retiring in the UK. Ignore where you want to retire for now and focus on where you live. Where you live now will tell you what your options are, from a tax standpoint.

That said, basic first time investor mistakes: Trading too much, buying expensive products, trying to time the market, taking on too little or too much risk.

As for the high-medium-low risk mix you refer to: how old are you, how many years until retirement do you have, what debts do you have, how do you expect your income to increase (or decrease) until your retirement, etc. All of those questions will determine the level of risk appropriate for you.
posted by dfriedman at 6:33 AM on September 16, 2013

That's awesome. I'd suggest having a discussion with a fee-based Certified Financial Planner. Not someone who is a broker, but someone who will help you set up a plan for investment.

That said, every investment firm has a "target-date" investment vehicle. Fidelity Freedom funds for example.

You pick a date into the future, say 2023, and you put your money in the fund. The assets are allocated from high-growth to low risk as the fund nears the target date.

Because these are managed funds, there are fund fees associated with them, so do compare.

Now Exchange Traded Funds have the lowest fees, because they are based on the different exchanges. So there's no real management involved. I like SPDR, which is a Standard & Poors Exchange Traded Fund.

I would urge you to be educated in how investment markets and instruments work. $12,000 per year is a LOT of money and I'd hate to see you flush it down a rat-hole because you didn't feel like learning about how to manage it.

Also, if some of this money is for retirement, understand the tax deferred options, IRA, Roth IRA, 401(k), etc. Seriously, this is your financial future!
posted by Ruthless Bunny at 6:52 AM on September 16, 2013 [1 favorite]

Why a managed plan? Why not a passive index fund with lower fees? As for risk, you could put that 90% into a total market index and the rest into REIT index and/or small cap value index. But you might also want to consider putting some into a bond index.
posted by Dansaman at 8:06 AM on September 16, 2013

Just some further detail: I am British and working for an international company (hence the pay in dollars). I expect to be moved between countries every 3 years or so. The fund I am looking at is based in the Channel Islands, which means it will be tax free until I withdraw the money (at which time I envisage I will be back in the UK, so UK taxes will apply).

$1000 is about 50% of my monthly discretionary income. The other 50% will be kept as cash.

One follow-up question: is there a good "investment for dummies" source (website or book) that I can refer to get up to speed with the most important terms and concepts?
posted by teselecta at 8:16 AM on September 16, 2013

Classic first time mistakes:
1) Reaching for yield
2) Taking advice from people on commission
3) Under diversifying
4) Trying to time the market
5) Thinking short term success represents special skill

Best investment advice for most, let time be your friend. Do this by living below your means, and investing regulalry in a diversified low cost (and hopefully tax advantaged) portfolio.

I respectfully disagree with the suggestion for target based funds. As John Bogle points out, people typically and incorrectly do not include their future government provided income as part of their fixed income. For the average person in your position, an all equity portfolio is likely the best path. Like Bogle, I think that low cost index ETFs are the best path. I believe that "Bogleheads" typically use SPY as their market proxy.

I recommend being a bit more aggressive, still using low cost ETFs, but there are a few that I would suggest have slightly higher efficiency than SPY. (sure to be a controversial point)
I would point you towards the following ETFs
GURU (aggressive)

Also, I can easily count the number of mutual funds that are worth owing on one hand. I believe that Joel Greenblatts FNVAX and FNSAX are worth paying the management fees for. If you do not know Greenblatt, you really should. He is legendary at the Buffet level for providing alpha. You can invest along side him and get exposure to overseas markets (have not run up like American markets via FNVAX.
Not sure where you are currently located, if you are in US Ruthless Bunny is certainly right, get as much into your Roth/IRA as you are able. In particular the Roth if you are eligible. There is a lot more to know, worth studying a while. I am not a Boglehead, but I think for the average investor the work of John Bogle is very very much worth paying attention to.
posted by jcworth at 8:38 AM on September 16, 2013 [3 favorites]

Index Funds
posted by jasondigitized at 9:02 PM on September 16, 2013

The classic "Dummies Guides" to investing is supposed to be A Random Walk Down Wall Street, by Burton Malkiel. The Intelligent Investor, by Ben Graham is also said to be worth a look.

Note: I'm just getting started with this stuff myself, so I can't actually recommend either of these from knowing that they work!
posted by regularfry at 12:45 AM on September 17, 2013

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