Investments for babies
March 31, 2014 9:34 AM   Subscribe

Thanks to well-meaning family, I have owned a number of stocks and other assets since my birth. The net worth of these assets is very modest, but if I sold them it would offset some ongoing financial stressors. Yet it seems prudent to keep them for a while longer. But why? What if everything crashes next week? What if [the specific stocks I own] crash next week? How do people predict this and stay on top of their assets without spending an inordinate amount of time on them?

As is well documented in my other questions, I am a Broke Person. I earn a small salary at my full-time job that I love, and I have a lot of debt (student loan, auto, and consumer) that eats up most of my money. My lifestyle is frugal, I'm used to it, I'm not actively suffering, etc. But it often occurs to me that I could sell some stock, pay off a chunk of debt, and save money on interest. It might be a significant leap forward in my personal financial planning, where I hope to be able to afford a baby within five-ish years, or at least my own washer and dryer.

Keeping the stock and letting it appreciate in value is an option. I like the thought of having it around as a safety blanket. Then, I often think of doomsday scenarios where the market crashes and/or the economy ends as we know it, and I'd be glad to have the assets out of the market and in tangible form.

For now, it seems like I should monitor the stock prices in question and try to find a pattern. But the tracking I've been doing is a much bigger time and energy commitment than I'd like to maintain, long-term, and besides I don't really know what I'm looking for. I know I could pick up any financial news publication and start reading, but...I just don't want to.

How does a layperson think of, manage, and strategize about investments? Any personal anecdotes, suggestions for apps, or financial news that might be engaging and interesting without being too math-y are welcome. I cannot afford to hire a professional for this.
posted by magdalemon to Work & Money (18 answers total) 4 users marked this as a favorite
A layperson, like you or me, should have money invested in index funds, which have a more predictable rate of growth than individual stocks. If I were you, I would either take the money from the stocks and reinvest it in a Vanguard index fund, or take out the money and use it to pay off debts. This somewhat depends on how high the interest rates on your debts are--if they are higher than about 6%, it's better to pay them off as soon as possible.
posted by chaiminda at 9:38 AM on March 31, 2014 [8 favorites]

How does a layperson think of, manage, and strategize about investments?

The short answer is, said fiscally-savvy lay person doesn't think much, manage much, or strategize much about investments. That person parks their money in bonds and/or index funds, preferably in low-fee accounts (ie, Vanguard and/or Fidelity Spartan), possibly taking into account their tax situation to figure out an ideal mix of the two.

You will not find a pattern in stock prices. There are many, many, many people smarter than you that would find that pattern first, and then capitalize on it to make money before you could. The price of an investment at any given time is the market consensus on how valuable that investment is. You can't beat the market. The only thing you can do is go with the flow of the market and hedge your bets such that you incur an acceptable amount of risk.

I often think of doomsday scenarios where the market crashes and/or the economy ends as we know it

Catastrophizing is not good financial planning.
posted by saeculorum at 9:39 AM on March 31, 2014 [7 favorites]

You can sell the stocks and reinvest, or sell them and pay off debt (be aware that there are tax implications for selling stocks, capital-gains, etc.)

You don't have to keep those exact stocks, hell, if you have MCI and Polaroid, those decisions have been made for you!

When traveling, my mother used to bring us back freshly minted ones and coins from Washington. I'd spend mine, my sister saved hers.

I got some lunch at Taco Bell, she still has $1.91

Monetary instruments aren't worth a thing as paper in your hand.
posted by Ruthless Bunny at 9:42 AM on March 31, 2014 [2 favorites]

Seconding chaiminda.

There's no reason for a layperson to ever own individual specific shares, as opposed to index funds. Profiting on individual shares is always much riskier than index funds, and requires a degree of deep awareness of industry and company behavior that laypeople are just not in a position to pursue or maintain.

In addition, getting rid of debt is a completely guaranteed return and therefore represents a very, very safe "investment." Stocks might go up 8% or down 4% or any other randomly chosen number - on the other hand, paying off a 5% loan is a guaranteed no questions asked 5% return, which is an amazing investment opportunity.

If I were you, I would sell every single stock I had, pay off all my debts, and invest anything left over in index funds that I could (mostly) ignore and not have to try to identify "patterns" that don't exist and, if they do, I'd never be able to pick out faster than the professionals who do nothing else.
posted by Tomorrowful at 9:42 AM on March 31, 2014 [9 favorites]

it seems like I should monitor the stock prices in question and try to find a pattern.
This is what the professionals do, and even they aren't all that good at it. If it were that easy, everybody would make money on the stock market and nobody would lose.

If cashing out now will make a significant and permanent difference in your personal finances (and not to simply pay off a "mistake" like a maxed-out credit card, which you are liable to make again in the near future) - then go for it. Being able to pay off one of your debts (or a significant portion) will open up that monthly payment to roll into another debt or just to provide some breathing room in your monthly cash flow.

Having a safety net is important, but at a certain point, having assets just for the sake of having them doesn't help you in the real world.
posted by trivia genius at 9:42 AM on March 31, 2014

If I were you, I would sell every single stock I had, pay off all my debts, and invest anything left over in index funds that I could (mostly) ignore

This is my same advice. The negative returns you're getting on your debt are worth wiping out. Most people shouldn't be doing their own stock picking, especially with money that you'd like to keep low-risk. Make sure you are clear on what taxes you will owe as a result of selling stock and then I'd just ditch it, pay off debts (highest interest rates first) and reinvest what's left over. I have my own assets which are mostly parked in index funds and I also manage a larger estate for which I have a money manager who does this for me.

Many people like for giving you a decent overview of your financial situation in a friendly way with access to resources to help improve it, if that's what you want. I mostly find that having a good bank where I can look at a bunch of stuff online, and pay and manage bills from there is mostly all of what I need.
posted by jessamyn at 9:47 AM on March 31, 2014 [3 favorites]

There's no reason for a layperson to ever own individual specific shares, as opposed to index funds.

I think perhaps one exception is the couple of shares given to a kid to get her interested in learning about the financial system. She gets the proxy mailings, the annual report, etc. She gets to fill out the Scantron form to vote (do they still do it by Scantron?). Follow the share price in the newspaper. It's about understanding what equities are, not about making money.

BUT, someone also needs to be around to tell the kid not to invest in individual shares as an adult.
posted by Jahaza at 9:55 AM on March 31, 2014 [1 favorite]

I agree with the "sell them all and pay off the debt and invest in index funds" plan. Individual stock-picking is a game (one best played with other people's money), not a reasonable investment strategy.

But! Don't forget that you will owe capital gains taxes.
posted by mskyle at 9:56 AM on March 31, 2014 [3 favorites]

Compounding interest, or reinvesting all the growth to make it grow even faster, also known as leaving it alone forever, is pretty darn powerful, but it's not magic. We laypeople get it in our heads that you need to invest your money and then leave it alone for a long time, because "stocks get more valuable over time" which is reasonable - but it's too easy to mis-translate that, and somehow come up with the belief that old stocks are more valuable than new stocks.

If the stock portfolio that you have is worth $2000, then that's what it's worth. Yes, it's worth a whole lot more than the $800 that your parents paid for it years ago, but it's not worth more than the same portfolio of stock that someone bought yesterday for $1990, and (taxes and fees aside) it's worth exactly the same as $2000 in the bank. There are no loyalty points; in another 20 years, it will not have appreciated any more than a $2000 investment you made today.

So, rephrase the question:
If you didn't have those stocks, but had $2000 in the bank, would you use it to pay down debt? Or as a down-payment on something you've been needing? Or would it make you feel most secure to have it in a retirement fund or other form of long-term savings?

If you wouldn't invest the money today, there's no reason to leave it invested today.
posted by aimedwander at 10:26 AM on March 31, 2014

I disagree with the advice to sell the stock and pay off (some) of your debt. As a Broke person, it sounds like you have no financial safety net. What if there is a catastrophe? Not a stock market catastrophe like your car breaks down, you can't get to work, you still owe on the nonworking car and can't afford a new (or new-to-you) one. What if you lose your job? The rule of thumb is to have at least three months of living expense tucked away for when you really need it. I'm guessing that this money is as close as you get to this kind of rainy day fund. (If I'm wrong, you already have that, then yes, sell the stocks and pay off your debt.) If I'm right, sell the stock and put them in a no-load, low cost mutual fund (I like Vanguard) or maybe even two - one for stocks (which will go up more over time) and one for money market (which will earn close to zero but be available for emergencies). However, if you don't trust yourself not to dip into the emergency funds then I think you are better off leaving the money where it is (taking a risk that it won't do as well as a more diversified investment) but having it in a format where you won't spend it if you don't really, really need it.
posted by metahawk at 10:30 AM on March 31, 2014 [1 favorite]

I agree with everyone's advice about switching to index funds and eliminating debt. The only deviation I have from the advice already given, if you really do want to keep your investments, is in regards to generating income from what you currently hold. You could be selling call options on your long term investments to generate immediate income to pay down some of your debt. Getting involved in that is definitely not an overnight thing and would require a good deal of studying but can be beneficial in lower risk scenarios where you currently hold an investment for the long term.
posted by mrdrummed at 12:03 PM on March 31, 2014

You said "I earn a small salary at my full-time job that I love"
Could you ask for a raise, or find a part time moonlight job to ease your financial situation?
posted by Cranberry at 12:10 PM on March 31, 2014

Financial Hierarchy of Needs: (USian centric)
  1. Shelter and physical goods (canned food/pawning the TV/anxiety-based "finance")
  2. A Job (hopefully a stable one)
  3. Medical Insurance, (possibly with a pre-tax FSA which reduces your taxable income)
  4. Emergency Savings Fund (3-6 months of expenses)
  5. Servicing Debt:
    • High interest (credit card) first
    • Rebuilding credit scores through responsible debt use (car loan, no balance CC, etc)
  6. Retirement Savings (minimum 5% of annual income in a pre-tax/tax-deferred vehicle, aim for IRS Max, also reduces your taxable income)

  7. Goal Savings
    • Savings for Down Payment/House Repair Fund (could be in an investment/retirement account, look into loans from your investment vehicle)
    • Savings in 529 College plans (tax-deferred, can be transferred to children, grandchildren, nieces/nephews)
    • Daycare fund (dependent-care FSA)? Art collection? Travel the world? Charitable Donations?
  8. Index Funds/ Mutual Funds/ Income Funds/ CDs. Low risk, proven return investments

  9. Individual stocks

  10. Owning businesses/Mit Romney level shit/you have an accountant by now.

I swear, a booming niche in psychology will be finance based traumatic stress. You think you are stuck at level 1, attempting to navigate the finance of physical goods. A washer and dryer is more good to you than an investment because SOCIETY MIGHT COLLAPSE and at least you can pawn that shit? Yeah, no sweetie. Its ok, I've been there too.

You need to consider the tax implications of selling those stocks. If you've held them for 20-30 years you might have very considerable unrealized gains which are subject to tax. You can couple this with increasing your tax-deferred investing (retirement) in a given year, but there is no way to avoid math here. You need to figure out what your investments are worth, what 3-6 months of expenses looks like to you, and how much debt you hold.

Don't let the math scare you away! You should probably consider getting yourself to position 4 by cashing out some of those investments. Withhold the amount of taxes you calculated on your capital gains, and don't let yourself spend it. Then start a generous emergency fund. With what is left, take out a good chunk of the most expensive debt you have. This is what is costing you the most (has the highest interest).

Lets say you have $1000 balance on a card, and a monthly minimum-payment of $100. Of that payment only a small percent is going to your principal, the rest is interest. If you can put $500 on that card with these investments you liquidize, and you can keep making that $100 payment each month, you'll eventually catch up without feeling a difference in your monthly budget. Now you can take that $100 and put it to the next debt, and so on. I think Dave Ramsey is generally a repellant human being, but he calls this a "debt snowball" and it is a good-non-mathy way to think about this.

Once you knock out that payment, you'll have more room in your budget to start paying other debt, and so on. Upwards the hierarchy you can climb. Once your debt is gone, you can start putting more money in pre-tax retirement/529/FSA which means you will pay less in taxes at the end of the year so your money goes further, and then your money can start making money in investments. So this boost from cashing out a stock can have a very positive effect on your finances for years to come, even if it doesn't wipe them out entirely at first.
posted by fontophilic at 12:39 PM on March 31, 2014 [1 favorite]

Thanks to well-meaning family, I have owned a number of stocks and other assets since my birth.

Others above have already said everything I would suggest, but just to repeat the point: Unless you have cost basis information (what was paid to buy these stocks), the entire sale value of the asset might be considered "capital gains" if you sold them. If so, you'd owe whatever percentage of that entire sale amount as income taxes, and you might (might) face the prospect of being bumped to a higher tax bracket on that extra income.

(Because of the way marginal taxes work, you only pay the higher rate on the extra dollars, not your entire income, but keep in mind that if you sell stock, the IRS will want its bite of the apple.)

The net worth of these assets is very modest [...]

And this is where things become subjective. But in any case, you probably have better things to do with your time than worry about potential swings in individual stock prices.
posted by RedOrGreen at 12:53 PM on March 31, 2014

> This is my same advice. The negative returns you're getting on your debt are worth wiping out.

I agree. Look at debt this way. If you owe $1,000 on an account that is charging you 18% interest, paying that off is essentially getting 18% return on that investment. You cannot get that kind of return with any bond or savings account, and unlike stocks, the return is guaranteed.
posted by megatherium at 1:27 PM on March 31, 2014

There's no reason for a layperson to ever own individual specific shares, as opposed to index funds.

That's completely untrue but whatever.

Stock goes up; stock goes down. You can make a choice to simply ignore it and not manage it at all if you like. Or, you can cash it out and stick it in a nice safe Vanguard account for the medium term and ignore it there.
posted by DarlingBri at 1:43 PM on March 31, 2014

The one caveat here is that you need to be not contributing further to your consumer debt. If you pay your credit cards down to zero, are you going to keep that debt at zero, or are you going to be tempted to start putting things on credit? If you're going to cash out these investments, be sure it's going to be worth it!
posted by Blue Jello Elf at 1:53 PM on March 31, 2014

If you are single and your taxable income is below $36,900, you are in the zero capital gains tax bracket. (Up to $73,800 if married). This would be an excellent opportunity to sell your stocks tax-free.

Every day that you hold stocks and hold debt is the same as if you went to the bank and asked them to lend you money so you could invest in the stock market. Would you do that today? If not, you should sell tomorrow.
posted by JackFlash at 5:26 PM on March 31, 2014 [6 favorites]

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