How do I invest?
December 3, 2017 4:52 PM   Subscribe

I have always been good at saving money, and anxious about investing it. But I'm trying to Be An Adult and incrementally move my savings from my bank account into ETFs. I have some questions.

1) Do I need to diversify among ETFs? How many ETFs should I have in my portfolio? Right now I just have a chunk of money in one ETF (the Vanguard Total Stock Index), and maybe that's okay?
ETFs are already kinda diversified since they track many stocks, right? But it feels weird, like all my financial eggs are in one basket.

2) If I should hold more than one, how do I go about selecting the additional ETFs? Other than low fees, it seems like a crapshoot.

3) I know that you can't time the market, and it's foolish to try. But it feels bad to be investing at what's probably a market peak. Any tips for getting over that feeling?

For what it's worth, I'm in my early 30s so I'm okay with a riskier, stock-heavier portfolio.
posted by mellifluous to Work & Money (16 answers total) 22 users marked this as a favorite
For 1) I use a targeted retirement date fund (at Schwab, but I think every place has them) that is a mix of index funds, bonds etc, and the risk profile changes automatically with time to go from risky now to much less risky (but lower yield) by the target retirement date. The fees are very low, and no fee to buy or sell if you hold for at least 30 days.

3) if you're adding x dollars per month instead of buying a huge chunk now, you're a bit insulated from market shocks. If the market goes down next month, your x dollars next month will go a bit farther, even though x dollars from last month is worth a bit less.
posted by permiechickie at 5:06 PM on December 3, 2017

The target date funds are imperfect (one size fits all risk profile), but pretty good for most people. If you want to go into the weeds on it Bogleheads has some good info.
posted by primethyme at 5:11 PM on December 3, 2017

The Vanguard total stock index ETF is one of the best ones around, with low fees and wide diversification. You could add an international ETF or two but not really necessary.
The first decision you should make, however, is your asset allocation : what percent of your money you're comfortable keeping in stocks versus in a savings account, treasury bonds, or other safe places. 90% in stocks? 30%? You decide. You can Google around to get tips on how to decide.
It does feel like a weird time, the market is so high. To deal with that you can use dollar cost averaging, a fancy way of saying buy shares of the ETF on a fixed schedule (monthly, quarterly, semi-annually, whatever) with a fixed amount--decided in advance--each time. That second point is important, or you'll be tempted to time the market by investing more or less each time an investment date rolls around.
posted by mono blanco at 5:12 PM on December 3, 2017 [1 favorite]

Yeah, I would not invest a lot right now. Wait and see. The suggestion to set up a small auto purchase each month is good to get you in the habit and spread your risk, I'd do that. But I know I just took most of my money out of US stocks and went into treasury securities and bonds because I have a bad feeling about the next 6 months. But if I left my money in ETFs for the next 25 years I'd probably not notice much one crash along the way.

The stock market is one big Ponzi scheme, basically, with most companies stock selling for far, far more than they are actually worth. It all works over the long term as long as people keep investing more money but it's best to keep in mind that in terms of relevance to prices of stock actual value < investor confidence.
posted by fshgrl at 5:18 PM on December 3, 2017 [1 favorite]

Agree with the target-date fund suggestion. Vanguard has them. Your goal is to avoid fees as much as possible.

But...I think you should do some reading first. "Investing" is a broad term. You need to be thinking about all your assets everywhere (even if they're small now) and what kind of risk you can afford to be taking on. For instance, I think probably 98% of sane people would say that, unless you are getting contributions matched by an employer, your #1 priority should not be investing per se, but rather building emergency savings in a savings account. How much? Already you are getting into subjective matters of preference and risk tolerance, but probably more than you think. From there, assuming you are not thinking of buying a house in the relatively near future, you should be looking at taking as much advantage of tax-advantaged retirement accounts as you can under the circumstances. That's when you start worrying about asset allocation as you're thinking about it. There are different theories, but generally stocks are more volatile and more risky than bonds are and have correspondingly higher returns. An all-stock index fund is therefore more diversified and less risky than, say, holding only a few stocks, but, relative to all the other assets you could be holding, quite risky. That's why something like a target-date fund can be helpful: it adjusts proportions according to varying theories of risk.

The market-timing issue is vexing right now. I do feel that we are at or near the top of the market, and the political situation in the U.S. is just about as weird as it could possibly get without our actually being at war, foreign or civil. The problem is that you will be not be able to accurately guess when the market has dropped "enough" to invest. You will almost certainly miss the bottom. If we are talking about relatively small sums, cultivating the habit and experience of investing is probably worth the pain of knowing that you're buying in relatively high, but, if you must, you could opt into a more-conservative target fund (e.g., one for a retirement date near to the present) to start with. Either way, you'll have to learn that you can't foretell the future and to both forgive yourself for that and make your plans with that in mind. (I actually did manage to buy a lot on the very lowest day of the S&P 500 during the financial crisis, but that's more a humorous story than a life guide, and I was just picking a date within a relatively narrow range. Meanwhile, I put a chunk that was in a target-date fund into a bond index fund shortly after the election because I was looking at buying an apartment and I didn't want to worry (as much) about politically-driven volatility--given my goal/relatively short-term investment horizon, that wasn't a bad decision, but it definitely has cost me paper gains, at least.)

In conclusion, always remember: no one who tries to sell you any financial product is your friend or has your best interests at heart. No one who tries to sell you any financial product is your friend or has your best interests at heart. No one who tries to sell you any financial product is your friend or has your best interests at heart.
posted by praemunire at 5:54 PM on December 3, 2017 [5 favorites]

If you want to handle the diversification yourself rather than getting a target date fund, you can use the Three Fund strategy. It's not recommended getting more complicated than that for most consumers.

Any tips for getting over that feeling?

Automate your savings and try to not pay too much attention to your short term gains or losses.
posted by Candleman at 6:23 PM on December 3, 2017 [2 favorites]

One thing to keep in mind about target date funds is that, if you have investments outside of tax-advantaged accounts, it can be advantageous to not use the target date funds and allocate your assets in the tax-advantaged and non-tax-advantaged accounts differently (while arriving at your desired overall allocation). Exactly how much money you need in taxable accounts for it to be worth worrying about, I don't know.
posted by hoyland at 6:34 PM on December 3, 2017

Stick with Vanguard (none of their funds will rip you off on fees). Keep it simple - allocate to 3-4 basic ETFS (equity/bonds/international) according to your risk tolerance or just use a target date fund, which basically does the allocation for you. Vanguard has programs for a consultation with an advisor if that is something you would like.
posted by Mid at 6:54 PM on December 3, 2017 [1 favorite]

I've been investing for about 20 years, and if I avoided investing when I thought the market was too high, I would have much less money right now. While I understand the impulse, and have felt it MANY times myself, I disagree with those who are saying to wait. Trying to time it is a losing game.
posted by primethyme at 9:37 PM on December 3, 2017 [4 favorites]

Trying to time it is a losing game.

Normally, I completely agree. It's just such a peculiar moment that I feel not quite comfortable simply dismissing the idea that one should be a little more conservative in one's investment choices right now. It's not what I'm doing, but I can't just wave my hand dismissively at the idea.
posted by praemunire at 1:01 AM on December 4, 2017 [2 favorites]

If by holding more than one ETF you mean, "What is the simplest ETF portfolio I can sensibly have?" for many that would be the 3-Fund Portfolio, which you can read about here. (oops, Candleman beat me to it :-)

In addition, some people also hold sector ETFs (technology, commodities, health care, etc.) or style ETFs (e.g. small cap, mid cap, value). Since you already own these stocks in your total stock fund, these ETFs are often called "tilts." (Stay away from inverse and leveraged ETFs.) Regarding selecting your tilts, yes, it's a crapshoot, since past performance doesn't guarantee future results. There are many bogleheads discussions on this. Take your pick.

At your age, I wouldn't worry about investing at the top, first because nobody knows if we're at the top and second because 30 years from now a drop today will be just a little blip on the chart in 2047.

You don't mention if your portfolio is in a tax-advantaged account like a 401K or ROTH. You're better off filling your tax-advantaged space first, and (say) a regular, taxable brokerage account second.

Some investors your age are comfortable going with a 100% stock portfolio. Me, I think it makes more sense to own a total bond fund, too, so you can rebalance between stocks and bonds during market. In any case, you can read about allocations here.
posted by Short Attention Sp at 5:09 AM on December 4, 2017 [1 favorite]

It's worth noting that you don't have to invest in ETFs. You can own the identical Vanguard Index funds as ordinary mutual funds. This eliminates ever paying a trading commission and eliminates having to deal with bid-ask spreads in a brokerage trade. Commissions might make a difference if you make lots of incremental trades or invest new money on a frequent schedule. But you can avoid commissions on Vanguard ETFs if you buy them through a Vanguard brokerage account.

There is a behavioral aspect to this as well. Some people can be easily sucked into the casino atmosphere of market trading ETFs and that can be avoided by investing in ordinary mutual funds.
posted by JackFlash at 9:01 AM on December 4, 2017 [2 favorites]

If you're not interested in learning the specifics of learning your own money - I can't quite tell if that's the case for you or not - a robo-advisor like betterment or wealthfront might be worth considering. They're pretty simple - they invest in a very reasonable set of ETFs for you based on information about your age, risk tolerance, etc. and they regularly re-balance automatically - but for me it's helpful to have that hands-off approach coupled with tools helping me predict how much I need to save, etc. They invest in low-fee ETFs and take a pretty reasonable fee off the top (find a referral link for wealthfront to get up to $15k managed "free", aka no fees from the wealthfront side, in perpetuity). Much much cheaper than traditional/scammy investment advisor services - I'm careful about fees and these are worth it to me.

Also, if you're American and doing this, definitely invest in funds within an IRA (traditional or Roth, different eligibility criteria apply) before investing in taxable accounts. It's super easy to do and you'll be glad you did.
posted by mosst at 1:28 PM on December 4, 2017

3) I know that you can't time the market, and it's foolish to try. But it feels bad to be investing at what's probably a market peak. Any tips for getting over that feeling?

This poster from earlier this year was also concerned about investing at the market peak. Since then, the S&P 500 has grown 15.79%.
posted by jason and the garlic knots at 7:50 PM on December 4, 2017 [1 favorite]

3) I know that you can't time the market, and it's foolish to try. But it feels bad to be investing at what's probably a market peak. Any tips for getting over that feeling?

I like this hypothetical example (which I probably found elsewhere on MetaFilter) of an investor who only invests at the highest market peaks before the biggest crashes of the past forty years. Despite their terrible timing, they still would have ended up with considerable growth*. It's just a sketch, but I found it useful for accepting that market timing is just one more element of investing that is not worth spending energy on (unless you get enjoy the activity for its own sake). I think this is especially true in an age of automated investing and low-cost index funds and target-retirement-date funds.

* Past performance is no guarantee of future results, of course.
posted by Lirp at 9:57 PM on December 4, 2017

Disclaimer: I work for ALPS. I would say check out the list of ETF's. Yes, the goal is to avoid higher fees, but if you are going to look at the investment returns, then is it worth paying a little more for a better return. Most of the information is listed on the fact sheets, regarding expenses, returns, risk etc.
posted by brent at 12:31 PM on December 5, 2017

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