Help me choose how to invest!
August 29, 2020 1:59 PM Subscribe
I have a little bit of money to play with via a Roth IRA, and don’t know where to begin when it comes to choosing investments. Help?
I put $500 into a new Roth Contributory IRA months ago, via Schwab, but didn’t take the step of choosing stocks because everything felt up in the air with Covid. So the $500 is sitting there (it’s grown by 6 cents) and I’d love to start investing, but I have no idea where to start. I’d prefer not to put my money behind companies like Amazon, unless there’s a convincing argument to do so. I have a little more money to play with if adding more to the $500 balance is advisable to begin with. Again, I’m not knowledgeable at all on this process so feel free to answer accordingly.
I also have a 457(b) that I contributed to while teaching from 2011-2014, and can no longer contribute to (no longer teaching), but it’s doing well on its own. I have no debt.
Thanks for any advice you can offer!
I put $500 into a new Roth Contributory IRA months ago, via Schwab, but didn’t take the step of choosing stocks because everything felt up in the air with Covid. So the $500 is sitting there (it’s grown by 6 cents) and I’d love to start investing, but I have no idea where to start. I’d prefer not to put my money behind companies like Amazon, unless there’s a convincing argument to do so. I have a little more money to play with if adding more to the $500 balance is advisable to begin with. Again, I’m not knowledgeable at all on this process so feel free to answer accordingly.
I also have a 457(b) that I contributed to while teaching from 2011-2014, and can no longer contribute to (no longer teaching), but it’s doing well on its own. I have no debt.
Thanks for any advice you can offer!
A great resource for advice is the bogleheads wiki & forums
Baseline advice: it is relatively simple to do fairly well investing in the stock market by buying low-fee exchange traded funds that passively track and invest in a diversified portfolio of all the stocks in the market. Don't attempt to pick winners by investing in individual stocks. Research suggests that you need to hold a portfolio of around 40+ individual stocks before there is enough diversification so that your investment returns are not too adversely exposed to the fate of any one individual company (e.g. back in the day, there was a lot of excitement around Enron, the CFO of Enron was winning industry awards for CFO of the year. If you invested $500 in Enron stock you'd lose all your money. If you invested only $5 on Enron and the remaining $495 across 99 other companies, you'd only lose at most $5 when Enron went bankrupt) . Trying to do better by putting in more more effort to select individual stocks or pay an investment manager to select individual stocks for you usually requires more time and effort and fees while also producing inferior investment results. Then ignore what the news is saying about the market and leave the money invested for timelines of 10+ years.
The main factors that influence investment success are:
1. how much you invest
2. what asset classes you invest in (e.g. US stocks vs international stocks vs US government bonds vs corporate bonds vs gold vs bitcoin vs tulip bulbs vs commercial real estate)
3. which individual investments are selected within an asset class
The first factor, how much you invest, has the most influence. Then the second factor, choosing asset classes, has the next most influence.
One example of a low-fee exchange traded fund (ETF) that passively tracks an index is Vanguard's "VTI" - this fund tries to track the performance of the US total stock market, by investing in over 3500 US public companies in the same proportions to how the US public companies are valued.
If you buy 1 unit of VTI ETF (current market price about $180) that'll be equivalent to you making fractional investments in around 3500 different US companies: about 5% of your $180 will be allocated to Apple, another 5% for Microsoft, around 4% for Amazon (alas), 3% for Alphabet (aka Google), 2% for Facebook, 1% for Johnson & Johnson, ...etc..
https://investor.vanguard.com/etf/profile/overview/VTI/quarter-end-holdings
One thing to note is that VTI only tries to track the performance of the US stock market, so putting 100% of your money into VTI is akin to making a bet that the US stock market will perform no worse than non-US stock markets, but it is possible that non-US stock markets will have superior performance in the next decade or more. So it'd be wise to have some allocation of investment to non-US stocks as well. Here's another vanguard ETF that takes a similar low-cost diversified passive investment but for all non-US stocks.
posted by are-coral-made at 2:28 PM on August 29, 2020 [9 favorites]
Baseline advice: it is relatively simple to do fairly well investing in the stock market by buying low-fee exchange traded funds that passively track and invest in a diversified portfolio of all the stocks in the market. Don't attempt to pick winners by investing in individual stocks. Research suggests that you need to hold a portfolio of around 40+ individual stocks before there is enough diversification so that your investment returns are not too adversely exposed to the fate of any one individual company (e.g. back in the day, there was a lot of excitement around Enron, the CFO of Enron was winning industry awards for CFO of the year. If you invested $500 in Enron stock you'd lose all your money. If you invested only $5 on Enron and the remaining $495 across 99 other companies, you'd only lose at most $5 when Enron went bankrupt) . Trying to do better by putting in more more effort to select individual stocks or pay an investment manager to select individual stocks for you usually requires more time and effort and fees while also producing inferior investment results. Then ignore what the news is saying about the market and leave the money invested for timelines of 10+ years.
The main factors that influence investment success are:
1. how much you invest
2. what asset classes you invest in (e.g. US stocks vs international stocks vs US government bonds vs corporate bonds vs gold vs bitcoin vs tulip bulbs vs commercial real estate)
3. which individual investments are selected within an asset class
The first factor, how much you invest, has the most influence. Then the second factor, choosing asset classes, has the next most influence.
One example of a low-fee exchange traded fund (ETF) that passively tracks an index is Vanguard's "VTI" - this fund tries to track the performance of the US total stock market, by investing in over 3500 US public companies in the same proportions to how the US public companies are valued.
If you buy 1 unit of VTI ETF (current market price about $180) that'll be equivalent to you making fractional investments in around 3500 different US companies: about 5% of your $180 will be allocated to Apple, another 5% for Microsoft, around 4% for Amazon (alas), 3% for Alphabet (aka Google), 2% for Facebook, 1% for Johnson & Johnson, ...etc..
https://investor.vanguard.com/etf/profile/overview/VTI/quarter-end-holdings
One thing to note is that VTI only tries to track the performance of the US stock market, so putting 100% of your money into VTI is akin to making a bet that the US stock market will perform no worse than non-US stock markets, but it is possible that non-US stock markets will have superior performance in the next decade or more. So it'd be wise to have some allocation of investment to non-US stocks as well. Here's another vanguard ETF that takes a similar low-cost diversified passive investment but for all non-US stocks.
posted by are-coral-made at 2:28 PM on August 29, 2020 [9 favorites]
Best answer: Buy the Vanguard, Fidelity or Schwab Target Date fund that is closest to the year you want to retire.
To understand why this is good advice, read The Best Investment Advice You'll Never Get. It's a long article, but it's not technical, and it will give you a strong intuition for why the conventional wisdom is what it is (and is right!)
posted by caek at 2:49 PM on August 29, 2020 [7 favorites]
To understand why this is good advice, read The Best Investment Advice You'll Never Get. It's a long article, but it's not technical, and it will give you a strong intuition for why the conventional wisdom is what it is (and is right!)
posted by caek at 2:49 PM on August 29, 2020 [7 favorites]
Another resource that provides insights and suggestions to start learning about saving, investment and personal finance is William Bernstein's booklet "If You Can": it's about 15 pages long (excluding the recommended reading).
It's available as a free PDF downloador as a cheap ebook - as linked from Bernstein's site.
> For years I've thought about an eleemosynary project to help today's young people invest for retirement because, frankly, there's still hope for them, unlike for most of their Boomer parents. All they'll have to do is to put away 15% of their salaries into a low-cost target fund or a simple three-fund index allocation for 30 to 40 years. Which is pretty much the same as saying that if someone exercises and eats a lot less, he'll lose 30 pounds. Simple, but not easy.
> Not easy because unless the millennials learn a small amount about finance, they'll fall victim to the Five Horsemen of Personal Finance Apocalypse: failure to save, ignorance of financial theory, unawareness of financial history, dysfunctional psychology, and the rapacity of the investment industry.
posted by are-coral-made at 2:54 PM on August 29, 2020 [1 favorite]
It's available as a free PDF downloador as a cheap ebook - as linked from Bernstein's site.
> For years I've thought about an eleemosynary project to help today's young people invest for retirement because, frankly, there's still hope for them, unlike for most of their Boomer parents. All they'll have to do is to put away 15% of their salaries into a low-cost target fund or a simple three-fund index allocation for 30 to 40 years. Which is pretty much the same as saying that if someone exercises and eats a lot less, he'll lose 30 pounds. Simple, but not easy.
> Not easy because unless the millennials learn a small amount about finance, they'll fall victim to the Five Horsemen of Personal Finance Apocalypse: failure to save, ignorance of financial theory, unawareness of financial history, dysfunctional psychology, and the rapacity of the investment industry.
posted by are-coral-made at 2:54 PM on August 29, 2020 [1 favorite]
Everybody's advice to just buy low-cost index mutual funds or ETFs (which are basically the same as mutual funds, just you can buy or sell shares of them directly on stock exchanges) is correct. Roughly speaking, fees over 0.5% (one half of one percent) are "pretty high". I find it sometimes seems tempting to go for a "more interesting" actively managed fund, and have to talk myself out of it.
Few people beat the market over the long term. There is evidence for "investing skill", in that sometimes fund managers do get things right in ways that aren't purely random. But crucially, after fees you see much less of the benefit, and there's always the risk that they'll screw up or their skill will stop working. On top of this, the best strategies and managers generally aren't open to ordinary retail investors -- not worth the hassle of dealing with the SEC. Plus if you knew how to consistently pick good fund managers, you would yourself be able to start a successful investing firm investing in a basket of funds, which suggests that you probably don't know how to do this.
Note that buying index funds will effectively mean you own some tiny portion of lots of companies you may not like, such as Amazon and Phillip Morris. If you want to exclude "bad" companies, you can buy ESG funds (environmental, social, governance). One example is Vanguard ESGV, which tries to track the US stock market but excludes stocks in "adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power" (but includes e.g. Amazon). The downside of these funds is that if one of the horrible industries ends up booming you will miss the returns, it's not totally clear whether it makes any difference to the world whether or not you own these stocks as part of an index with several thousand other companies, and fees tend to be higher (though still reasonable).
Btw -- the way to think about fees (and taxes, but they don't apply to Roth IRA) in this context is that you subtract them from your investing return. So let's say you buy some fund that ends up getting a 10% annual return, with a fee or expense ratio of 0.5% (sometimes stated as 50 basis points). Roughly speaking, you really got a 9.5% annual return. In theory, some actively managed fund could get a higher return that makes up for a higher fee, say they make 13% and charge 1.5%, leaving you with 11.5% -- but they might have a bad year, and whether the results are good or terrible, you still get charged that 1.5%.
Also, it's advisable, if your finances permit it, to put as much money as possible every year in your tax free account.
If you really want to "play with" the money by betting on individual securities, this isn't quite as terrible an idea as people might tell you. But you should still make sure most of your money is diversified, and treat stock picking as a weird hobby that will cost you money -- even if you don't technically lose money, you will probably make less than you would have with the index funds.
posted by vogon_poet at 6:53 PM on August 29, 2020 [1 favorite]
Few people beat the market over the long term. There is evidence for "investing skill", in that sometimes fund managers do get things right in ways that aren't purely random. But crucially, after fees you see much less of the benefit, and there's always the risk that they'll screw up or their skill will stop working. On top of this, the best strategies and managers generally aren't open to ordinary retail investors -- not worth the hassle of dealing with the SEC. Plus if you knew how to consistently pick good fund managers, you would yourself be able to start a successful investing firm investing in a basket of funds, which suggests that you probably don't know how to do this.
Note that buying index funds will effectively mean you own some tiny portion of lots of companies you may not like, such as Amazon and Phillip Morris. If you want to exclude "bad" companies, you can buy ESG funds (environmental, social, governance). One example is Vanguard ESGV, which tries to track the US stock market but excludes stocks in "adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power" (but includes e.g. Amazon). The downside of these funds is that if one of the horrible industries ends up booming you will miss the returns, it's not totally clear whether it makes any difference to the world whether or not you own these stocks as part of an index with several thousand other companies, and fees tend to be higher (though still reasonable).
Btw -- the way to think about fees (and taxes, but they don't apply to Roth IRA) in this context is that you subtract them from your investing return. So let's say you buy some fund that ends up getting a 10% annual return, with a fee or expense ratio of 0.5% (sometimes stated as 50 basis points). Roughly speaking, you really got a 9.5% annual return. In theory, some actively managed fund could get a higher return that makes up for a higher fee, say they make 13% and charge 1.5%, leaving you with 11.5% -- but they might have a bad year, and whether the results are good or terrible, you still get charged that 1.5%.
Also, it's advisable, if your finances permit it, to put as much money as possible every year in your tax free account.
If you really want to "play with" the money by betting on individual securities, this isn't quite as terrible an idea as people might tell you. But you should still make sure most of your money is diversified, and treat stock picking as a weird hobby that will cost you money -- even if you don't technically lose money, you will probably make less than you would have with the index funds.
posted by vogon_poet at 6:53 PM on August 29, 2020 [1 favorite]
At the start of my career I worked for a small mom-and-pop business. They couldn't afford to set up pensions, but they bought us each a copy of the Wealthy Barber, which is geared to Canadians specifically, but its advice should apply to Americans as well. Echoed by everyone here -- just go with low-fee index funds and forget about it. But since you're asking, I would try to get his book from your local library. If they only carry books by Americans, maybe something by the likes of Suse Orman.
The owner also topped up the barber book with this advice: once your retirement account hits $100K, if you have the inclination, you can do better by investing in about 10 stocks across all sectors. But this was in the days of mutual funds that skimmed off 3% a year. Now that we're in a world with index-based ETFs with negligible fees, and near-zero commissions to buy in, I would go with that and forget about betting on the market.
If you do have the inclination, once your retirement account passes $100K I would allow 5% for more speculative whims, like buying individual stocks or even options. But only if you want to spend that time, and are prepared to see much of it disappear quickly.
But there's nothing wrong with looking at your statement once a year and seeing, most of the time, it climb on average 10% a year. Which means with no extra inputs, it will double about every 7 years (assuming it's all in a tax-free account).
posted by morspin at 10:32 PM on August 29, 2020
The owner also topped up the barber book with this advice: once your retirement account hits $100K, if you have the inclination, you can do better by investing in about 10 stocks across all sectors. But this was in the days of mutual funds that skimmed off 3% a year. Now that we're in a world with index-based ETFs with negligible fees, and near-zero commissions to buy in, I would go with that and forget about betting on the market.
If you do have the inclination, once your retirement account passes $100K I would allow 5% for more speculative whims, like buying individual stocks or even options. But only if you want to spend that time, and are prepared to see much of it disappear quickly.
But there's nothing wrong with looking at your statement once a year and seeing, most of the time, it climb on average 10% a year. Which means with no extra inputs, it will double about every 7 years (assuming it's all in a tax-free account).
posted by morspin at 10:32 PM on August 29, 2020
Leaving out the masses of investment firms and advisors who are trying to separate you from your money, I would say that upwards of 90% of the online advice is by people for whom the world of finance and investing is a hobby. It has roughly the same flavor and significance of vinyl enthusiasts debating the merits of obscure audiophile equipment. That is, sometimes better informed than the experts, passionately argued, and utterly irrelevant to anyone just looking to listen to some nice music. The "index card" referenced above is probably overkill, actually. To retire, one has to pay off high-interest debt, live below one's income, and invest the difference in a low-cost index investment. As someone who read big chunks of the Wall Street Journal daily for years, it's great fun, but it doesn't matter. You are not going to be smarter or better informed than most investors, and pretending you are is a losing game.
For most people, some kind of automatic investment will help them. Figure out what amount of money you can afford to put away without missing it, and set it up to go into a target date fund today. Right now. Whoever is currently holding your IRA is fine. If you can do 10-15% of your income, that's spectacular. But something is way, way better than nothing! The key afterwards is to do nothing but increase your monthly contribution when you can. Vanguard did a huge study of retirement accounts and the number of transactions that led to the best performance was zero. Let that sink in. Zero. All the talk about investment strategies and rebalancing is just crap. Checking your statements quarterly or even yearly is much more likely to lead to a good outcome than looking every day. Ignore the hobbyists.
posted by wnissen at 1:34 PM on August 30, 2020 [3 favorites]
For most people, some kind of automatic investment will help them. Figure out what amount of money you can afford to put away without missing it, and set it up to go into a target date fund today. Right now. Whoever is currently holding your IRA is fine. If you can do 10-15% of your income, that's spectacular. But something is way, way better than nothing! The key afterwards is to do nothing but increase your monthly contribution when you can. Vanguard did a huge study of retirement accounts and the number of transactions that led to the best performance was zero. Let that sink in. Zero. All the talk about investment strategies and rebalancing is just crap. Checking your statements quarterly or even yearly is much more likely to lead to a good outcome than looking every day. Ignore the hobbyists.
posted by wnissen at 1:34 PM on August 30, 2020 [3 favorites]
Oh, and as for Amazon, there are good theoretical and practical arguments to be made that it's effectively impossible for individual investors to have any impact on the value of a stock. Too many other investors lurking about who will pick up the pennies responsible folks leave on the ground, so to speak. If you want to do something anyway, probably the easiest is to to invest in a "small cap" index fund. It stands for "small capitalization", kind of the opposite of the S&P 500, which is the 500 largest stocks by capitalization. However, the small cap funds have historically underperformed the overall market, so I wouldn't put much in there.
posted by wnissen at 1:42 PM on August 30, 2020
posted by wnissen at 1:42 PM on August 30, 2020
Response by poster: ALL wonderful answers! Thank you so much!
posted by sucre at 4:37 PM on August 31, 2020
posted by sucre at 4:37 PM on August 31, 2020
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When investing for retirement you want diversification and intelligent exposure to the markets and if you don't know anything about investing, it's probably not a good idea to pick stocks.
posted by selfnoise at 2:14 PM on August 29, 2020 [16 favorites]