Late start at investing, best strategies for making the best of it?
February 12, 2021 6:11 PM   Subscribe

Getting a late start at investing; how best to move a portion of my small savings into this bull/bubble market, knowing it may turn soon?

I'm a 38 year old who's spent the past 15 or so years making dumb-but-not-disastrous financial decisions, and I am finally ready to get my act together and manage my finances as smartly as I can going forward.

I've never dipped my toe into the stock market or any kind of investing up till now. I grew up quite poor, and I have a lot of hang-ups and fears around money, and I basically avoided smart money management as an adult out of anxiety. I can see now that this cost me a pretty large opportunity to invest in the great stock market for the past 10 years or so, and to a certain extent I'll always be playing catch-up. I'd like to start investing in a smart way, and make the best of my situation.

I have about $17k in savings, which I know is small for my age, but it is what I've got to work with. I'd like to invest $8k-$10k of that, reserving the rest as an emergency fund. I'm confused about best strategies, though, because I understand we're in a bubble market, and most people seem to expect a correction before too long. Would it be smarter to 1) invest the entire $10k now, diversifying as much as possible to hedge against the expected downturn or 2) "dollar-cost-average" my savings into the stock market over a number of months or years? I don't feel adept enough at any of this to know which is the riskier move, assuming I want move this money out of my savings account at some point.

The above is about what to do with the money I just had sitting in a low-interest savings account. I'm also planning to invest 10% of my paycheck going forward, rather than squirreling it away or spending it.

If it's relevant, I currently make $65,000 a year in NYC; I am engaged, but we have no immediate plans to have kids. I have no credit card debt to pay down, thank God, but I'm still working on $40,000 of student loan debt, which I have been current on this whole time. At least my credit's good!

Thanks so much for your help! I have a lot of shame and anxiety about money, which I've slowly been working through in therapy, and I'm excited to get my foot into the door of the grown-up world, no matter how late I may be....
posted by scarylarry to Work & Money (19 answers total) 22 users marked this as a favorite
Not a financial advisor - just a regular Joe. For you, I think best bet is to use something like Betterment or Wealthfront. These are "robo-advisers" meaning they use algorithms to try to figure out what to invest. You set your risk tolerance and they do allocations for you. For a data point, I'm the same age as you and I'm 90% stocks / 10% bonds.

re: correction. It will probably happen. Maybe even soon. Maybe not soon. But since you're not retiring for a few more decades and don't need this money in the short term (you don't need this money the short term, right?) I would not worry about it. Read this: Timing the Market vs. Time in the Market. Psychologicaly it might make you feel better to only drop a few K in the account and then setup a recurring deposit. I have mine setup weekly. Doing very rough math, at $100 a week you're dropping 10% of post tax into investments. You can always adjust it up or down.

To get more info read Unshakable by Tony Robbins. Ignore the fact that half the book is basically an infomercial. Focus on the "info" part, not the "mertial" part. If you have "complicated feelings" or worse about the author, don't worry, I do too. The information portio is solid. Maybe someone else can post some books that have less controversial author.
posted by pyro979 at 6:46 PM on February 12, 2021 [4 favorites]

Does your employer offer a 401k? Those plans are generally pretty low risk. You could make a large, tax free, contribution to that each month and compensate yourself with your savings. You could also look into setting up a Roth IRA, which is basically, sort of, a personal 401k and contribute some of your savings.
posted by TurnKey at 6:55 PM on February 12, 2021 [5 favorites]

Why not open a Roth IRA? You can still invest $6,000 for 2020, and then the other $4,000 for 2021. Top it off with $2,000 over the next few months until 2022. Guided Roth IRAs will have some minimum balances and fees, but you can get something like Merrill Edge and do your own trades, with no commissions.

Since it's after-tax money, you won't get taxed on it when you start drawing upon retirement.
posted by Master Gunner at 7:03 PM on February 12, 2021 [7 favorites]

The Roth is not a bad idea at all, but if you're looking for a share investment (inside either a Roth or brokerage account) then I would suggest just getting an S&P 500 tracker fund, and I would recommend Vanguard. Trackers don't have much in management fees because you're not paying expensive people to choose stocks for you, and Vanguard are among the lowest of even those, meaning that more of your money is working and less is being taken away by your investment firm.

You can find resources online, but in general this sort of passive fund management (effectively, 'buy what the market tells you to') works out better for you than most actively managed accounts where they take a cut off the top. Warren Buffet, who runs Berkshire Hathaway and has done very well for himself over the years, recommends this. So do plenty of others.
You can find plenty of discussions about tracker funds online.

Don't invest if you think you're going to need the money tomorrow or in a year or two or even urgently at some point. If you use a Roth you're basically committing to investing until retirement, and if you use an investment account you should still view this as 'locked away', because short term investments mean you're at the vagaries of the share price at the moment you need to sell, and not the long term upward trend. You will almost certainly come to a point where your savings are worth less than last week or last year - the trick is to ignore that, and remember that you aren't going to sell the shares right now.

Finally, if you have a 401k with an employer match, you should max out the match first. It's a free boost - you end up putting quite a bit more in your investment than you would manage any other way.
posted by How much is that froggie in the window at 7:30 PM on February 12, 2021 [6 favorites]

If you use a Roth you're basically committing to investing until retirement

Incorrect. Unlike a normal IRA, you can withdraw contributions to a Roth at any time without penalty. Only the gains are "locked up," and even then there are exceptions. So you can retrieve those contributions, at least, if you do end up needing them (assuming they haven't evaporated in the market, of course).

If your employer offers any sort of matching program, that's what you should take advantage of first. Free money!

If your student loan interest rate is much above 6%, you should consider prioritizing faster repayment of the loans. It doesn't make sense to invest if the returns will be outstripped by the interest going out the door on the loans.

Otherwise, open a Roth as described at Vanguard and put the money in the Target Retirement Fund closest to your planned retirement date. Your goal shouldn't be to time the market. You have a good thirty years to retirement. There will be many swings up and down between now and then. As an amateur, your job is not to tell the future (which is what attempts at market-timing are), but to manage to keep up contributions through the vicissitudes of life and not to incur stupid and useless fees. Vanguard will protect you from the latter. The former is a matter of outsmarting your individual brain, and so setting up a monthly auto-withdrawal from your checking to your Roth is probably the best plan.
posted by praemunire at 8:03 PM on February 12, 2021 [7 favorites]

There are two questions here:
1) What type of account to invest the money in (401K vs IRA vs Roth IRA vs regular taxable account)
2) What kind of stocks to invest it in.

You might find /r/personalfinance helpful here. In particular, their wiki has a nice flow chart (also available as text with some more explanation). The wiki also has some info about investment and fund selection.

The most common tl;dr advice for each of the questions is
1) Assuming your primary goal is saving for retirement, start with the 401k if you have any sort of employer match, otherwise do either a IRA or Roth IRA (you can't do both by law). Once both are maxed out, go to taxable accounts.

2) Target date funds are easy and will adjust from something like 90%stock/10% bonds to something more conservative as you get closer to retirement. Total market index funds or S&P 500 funds are also good. Basically you want something that's passively managed (i.e. not stocks getting picked by a person, but just some rule, like "buy everything in the US stock market" or "buy everything in the S&P 500"). These investments will have lower fees and are easier to choose amongst - you can't really go wrong. Low fees in this context means something like 0.1% or similar, btw. If this all sounds complicated, just go with a Vanguard target date fund that corresponds to when you expect to retire.

In terms of dollar-cost averaging: you can't really time the market, so this is mostly about psychological comfort. One thing to keep in mind is that once you invest the money, you're best off keeping it there - you don't want to panic sell, especially if you're investing for the long-term. So for the initial investment, whatever strategy makes it easiest for you to avoid looking at the value of your account might be easiest here. After that, setting something up to automatically add and invest money to your account makes sense.

Also, good for you for tackling this. Remember, the key thing here is saving the money and then investing it, so you're already halfway there. The other stuff (types of accounts, what types of stocks) matters, but is less important/fixable.
posted by matildatakesovertheworld at 8:12 PM on February 12, 2021 [7 favorites]

I would recommend not a Roth IRA but a traditional IRA. As a single person in NYC, your taxes are pretty high. Your marginal federal rate is 22%. A traditional IRA will give you a substantial tax deduction, saving you $1,350 just on federal taxes and more from state and local.

Note that if you have not yet filed your 2020 taxes, you can still make an IRA contribution for 2020. This will save you on taxes for last year, getting you a refund in April. You can then also make another contribution for 2021.
posted by JackFlash at 8:36 PM on February 12, 2021 [2 favorites]

Just start piling money into a broad index fund. Keep doing it for many years. That’s it.
posted by jasondigitized at 9:03 PM on February 12, 2021 [1 favorite]

For the initial setup, I would dollar-cost-average your lump amount into a handful of ETFs over the next six months.

Then invest a small amount periodically from now on. The amount should be whatever is relatively painless for you, and should be automatic, at least once a month, via your paycheck or bank transfer. AUTOMATIC.
posted by intermod at 9:22 PM on February 12, 2021

I recently discovered Bitches Get Riches which deals with a lot of the emotions and social expectations around financial management. They've got solid advice as well, but the feelings part is well handled.
posted by dorothyisunderwood at 10:21 PM on February 12, 2021 [1 favorite]

As a single person in NYC, your taxes are pretty high. Your marginal federal rate is 22%. A traditional IRA will give you a substantial tax deduction, saving you $1,350 just on federal taxes and more from state and local.

As I'm sure you know but OP may not understand, the taxes will get paid either up-front or at withdrawal during retirement. The only question is whether OP is likely to have a higher income later in their career and (usually) thus in retirement than they are now. I'm not one of those people who blindly favors the Roth, but given where they're starting from in NYC, chances are good.

But, honestly, OP, this is tinkering at the margins and doing either wouldn't be a bad decision.
posted by praemunire at 10:32 PM on February 12, 2021 [1 favorite]

I'm not your financial adviser, nor do I hold certifications in advising people. This is an internet-random talking.

Unless you can spend a bunch of time preparing and reacting to market news, take the long view and buy-and-hold to wait out bubbles and seasonality.

You might make bets like:

US, UK and Germany, have 10- to 30- year government bonds that the market will pay you to take (which is admittedly a simplified view that you will have to pony up while the measure of a bond's return is its yield curve, presently they're negative) ... if you want to bet on post-covid, post-austerity, post-2008 infrastructure investment to make these nations places easier to live in and be profitable over that 10- to 30-year time frame.

Pile on to the tracker train, amplifying demand for returns equal to the markets (or clusters of shares they track), using the stats about tracker $$$ volume versus $$$ volume in the things they're indexing (some is 7x and some gets up to 14x but check for yourself) is a supply versus demand thing suggesting that trackers pull upward the whole indexed price space.

Alphabet (including Google), Apple, Facebook, Netflix, Amazon, Microsoft, Tesla -- all exporting the USA dream and tech transforming people's lives so that the products and services of theses companies embed in our lives. The bet is that a Biden administration plays anti-trust and data protection legislation that amplifies the userbase while investing in good rural internet infrastructure

The ubiquitous chip designer, ARM is uniting with the best big-data chip designer nVidia (subject to regulatory approval). ARM have servers you can rent in AWS, have the cachet of just being adopted by Apple and just keep growing, while Nvidia make the best tooling and silicon to turn gigabytes of training days into a few megabytes that run on your phone, tablet or laptop. The bet is that regulatory control over those gigabytes won't harm nVidia's customers or that monpoly review of the sale of ARM to nVidia won't obstruct it.
posted by k3ninho at 1:11 AM on February 13, 2021 [1 favorite]

A few hundred bucks paid for advice from somebody qualified to give it will yield a substantially better return than anything else available in the market to the unsophisticated investor.

Only ever deal with independent financial advisers who charge fees up front. Never deal with financial advisers attached to investment banks who offer "free" services and make their living off commissions for the investments they spruik.

The single exception to that last rule is free financial advice from your credit union, if they offer it. And if you're not already banking with a credit union, find one you like and switch.
posted by flabdablet at 4:57 AM on February 13, 2021 [7 favorites]

IANAFIC (I am not a financial investment counselor), but I suggest focusing on eliminating debt first. Which is not to say you shouldn't considering putting money into, say, a broad index fund. But I'd prioritize bringing your debt down faster now so that you can open up your investment options later.
posted by SPrintF at 6:27 AM on February 13, 2021 [2 favorites]

You should absolutely not be investing cash in the market until the following conditions are met: maxed retirement contributions, no debt (arguably excepting a mortgage), healthy savings.

Getting into the market with a non-retirement investment account is not a smart money decision, at least until you have a large positive net worth.

Follow the /r/personalfinance flow chart.
posted by so fucking future at 8:49 AM on February 13, 2021 [7 favorites]

Indexed funds are a good way to invest in the stock market. You'll be in mutual funds, along with other investors. You are likely (no guarantees) to have returns roughly matching the market's gains/ losses. Fidelity and Vanguard get high marks as good companies for an IRA or other savings account.

I prefer not to profit from tobacco, arms sales, and such, so I look for Socially Responsible funds within the company that holds my IRA. Interestingly, they weathered the Big Fat Recession better than other funds, but they're usually regarded as a bit less profitable.

Good places to start reading: (MeFi's own) Get Rich Slowly and Mr Money Mustache. It's a good idea to pay *some* attention to finance. As far as a coming correction, lots of people devote their professional lives to these kids of predictions, and they usually have a crappy track record; you are unlikely to achieve a more informed understanding. One way people deal with this is to invest a certain amount per month. Investing has more schemes and myths than probably any field.
posted by theora55 at 8:59 AM on February 13, 2021 [2 favorites]

Response by poster: These are all such wonderful, helpful responses! Thank you, everyone. I feel like I have some directions forward now. Principally, maxing out my retirement contributions through work and aggressively paying down my debt. I will also be dollar cost averaging investments in index fund ETFs and bonds, and hopefully that will weather any market downturn in the next few years. So helpful. Thanks immensely!
posted by scarylarry at 12:16 PM on February 13, 2021 [1 favorite]

The Bogleheads community is an excellent resource. They're not trying to sell you anything. The community promotes an investment approach of living below one's means and following a simple passive investment approach of regularly and methodically investing into a diversified portfolio of stocks & bonds using low-fee exchange traded index funds. Bogleheads have a wiki on how to get started. You can also sign up to the bogleheads forum and ask for advice specific to your situation on how to adjust or establish your investment portfolio.

Be clear on what your financial goals are. Be clear on what you plan to use these investments for, when you would need to cash out those investments, and how much flexibility you have over the timeline for cashing out. If you are investing toward retirement and do not plan to use the invested money for e.g. 20+ years then the stock market is likely a great asset class to invest in. If you are investing with a goal to accumulate a down payment for a house where you would need to cash out on a short time frame (0-3 years say) then investing in stocks is a poor choice as you are putting yourself in a position where you might be forced to sell stocks for less than you bought them for if stock market prices crash and do not recover in time for your house buying schedule .

To echo one of praemunire's good points:

> If your student loan interest rate is much above 6%, you should consider prioritizing faster repayment of the loans

I agree. If student loan interest rate is similar to or larger than 6% you will get equivalent or better investment returns with much less risk by accelerating paying off the student loan early compared to investing in the stock market.

My mental model: given market conditions from the last few years, the nominal rate of return for US equities is about 6% a year, on average. Return for any individual year will fluctuate wildly. So that's around a 6% - 2% = 4% average real return after subtracting inflation. Bonds currently have approximately 0% real return (could be a bit positive or a bit negative depending on how risky or safe the bonds are). So a diversified portfolio that is 80% stock and 20% bonds is expected to produce a 3.2% return. That means if your goal was an investment portfolio that on average generates $20,000 year in real returns you would need to accumulate stocks and bonds worth roughly $20,000 / 3.2% = 20000 / 0.032 = $625,000 . Sounds like a big number but very achievable if you can get into the habit of regularly saving and investing 15%+ of your income for decades.
posted by are-coral-made at 2:09 PM on February 13, 2021 [1 favorite]

matildatakesovertheworld's point is excellent:

> whatever strategy makes it easiest for you to avoid looking at the value of your account might be easiest here. After that, setting something up to automatically add and invest money to your account makes sense.

The hardest part of investment is the behavioural part. We are human and our human operating system is not good at making good long term financial decisions or tradeoffs involving complex financial risks. Left alone we will get spooked by news and inflict large losses on ourselves by fleeing the stock market after a crash, or take extremely risky, undiversified and probably unrewarding bets on stocks we only understand superficially because our friends or colleagues mention them. Or we'll be too afraid of a potential crash that we never invest in stocks and slowly have our savings decay due to 2% inflation every year.

The more you can set things up so that reasonable investment decisions happen automatically without your individual human attention or involvement (e.g. 15% of your gross income is automatically deducted from your paycheck goes into a tax-advantaged low fee target date fund), the more likely you are to be in a healthy financial position after a few decades.

Fun anecdote:

> O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…”
> Ritholtz: “They were dead.”
> O’Shaughnessy: “…No, that’s close though! They were the accounts people who forgot they had an account at Fidelity.”
posted by are-coral-made at 2:25 PM on February 13, 2021 [2 favorites]

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