How would you invest $100000?
July 7, 2008 7:43 PM   Subscribe

About $100 000 has been transfered to me, and I don't know how to properly invest it.

For various reasons, I am now in charge of about $100 000, cash. Problem: I am 21 years old and I know absolutely nothing about investing on this scale.

Can anyone give me some advice on how to properly invest this much? I already have a discount brokerage and savings accounts holding about 30 grand of my own money, so I'm not completely helpless, but I've never had to even think about this many figures before. I'm terrified that I'm going to mismanage this situation into disaster.

Okay, so details:

-I live in Canada. My job doesn't offer any sort of investing plan or anything like that.
-I want this money to grow. At minimum, I would like to "keep up" with what other people do (I'm imagining this is around 7-10% growth per year, is that correct?)
-I don't want to spend any of it for the foreseeable future.
-Tax! Please tell me about how to deal with tax.
-I have a fairly low risk tolerance
-Diversification is important to me. Simplification is not really, although of course it's welcome.
-Property is out of the question. I spent most of last week thinking about buying a Playstation 3. I most certainly cannot handle owning land at this juncture in my life.
-I really don't want a financial advisor. Self management is important to me.
-I have established accounts at TD and ING Direct.

So basically, AskMe, I think I am asking how you would choose to invest this money, given these parameters. Please hold my hand and treat me like an idiot, since I am.

Any help would be much appreciated. Thanks!
posted by anonymous to Work & Money (38 answers total) 18 users marked this as a favorite
You really do want a financial advisor. Really.
posted by mr_roboto at 7:53 PM on July 7, 2008 [1 favorite]

Please hold my hand and treat me like an idiot, since I am.

Go get a financial adviser, idiot. :)
posted by ellF at 7:55 PM on July 7, 2008 [1 favorite]

Get a financial adviser. You don't need much advice - the answer will probably boil down to "Pick a bunch of index funds, heavily weighted toward overseas ones, toss it in, and walk away."

You don't need to get an adviser in the sense of someone who manages your money for you. Frankly, with just ~$130,000 in assets, there's no point. (Yes, it seems like a lot, but it's at a scale that's still very self-manageable.) What you really want is someone who can go over your options with you - ie, the handholding - and help you decide where to put it, and you can reallocate yourself as time goes on. You want a one-time consultation, with polite refusal of more-extensive services.

In particular, you really really want a professional's help in sorting out the tax implications. The rest of it I'd feel confident letting the green handle, and just pointing you at some of the better "Hooray index funds!" questions we've had, but the tax issues (especially given that you've abruptly gained $100,000 - which may well be about to become much less, if you haven't paid taxes on it yet) are serious and not to be left to a bunch of random internet strangers.
posted by Tomorrowful at 8:07 PM on July 7, 2008

You don't want a financial adviser but you do want total strangers to advise you. How is that self management? Get an adviser, particularly for taxes.
posted by otherwordlyglow at 8:11 PM on July 7, 2008

If you were in America, I could give you a pretty good idea of what to do, but the Canada thing throws me off. I would go with the others so far and recommend a good financial advisor. Pick one that you feel good about, one who will hold your hand and teach you, not one that throws a bunch of fancy words at you and tries to seem "sophisticated."

I would also recommend that you have a little bit of fun with the money, and that you give some of it away to charity or whatever floats your boat. But I think you are on the right track wanting to invest this rather than blow it all.
posted by joshrholloway at 8:12 PM on July 7, 2008

Do you have any ambitions for post-secondary or post-graduate education? That might be a better investment than any financial vehicle, because it could greatly increase your earning potential.
posted by randomstriker at 8:15 PM on July 7, 2008 [1 favorite]
posted by neuron at 8:15 PM on July 7, 2008

Getting a financial I planner is better than a financial advisor...who is more likely to be a salesman (or woman) trying to score a 5% commision on your hundred grand. A competent financial planner should walk you through determining a GOAL toward which you would dedicate certain assets to help you achieve. Only when you have a specific goal and a time horizon in mind can you begin to know HOW the money should be invested....

The problem with using financial adviors or even planners is the general public has little idea how to evaluate their competence so as to separate the good ones from the merely average or, god help you, the venal charlatans.

If you don't want to go through all the this effort then you could do worse than to follow the advice I give (as I am a financial planner) to youngsters like yourself: three rules, 1) don't spend more than you make; 2) save at least 10% of what you earn and increase it to 20% as soon as you can, and 3) invest all your funds in three broad index funds from Vanguard - the total US market fund, the total international market fund, and the total world bond market fund. The proportions going to each fund is your only 'tough' decision but you could choose 50%-30%-20% and be OK for the next 20 years without ever looking at it again.

Your expected return would be around 8-11% annualized compounded and that's about the most you could hope for with your level of education and interest in investing. Expect any more return and the risk you must take is WAY too high. Another plus is you won't pay much in fund fees and you won't pay any commission to buy or sell in your TD account.

Good luck.
posted by emberm at 8:16 PM on July 7, 2008 [12 favorites]

Peter Lynch's One Up On Wall Street
David and Tom Gardner's The Motley Fool Investment Guide
Bogle's Bogle on Mutual Funds
and, the ubiquitous An Idiot's Guide to Investing (caveat: if you get something out of that series of books; I find them marginally useful at best, and some people despise them, but for others they are a great primer).

(BTW, I've listed them in order of usefulness, in case you aren't up to reading 3-4 books.)

"Risk-averse" sounds like diversification + bonds, to me. No problem; there are even tax-free (municipal) bonds out there! Diversification is actually pretty easy in today's investment world: buy an index fund or two, et voilà!

As for taxes, at year's end you will take the year-end paperwork sent to you from your broker of choice to the accountant of your choice (Fidelity allows you to buy damn near anything from them, even other companies' funds, without additional charges, so I'd open an account there, and get all your paperwork back from one company). The accountant - HR Block, your cousin Bob the CPA, whomever - will do your taxes for a simpe fee. No problems.

posted by IAmBroom at 8:19 PM on July 7, 2008 [3 favorites]

Wait a few more months until the US market crashes and buy low.
posted by T.D. Strange at 8:31 PM on July 7, 2008 [4 favorites]

Some of the respondents here should temper their advice with the recognition that the poster is in CANADA. (Not naming names, but financial advice - even/especially good generic advice - may apply quite differently in the Land of the Increasingly Valuable Loonie.) How? I don't know. But I'm sure the tax implications of various decisions are quite different.
posted by Tomorrowful at 8:34 PM on July 7, 2008

If you don't want an ongoing relationship with a financial planner, you don't have to. You can always find a fee-based (rather than commission-based) financial planner who will collect all your information - goals, risk-tolerance, time-horizon, tax issues, etc - and develop a comprehensive financial plan for you. It will then be up to you to implement the plan. You can go back to the financial planner if your situation changes or you change your mind about managing on your own.

FWIW, I used to work in financial planning, I have a degree in finance and a law degree, and I would never, never presume to manage my own investments. It's just too hard to be objective about your own money. Investing well is basically a battle against all your human impulses. It's difficult if not impossible to do without some external discipline, advice, and moral support.
posted by JennyK at 8:39 PM on July 7, 2008

First, about the financial planner/advisor stuff and there really isn't much difference between them (in practice the terms are used interchangeably). Financial business types exist to make money.

At one time, people recommended fee-based planners because they weren't just hawking the stuff their IB wanted to dump, they make money by charging you fees, etc. But in practice they are still often driven by incentives encouraging them to recommend particular investments.

%age based planners are silly; they are incentivised to make risky bets on multiple accounts. Often they have a payment schedule which is structured such that above a certain return they get yet more payoff. The side effect of this structure, although naively it seems like the right approach ("If they win, it means you won") is that they have multiple clients so their maximum payoff is obtained by putting highly risky investments in multiple baskets (customers). If you lose, they still get paid, but they expect one or more clients to win (which may or may not be you).

Read "a random walk down wallstreet" and then, once you've worked out the taxes (what does "transferred" mean?) invest in low/no fee index funds. Do multiple buys over the course of a few months (one buy a month for 5 months @ $20k a pop).

Coffeehouse portfolio is a good one for most people.
posted by rr at 9:04 PM on July 7, 2008 [1 favorite]

Seconding TD Strange
posted by mhuckaba at 9:33 PM on July 7, 2008


As your friends' parents who they deal with as a starting point.
posted by smitt at 9:35 PM on July 7, 2008

I wouldn't be putting money into the market right now. I know you said not a house, but that is without a doubt the smartest way you could invest this money. Also, start an IRA of some kind.
posted by xammerboy at 9:40 PM on July 7, 2008

Me. I'd park it in the most locked up form of account out there. In the US this would be a Certificate of Deposit.

Then, I would read up on the best way to invest it. Find something I understood and was comfortable with, then go with that.

Also, you didn't say how you got it. You're already far ahead of the game for your age, so not effing up is the real key, not worrying about how much you'll get over the next couple of years.

If you got it an an inheritance, then take the time to grieve. Mourning people don't tend to make good choices.

It's not about interest and earning at this point, but preserving until you know what you want to do.

Oh, and you could also send some my way. Just a thought.
posted by cjorgensen at 10:02 PM on July 7, 2008

THIRDING TD Strange. This is a BAD time to be just getting into the market. We are entering a pretty damn big recession, caused by the collapse of the housing bubble and resultant credit and debt bubbles. Luckily for you, though, Canada will probably be less hard-hit than the US and the UK. So for something really low risk, far safer than the market, how about Canadian Treasuries? TD offers them here. Then you can always ease your way into the market after at least another year or two and probably get some good deals.
posted by Asparagirl at 10:07 PM on July 7, 2008

I've got this revolutionary invention, I just need some seed money... we're based out of Ghana and due to some pesky laws it would be best if you sent a money order...

Nah, I'm joking. Get a financial advisor.

I really don't want a financial advisor. Self management is important to me.

You might have this image in your head of yourself telling guys in a bar about how shrewdly you "boned up" on the "game". Forget it man, it's complicated stuff and you're money is just sitting there for now. Your wisest investment is in a financial advisor, espescially since it's such a small fraction of what you'll be working with. A good one will teach you a lot about what is going on and let you make decisions. All rich people who don't work in finance use advisors.

So yeah, get an advisor.
posted by phrontist at 10:20 PM on July 7, 2008

Yeah, now is not a good time to invest, although we may be very close to the apex. If you had invested this money in an Index fund based on the Dow, last October you would have lost almost 20%. If you had gone with a NASDAQ index, you would have lost 17%.

So yeah, I've always thought the people recommend index funds for every Ill are not too bright.

Btw, if you had invested $100,000 in a dow based index in 2001, it would be worth about $105,000 today. With inflation, that's less then what you would have started with. And NASDAQ you would only have about $55k! You still wouldn't have recovered from the .com crash. Some companies have recovered, others never did.
posted by delmoi at 10:21 PM on July 7, 2008

In general, trying to time the market and find the 'right' time to invest is very difficult or impossible, since in theory, the current market levels price in all future information. The danger with market timing is that you'll miss significant appreciation as the market recovers (whenever that happens). I would suggest a financial planner; alternatively, read up on asset allocations, decide what yours should be, invest in it (without trying to time the market) and don't look at your investments more often than once every few months.
posted by bsdfish at 2:10 AM on July 8, 2008

While the advise about getting a financial planner is spot on, I understand fully if you can't hand responsibility for your money to a third party and sleep soundly.

In my profile I maintain links - as well as a plan - that will help you become a Student of the Markets.

It won't be easy, and it won't be fast (I've worked in banking for about 25 years, live & breathe finance, have two Masters, teach the subject part time at a local University, and it seems the more I learn about the markets the less I really know) but it will be intellectually and financially rewarding. And the more you know about finance the more effectively you'll be able to work as a team with whatever Financial Planner you ultimately select.

Ignore all the other adivse in this thread about specific instruments until you either have selected a planner or have mastered some basics about the markets. Even what appears to be the least risky instruments carry risks of their own, risks frequently unknown to or unappreciated by retail money, and its best you either get some professional advise or acquire some knowledge of your own (preferably a combination of the two).

Finally, what I tell everyone that asks me what to do with a windfall - put it someplace where you CAN NOT TOUCH IT for at least one year.

Don't hesitate to contact me by email if I can help with follow-up questions.
posted by Mutant at 2:44 AM on July 8, 2008

On mutant's theme of not touching it for awhile, which I think is wise, how about a term deposit? ING offers 8.25% on $100000, which when deposited for two years, will give you around $17181 in interest. Before defiantly see a professional; or at least do a lot of research before you do anything.
posted by oxford blue at 6:13 AM on July 8, 2008

Very short term: throw the money into a 14-day "jumbo" CD and have it roll-over. This will at least get the money working for you in the next 2 weeks while you sort out who you need to talk to.

Then, talk to somebody (a CFP) who can help you make a strategy.

I am huge on ETFs (exchange traded funds) instead of mutual funds, so see if your advisor will recommend some to you. These would be used instead of mutual funds... they are baskets of stocks, and they are often no-fee instruments.

Good luck with your windfall!
posted by zpousman at 7:05 AM on July 8, 2008

I really don't want a financial advisor. Self management is important to me.

It might take you a bit to learn all that you need to know. Time or mistakes figuring this out could be very expensive. In the meantime, get a financial adviser. If in Canada you need someone else to advise you on the tax situation, get that person also.

For now, get a fee-only financial adviser. Fee-only means the only money they make is from what you pay them directly, that they make no commissions on selling you anything. It might seem like it costs more that way, but you always pay. If you don´t know how much you are paying, it´s probably more.
posted by yohko at 8:48 AM on July 8, 2008

Okay - so here's a dumb, somewhat related question. How is it that Countrywide Bank can offer 3 or 4% interest APR on their savings accounts, but US Bank on a Money Market or "Maximum Money Market" can't seem to do better than 1.25% APY, and that's if you deposit $100,000 or more? A friend recently closed one of her savings accounts at Wells Fargo, and when they asked why, she said because of the abysmal interest rate. They came back with some kind of special, super-deluxe savings account that would let them offer (hold me back) .25%, which only made her laugh. Is there something basic about the difference between the meaning of APR and APY that causes this to make sense, or are Wells Fargo and US Bank just screwing people?
posted by Death by Ugabooga at 1:54 PM on July 8, 2008

If you should happen to take the (frequent) financial planner suggestions seriously ....

Read this and especially about checking credentials. I suspect most people are confused by the title and profession and haven't thought past that.

The financial planners I have known personally ranged from an out of work sports magazine freelancer to someone who got canned from teaching SAT prep due to unreliability. Their "training" was almost entirely sales focused. In general you would be more surprised to find someone with actual qualifications than without.

It is true that now is a bad time to dive into the market, but even now is not a bad time to start a _long term_ investment plan for _retirement_ (i.e., not to park money to buy a house later). This is a windfall that can help you in the long term if you let it.

Someone mentioned a house, that's lunacy (especially in Canada, where the bubble is only now teetering at the top). Someone else mentioned an IRA -- you are NOT going to sink $100k into an IRA in anything approaching a timely manner unless Canada's rules are significantly different from those of the US (in the US, if you are independently employed, you would be well adviced to pursue the new self-employment equivalent to the 401k instead of an IRA anyway).
posted by rr at 1:59 PM on July 8, 2008 [1 favorite]

Countrywide can (must) offer high rates to get customers who are willing to risk having to go through FDIC to recover their funds when Countrywide defaults (point of interest: the FDIC does cover insurance).

And money markets are, in fact, no longer really yielding 1.25%.
posted by rr at 2:01 PM on July 8, 2008

Death by Ugabooga -- "Okay - so here's a dumb, somewhat related question. How is it that Countrywide Bank can offer 3 or 4% interest APR on their savings accounts, but US Bank on a Money Market or "Maximum Money Market" can't seem to do better than 1.25% APY, and that's if you deposit $100,000 or more? A friend recently closed one of her savings accounts at Wells Fargo, and when they asked why, she said because of the abysmal interest rate. They came back with some kind of special, super-deluxe savings account that would let them offer (hold me back) .25%, which only made her laugh. Is there something basic about the difference between the meaning of APR and APY that causes this to make sense, or are Wells Fargo and US Bank just screwing people?"

Very reasonable question Death by Ugabooga; not dumb at all. And like many questions, there are both short and long answers so I'll try to present both for you.

Short answer: Countrywide is trying to attract deposits. Banks operate in a very highly competitive, highly regulated environment. Banks are in the business of accepting deposits from savers and, in turn, lending these funds to borrowers. Banks are required to maintain a specific level of reserve requirements on hand, in the event depositors - savers - wish to redeem their funds.

While The Federal Reserve sets "official" interest rates, banks can - and will - vary interest rates to attract business. What Countrywide is trying to do is attract deposits, probably because they either are approaching or have already breeched their reserve requirements.

Offering interest rates higher than the competition, all other factors being equal, attracts deposits.

So why are they offering higher interest rates?

And the short answer is: to attract deposits.

Now for a somewhat longer answer: Even in the best of times, banks operate in competitive, difficult, highly regulated and very precarious environments.

Bankers typically face a multitude of risks - uncertainties if you will - that aren't generally known to, nor appreciated by the retail crowd.

These risks include (but this list is not exclusive):
  • credit risk (the risk of an obligor defaulting)
  • operational risk (associated with a remarkably wide range of operational issues - I inventoried a few here)
  • market risk (the risk of market driven changes in asset values, think house prices or share prices)
  • liquidity risk (the difference between bid and ask, or buying and selling prices)
to name but a few of the more important challenges faced day in and day out by bankers (and you thought this was a rather cushy job).

Some of these risks are interrelated, specifically market risk (as manifested by interest rate risk) and liquidity risk.

Asset and Liability Management, or ALM deals with these two risks an integrated form. Although ALM has been practiced for decades, it's only since the early 2000's that we've seen academic research backing and refining the practice of Asset and Liability Management.

But as mentioned previously in the short form of our answer, banks are required to "hold back" or maintain a specific level of assets, assets which back loans made against deposits. This insures that if a depositor wishes to access his or her funds, these will be immediately available, in cash form.

The Asset and Liability Management group at modern bank will continually adjust interest rates offered in the market as needed to attract and maintain a specific level of deposits.

As more funds are needed interest rates will rise. As less funds are needed interest rates will fall. Simple supply and demand internal to the bank will drive part of the ALM interest rate setting policy.

But factors external to the banks own, internal funding decisions will also impact this offered rate; specifically, and as some in this thread have alluded to, if the general public fears a bank may not be solvent, they will NOT deposit funds there. Higher interest rates are an attempt to attract funds.

So while some folks will point to these higher rates as "evidence" that a bank is going out of business, this isn't always the case. In fact the truth be told, offering higher interest rates is NOT always evidence of bank's impending bankruptcy, in spite of what you might all too often read here on Metafilter.

Even professionals who have access to far more data than simple offered interest rates, frequently get this wrong. A comprehensive calculation of a bank's probability of default would have to take into account changes in bond prices (across a variety of seniority's), changes in share prices (both common as well as preferred) and the behaviour of Credit Default Swaps - specifically the change in premium demanded. And this would be only one side of the equation, the quantitative calculations; there are also qualitative factors impacting the change in an institutions probability of default.

Unfortunately no, simply looking at market driven interest rates offered by a bank is not always a reliable indicator of default. Wish it were that simple.

But in general, as long as you remain under the FDIC mandated ceiling of $100K per depositor, you should be fine. Suggest you hair cut it somewhat, call the limit $90K to allow FDIC insurance to cover accrued interest.

So yeh, very good question.
posted by Mutant at 3:46 PM on July 8, 2008 [4 favorites]

Death by Ugabooga: The market for deposits is extremely competitive. US Bancorp has 2,522 bank branches and 4,844 ATMs. Wells Fargo has even more of each. Countrywide has 194 "financial centers" (before accounting for the BofA merger, of course). So US Bancorp and Wells Fargo have natural deposit bases that blow Countrywide away. Countrywide needs to pay up to attract deposits--GMAC, Capital One and other depositary institutions with relatively small retail branch networks are all in the same position. Those high yield savings accounts are still much cheaper than alternative capital sources. Jitters about bank failures have probably increased the spread between the Wells Fargos and Countrywides of the world, but it isn't a new thing, especially in the CD market.
posted by mullacc at 3:51 PM on July 8, 2008

On preview, I think Mutant's answer is more applicable to differences in rates between banks of similar business models (like Wells Fargo vs US Bank vs Nat City) rather than the difference between the very very different business models of money center banks and capital markets-dependent firms like Countrywide Bank.
posted by mullacc at 4:01 PM on July 8, 2008

Absolutely true mullacc, and many thanks for making that distinction. I was trying to build the general case for why offered rates might be higher and didn't consider specifics, except for risk of default which I've seen (wrongly) raised here on Metafilter far too often.
posted by Mutant at 4:13 PM on July 8, 2008

ING offers 8.25% on $100000, which when deposited for two years, will give you around $17181 in interest.

What!? Can you provide a link to this? I see nothing of the kind on the ING site, and I'd be comsidering throwing some money at that if it were the case.
posted by stavrosthewonderchicken at 5:11 PM on July 8, 2008

Don't listen to these people.

Get your passport out, buy a plane ticket, and spend the next few years exploring the world and experiencing shit with strange and interesting cohorts. These are the best days of your life. You listen to these people, you'll find yourself the proud owner of a nice portfolio while you squander your precious youth in a cubicle. Invest in your biography.
posted by mullingitover at 6:29 PM on July 8, 2008 [1 favorite]

Unless you have finished your degree, now is not the time to play world traveller.

I also tend to feel that if you want to play world traveller, you should carve off at most 1/5th of that sum (after taxes) and use that to fund it.
posted by rr at 8:12 PM on July 8, 2008

Information was based on the ING calculator, and is backed up by information on this page: here.

I sent you a mail, in case you don't check back here.
posted by oxford blue at 10:32 PM on July 8, 2008 [1 favorite]

Okay - that's some very interesting information, Mutant, but the disparity in the interest rates I mentioned has been going on for a couple of years, I believe. Am I really correct in thinking that Wells Fargo's 0.xx% is their best offer to counter Countrywide's APY of 3.65% (which was up around 5% a year or so ago, but has been steadily decreasing)? I understand about attracting deposits and such, but how can they afford to offer a rate this much better for as long as they have been?
posted by Death by Ugabooga at 8:20 AM on July 9, 2008

Death by Ugabooga: Countrywide's business model isn't really a "bank" business model--it's a capital markets business model that generates higher returns with greater risk. It can afford to pay more for its deposits (theoretically) because it earns more with the assets it buys. One could argue that Countrywide is more like Bear Stearns or Lehman Brothers than it is like Wells Fargo. Wells Fargo's cost of funds is lower across the board because it has a more conservative business model.
posted by mullacc at 12:29 PM on July 9, 2008

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