Investments as a young person

E

ExplorerXLT95

New member
The following is a very simple question that will hopefully lead to a good discussion and some good information.





What is the single, best thing to do with your money as a young person in terms of investment?





For the purposes of this question, let us define "young" to be between the ages of 21 and 25. Also, if you would answer differently based on whether or not that person is married, please state your answers for both cases.



Hope we get some good discussion and advice out of this :xyxthumbs
 
Two words Real Estate. Of all my investments- stocks, bonds, mutual funds, real estate has done better than all of them. If I was your age again, I would buy real estate- land, a house, etc. :xyxthumbs
 
^ what he said, espicially if you can get your hands on either a multi-family home or waterfront property. With a multi-family, you can live in it and pay down the mortage with rental income (basically live for free if you play it right), and waterfront property NEVER goes down in the long run. I plan on buying a lake house as soon as I get out of college, and building up a portfolio over time. Of course, that's the plan, I'll probably end up blowing the money on fast cars and expensive women :).
 
Real estate is not the correct answer, IMO. Never put all of your eggs into one basket. Real estate is hot now, but it won't always be. I guess nobody remembers the early 90's in southern california...



Anyway, probably the best thing would be is to maximize your 401k at work (currently allowed to put up to $14000/year), or if no 401k, then maximize an IRA. Either account should be well diversified (i.e., you didn't want to have 100% of your 401k in tech funds in Dec 2000).



Compound interest over long periods (we are talking 20-30 years here) will do wonders.



I wish I had started funding my IRA when I was 21 (started at 25, and those 4 years will make a big difference over the long haul).



On Edit: I don't mean to say that you should avoid real estate. Real estate can and probably should be a portion of a well balanced portfolio. While I don't have any investment properties, I do have a percentage of my assets in REIT's (Real Estate Investment Trusts).
 
Guapsnaman - therein lies the beauty of owning a multi-family house. If you can buy a 3-family house for under 300,000 or so, and lease out the other two apartments for ~1000 a month, it's quite affordable. It only works in some markets though, no way are you gonna find that kind of price in NYC or Boston, but it can be done around here.
 
themightytimmah said:
It only works in some markets though, no way are you gonna find that kind of price in NYC or Boston, but it can be done around here.
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yup yup. I would sometimes called these real estate agents (who, if you've read Freakonomics, are "cheaters") to see how much houses around my neighborhood, and other less wealthy neighborhoods in Queens would cost, and you can't even imagine.
 
Me too! Althought Im a bit past 25 (32), I need to start investing wisely for extra income and for future. Currently Ive only been putting a small amt in savings and doing 401k. The wife and I need to start making our money work instead of just "enjoying" a great deal of what we make. Since you are talking the "Whats" it may be helpful to also talk about the "hows" of actually getting started, budget or financing plans, etc.
 
I'm 26 and here is what I have learned.



Unless you have a good match a roth IRA should be first priority before 401k IMO. If you have a match contribute up to the max match available then use the other funds to fund a roth ira. Remember roth's are funded with after tax dollars so you will never pay tax on them. Also you can never go back to fund prior years in a roth. Best investments in the roth are income generating vehicles for example I try to put my reits and div. bearing instruments in the roth when I can. Also as oppsed to a 401k your principle can always be withdrawn in a roth just not any of the gains if you have an "emergency". With a 401k there will be penaltys and tax consequences for any withdraw.



Also the sooner your money is in the account and invested the more you will make. Dollar cost averaging is bogus over a long investment horizon if your diversfied.



Make sure to choose low expense ratio non loaded funds if your gonna go the mutual route. As soon as it is plausible I will be switching to an all ETF portfolio. Always stay diversified!! If your not inclined to create your own portfolio target funds are a great easy way. I own some fidelity target funds for my projected retirement year I know that vanguard also offers similar funds. Start with the minimum and then use auto purchases to directely purchase monthly.



If your going to trade individual stocks make sure you know how to use stop losses. Another great feature many borkers also have now is a trailing stop so you can lock in gains and trail up as the market moves but you will get stopped out at a certain % if it starts to come off. I'd have as ton more moeny today if I had of used stops on all my positions in the 00' crash. I just sit and let all my positions trail down always thinking/hoping they would come back. Lesson learned.



hmm i could go on forever.........
 
Teck,



I thought there were penalties for both IRA and 401k for withdrawal, regardless. My learning was to do 401k first then IRA (401k max = $14,000, IRA= $3,000, and I think both will increase again this year). Typically this is because of company match. Also, your traditional IRA may not be deductible if you have a company 401k plan. Roth IRA is a different vehicle, you can't get a deduction for funding it. Roth vs traditional IRA is probably something people should read up on to decide which one to fund. I currently fund both a 401k to the max, and a traditional IRA to the max. I may be better off with a roth-IRA in my position, but that is something I am considering. And, like I said, I wish I had started earlier.



I agree with all of your other advice. Just to add some things:



By using a monthly auto purchase plan, you are in essence doing a type of dollar cost averaging. On months when the price is down, you purhcase more shares for your given amount, and on months when the price is up, you purchase fewer shares.



For low expense ratio no-load funds, Vanguard is a good bet, but they do have fund minimums.
 
Agree with most of what's been said.

For you younger guyz who are already maxing out in 401Ks, etc. Also look into a Roth IRA. You take post tax dollars and put them in. When you are eligible to take it out, you are not taxed. Age 59 1/2 last I checked. Hopefully at that age, you are doing well financially and your net worth is up there. So no matter what tax bracket you fall into, it won't matter when you're pulling from your Roth account. It will affect your 401K though.

Please keep in mind (last I read), when you make over $150K annually, you are no longer eligable to put money into a Roth. Shasta !



I also agree with the REITs as a starting vehicle in the Real Estate market. Most people in their 20s don't have enough money to buy a house/property (of course the variables are endless.....like LSPs).



As far as stocks, look into DRIPs as well besides regular holdings. You can start with very little money. Factors in dollar cost averaging and dividends if your holding offers.



It may be tough to think about retirement, but you have to start to think that way if you're in your 20s, 30s. Going to school, I was always told by older people that it's important to get a good education and a steady job. These days, the concern is financial security...not as much job security.



I recently bought a house and would not have been able to do it without investing at a young age.



Great book that I read a few years back "Rich Dad, Poor Dad"....simple obvious stuff....just makes you think.



It's not how much you make....it's what you do with it. ;)
 
By using a monthly auto purchase plan, you are in essence doing a type of dollar cost averaging. On months when the price is down, you purhcase more shares for your given amount, and on months when the price is up, you purchase fewer shares.
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Yep, but it's just when the money comes in for me to purchase as I get paid. $500 goes to auto purchase mutual funds and 100 for my GE DRIP. My Roth has been fully funded and allocated since march of this year as soon as the cash was in there.



As for how much to invest in the 401k why invest all the max 14k a year if you only get matched by your employer at a lower rate? Of course it's to your best advantage to invest up to thier maximum match. Then after that you have to make some decisions of what's better. If you can lower your tax bracket by investing more that could be a good reason and so on. I personaly can afford to fully fund my 401k (14k + match) and my Roth fully so I don't think about it much. Though next year when I start having a mortgage payment I may need to reduce my 401k down though I will personaly not forgo fully funding my roth.



There are penalties for a traditional IRA not on a roth (principal only though). You'd have to look into the advantage of rolling your traditional into a roth too see, but for the most part if your young enough the long term growth of after tax dollars will be greater then getting that small tax deduction and paying taxes later on the traditional.



Max contribution to a roth this year is 4k I would expect a traditional to be the same not 3k.
 
Oops, you are correct about the max contribution numbers.



I invest fully into the 401k to help reduce my tax burden. Also, I am catching up, since I was unable to invest in a 401k for 7 years as a gradstudent and postdoc, and at that time, max IRA contributions were $2000/year. That's why I stated the importance of investing early if you can, so you wont necesarily need to catch up.
 
What I have done is contribute the max amount to my ROTH IRA where I have an array of low (no) load mutual funds with low expense ratios. I divide up my contribution among them. I have picked out what I feel are the best while consulting my financial planner at Merrill Lynch.



I contributed to my 401k at work until I stopped working to go back to school. I'll pick back up as soon as I get another job.



I also contribute to my Merrill Lynch Cash Management account where I have an automatic investment plan established. Each month, a pre-determined amount is taken aout of the account and placed in quality performing, low expense Index Funds. When the market does poorly, I can invest more with my pre-determined amount. Vice versa when the market is doing well; I buy less with the same amount (a.k.a. dollar cost averaging). This has been my best performing strategy.



This way I know that I am diversified and don't have to watch the market every second with individual stocks.



With constant feeding of the 401k, the automatic investment plan and the ROTH IRA, I will be sitting pretty come retirment age in 35 - 40 years.



They key is picking the proper investments. My financial planner gave me great advice - It is not timing the market, but rather time IN the market.



My next step is to purchase a home as another investment once I start working again.
 
I understood about 1/2 of what you guys are talking about. IS it expensive to work with a Financial Planner? That may be my best bet until I get a better grasp on this stuff. Also wondering are you all just investing for retirement or for other things like house, nice cars, etc?
 
Ok, I have quick question. My employer doesn't start matching until I've been there for a year. Sounds like I should I hold off on my 401K until then. So, what to do with the money I was planning on investing (~20,000 this year). I am planning on becoming a first-time homeowner next year, should I just save it all for the down payment and hold off on any other investments? Thanks!
 
The answer depends on a lot of things but at this age I will assume it is your primary long term investment. I agree that a 401K with a good match is hard to beat but if that is not available then a Roth IRA is the way to go. I would recommend a broad market index fund with low expenses....over a 20+ year range it is unlikely that anything will do signifigantly better. Most people chase the latest hot craze and end up buying high, getting frustrated, and then sell low. The most important thing is to keep investing and to stick to a diversified plan.....chasing high returns is was dooms most investors to mediocrity.
 
So far we have in this order Roth IRA/Traditional IRA > 401K(if it's matched and up to the match) > Real Estate > Expensive cars > Fast Women > Fast Cars > Expensive Women, sounds like a plan.



Whatever you do, do it today, the sooner the better and pay yourself first.
 
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