$20,000 to invest: What to do?

[Lord-Barrington]

Mid twenties, good job with decent salary and few bills to pay at the moment.

First, some basics:


1) Of the 20K, at least 5K I'm keeping in a low interest, easily accessible spot as an emergency fund, so the investable amount is actually around 15K.

2) Since I am relatively young, I'm interested in growing my money at a healthy clip and am not against some risk in my (still non-existant) portfolio. But I will admit that seeing the indexes take beatings over the month of August has given me pause. Am I better to trow the money into bonds and wait this things out?

3) What's a good ratio of bonds/stock/cash to have in my portfolio for someone like me looking for a 8-10% return and not totally risk averse?

4) Would anyone of you recommend sticking most of my cash in a variety of ETFs and cutting out the middle man?



Thanks for the help everyone! It's much appreciated.

 

[akatsuki]

Buy when blood is on the streets - so if indexes are down, now is the time to buy.

 

[lasbar]



Mid twenties, good job with decent salary and few bills to pay at the moment.

First, some basics:


1) Of the 20K, at least 5K I'm keeping in a low interest, easily accessible spot as an emergency fund, so the investable amount is actually around 15K.

2) Since I am relatively young, I'm interested in growing my money at a healthy clip and am not against some risk in my (still non-existant) portfolio. But I will admit that seeing the indexes take beatings over the month of August has given me pause. Am I better to trow the money into bonds and wait this things out?

3) What's a good ratio of bonds/stock/cash to have in my portfolio for someone like me looking for a 8-10% return and not totally risk averse?

4) Would anyone of you recommend sticking most of my cash in a variety of ETFs and cutting out the middle man?



Thanks for the help everyone! It's much appreciated.

Set up a brothel...

The index is always up in that line of business.

 

[Amelorn]

Buy corporate bonds. I can't tell you where the stock market will be in a year, especially given this volatility eerily reminiscent of the early days of the credit crisis, but I doubt names like GE or Bank of America will go bankrupt in a year.

 

[Jr Mouse]

Wire me the money. I'll take care of it for you and get you some big returns, I promise.

 

[mr.orange]

buy gold?

 

[lasbar]

I have a friend in Nigeria who needs to take his money outside the country very quickly...

He only needs your bank account , pin number and 20000 US$ to set up the transfert...

You will get a billion Zimbabwean $ for helping him.......

 

[Swag22]

I would invest in equities now since the market is down...big blue chip companies with good prospects for future profitability. Speculation is going to pound these securities just like it has, and when they're down you should get in and wait out all this economic turmoil.

As for bonds, I would skip them for now because there is a good chance the fed will introduce some more inflation, thus devaluing the purchasing power of your dividend.

Go long bargain-priced large caps!

 

[mr.orange]

Use your money to feed hungry children in El Salvador.

 

[Lord-Barrington]

I am leaning towards this but I want to diversify a bit. I wouldn't want to put 15K into large cap stocks even if I agree many of them are probably undervalued.

 

[tradernick]

A complete answer to your questions is hard to provide here. A few things to think about

You need to take on more risk today to have a shot at 8-10% than you did at any time in the past 50 years. If by cash you mean the U.S. dollar, it's a commodity that doesn't provide a very good risk/return potential. If by stocks you mean the US equities markets, you have only to look at their performance over the past 10 years to know that 10% a year is a dream at this point. I do not see the US equities markets providing anywhere near 10% on an inflation adjusted basis going forward, and please remember that your real return must always be thought of in inflation adjusted terms. I do not and will not hold any U.S. dollars as I feel that even without another round of QE, the currency will not perform very well.

The idea of throwing your money into bonds and 'waiting this thing out' is appealing, but obviously you are not going to achieve your returns and the fact is that we do not know how long 'this thing' is going to last. What Swag22 said has some merit, but you don't have to hold US Treasuries, you can hold other government bonds.

Someone else said 'buy when blood is running in the streets'. This is a very good idea. However, blood is not running in the streets yet, not by a long shot. See below - I'm not saying that you shouldn't buy selected equities, just that blood is not running in the streets.

If you do not have the time and inclination to do a lot of research, there is not much you can do except to limit your stock market exposure to established stocks which throw off dividends. The value of dividends is vastly underestimated by people whose knowledge of the markets is incomplete. By all means, open a self-directed account and do not pay a 'professional' to do what you can do yourself.

The best thing for you to do is to start the process of educating yourself about the markets. If you are in your mid-twenties, this process will yield a way bigger return than your 15K. One of the best ways to achieve decent risk adjusted returns is to do what Warren Buffet did (in part). Yes, it still works. Look for small-mid cap companies with room to grow and invest in them for the long term. If you ask 'how do I do this' it's too big a question. You have to get out there and learn.

Someone said buy gold to get your returns. I can tell you this. Gold will trade at $1500/oz in the future. Anyone with the cajones to short it is going to make a hell of a lot of money. I wanted to short it at $1600 but one look at the chart showed me that it would be a bad idea. I am not telling you to short gold, I am just saying that anyone who shorts it here will eventually make a nice return. There are big risks associated with this type of position, including the risk that you could be right and still lose more than your investment.

Most important thing for you is this - don't be one of the sheep. Learn how the game is played and play it for yourself. Most guys think that their 'investment advisor' is a guy who has some sort of special ability to make good picks or grow money. This is usually a load of crap. Not always, but usually. Most investment advisors, especially those working for the bigger firms, are working from a fixed playbook and are not making any creative decisions at all. You can get the playbook and do what they are doing without paying them their edge.

 

[Lord-Barrington]

Tradernick,

Thank you very much for the thoughtful response. Your advice is appreciated and I look forward to educating myself further about investments in the coming months and years.

 

[MarkI]

Gold and silver, what are you waiting for?

 

[Amelorn]

8-10% is a significant risk. One asinine publication I read suggested that for someone under 35, they could pile 85% of their retirement savings into stocks and expect 8.61% returns. However, I was looking at Fidelity's corporate bond inventory (my broker) and found solid corporations like Goldman Sachs and GE with bonds at 4.5-6.5%. If one holds the bonds to maturity and collects the principle at the end, they are a fine and relatively safe place for a young person to begin putting their money into and forgetting about it. A caveat however. If interest rates rise, the value of the bond will sink on the secondary market. If one holds the bond to maturity, this is a non-issue. Selling the bond may result in a small capital gains loss. Of course, pocketing X% over several years will result in an overall gain even after selling the bond for 96% of face when you bought it for 100% at issuance. On the other hand, if you buy an A rated corp @ 5% and the interest rate remains static, yet the company gets upgraded to AA, you are now carrying a more valuable bond. With an AA rating, said corp might issue bonds at 4.25%. The old 5% will become a hot commodity. And I haven't even scratched the surface...

 

[Thebomb85019]



8-10% is a significant risk. One asinine publication I read suggested that for someone under 35, they could pile 85% of their retirement savings into stocks and expect 8.61% returns. However, I was looking at Fidelity's corporate bond inventory (my broker) and found solid corporations like Goldman Sachs and GE with bonds at 4.5-6.5%. If one holds the bonds to maturity and collects the principle at the end, they are a fine and relatively safe place for a young person to begin putting their money into and forgetting about it.

A caveat however. If interest rates rise, the value of the bond will sink on the secondary market. If one holds the bond to maturity, this is a non-issue. Selling the bond may result in a small capital gains loss. Of course, pocketing X% over several years will result in an overall gain even after selling the bond for 96% of face when you bought it for 100% at issuance. On the other hand, if you buy an A rated corp @ 5% and the interest rate remains static, yet the company gets upgraded to AA, you are now carrying a more valuable bond. With an AA rating, said corp might issue bonds at 4.25%. The old 5% will become a hot commodity.

And I haven't even scratched the surface...

As you said, inflation will take a bite out of your investments.

If you are in a true buy and hold strategy, a 40 year investment will return close to 10% annually. Even in a down year like 2008/2009, if you had bought 40 years prior, you would still earn over 10% annually on your investments. (see *)

*http://www.moneychimp.com/features/market_cagr.htm