Investing

With $100/month, you're limited to mutual funds. Otherwise, you pay a per transaction fee that would be at least 7% of your investment - very, very bad deal.

I'd suggest sticking with a Vanguard Target Retirement Fund:https://personal.vanguard.com/us/fun...RetirementList

Select your age, pick that fund, start moving money into it, done.

Note that these funds come with a minimum $1,000 opening deposit. So keep the money in a savings account until you have that amount.

Sounds like you are talking retirement, if you don't have an IRA open start there, either Roth or Traditional depending on income.

Tmac47_sl said:

Is there a camp on which is better for younger people to invest in?

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You probably want a Roth IRA.

This means you don't get a tax deduction when you make the contribution, but your withdrawals in retirement will be tax free. This makes a lot of sense, since that money will grow for a long time and you're currently (most likely) not in a high tax bracket.

With a regular IRA, you get to deduct your contributions from your income, but you will have to pay taxes when you make withdrawals in retirement.

So I decided to leave my E-trade account open and use for "shits and giggles / gambling" and decided to open one of the Vanguard accounts listed above. I have more then a grand to start off with (closer to 5) and got to this point on the Roth IRA.


What exactly does expense ratio mean and how does it affect me when I am doing something similar to what Tmac is doing and having $100 ish a month tossed into it after initial start up? 31 year old bartender here who will graduate in two weeks with my Accounting degree and already have a job lined up (for background).

Tmac47_sl said:

Is there any sort of precedent for a company matching the amount you put into personal investments? I'm familiar with 401k matching, but my work is different and there's opportunity for haggling on stuff like this and since I can't write it off myself, I wonder if the company would be able to write it off.

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I think employers usually provide matching only for the 401(k) plans they sponsor (where I imagine they get a cut from the management fee), so if they don't do that, you're mostly out of luck. It's actually no different from them paying you an extra $x and you transferring that $x to the 401(k) yourself. In both cases it's not taxable income. They don't get to write it off any different... in both cases it's simply a labor expense to them.

You want to make contributions with after-tax money, though, because your tax rate (presumably) is low at this point. So a Roth IRA is actually better than a 401(k) - it just comes with rather low limits. Nothing you have to worry about with $100/month, but it will be an issue when you ramp up your saving. It goes without saying that maxing your Roth IRA alone is not going to pay for retirement.

Fedor_sl said:

Amazon - The Bogleheads' Guide to Investing

read that

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Good book. One caution: last time I looked at it, their rates of return calculation did NOT account for inflation. I think they address it somewhere, but it's not incorporated into their retirement savings projections. So your actual savings need to be significantly higher than what they predict. 8% real rate of return just isn't going to happen, period. (The average real rate of return over a 35 year period is closer to 6% - and that two percentage point makes a big difference over the years.)

Wuyley_sl said:

What exactly does expense ratio mean and how does it affect me when I am doing something similar to what Tmac is doing and having $100 ish a month tossed into it after initial start up?

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This is the annual cut the fund takes from your investments. So if you invest $10,000 and the expense rate is 0.3%, you pay $30/year in fees. Doesn't sound like much, but by the time you retire you should probably have over a million in savings, at which point 0.3% is $3k. (Also keep in mind that it's annual... so over 30 years, that's going to add up to a chunk of money.)

Vanguard's expense ratios are very low, so it's generally not a big deal. With actively managed funds, you can easily break 1%, which in the above case at retirement would be $10k/year in fees.

http://www.investopedia.com/terms/e/...#axzz2Eo9MaS5S

Basically it's how much the fund costs to run. With mutual funds and ETF's you don't pay that out of pocket or anything, it just comes out of the fund's returns. So for example, if say the S&P 500 went up by 10% one year, and you owned a mutual fund or ETF that tracked the index with an expense ratio of 0.25%, the value of your funds would go up by about 9.75% (ignoring dividends, whether paid out cash or automatically reinvested). Also, even if the fund's index had zero return or a negative one, that expense ratio would further impact your investments.

In general you want to get the lowest expense ratios possible, as they'll just be a drag on your returns. Within reason anyways. Obviously 1% is way better than 2%, and 0.2% is better still. But the difference even over the long term between 0.2% and 0.15% is going to be pretty negligible.

Eomer_sl said:

But the difference even over the long term between 0.2% and 0.15% is going to be pretty negligible.

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Depends on your time horizon. Let's say you're 30 and you get a real rate of return of 6.5% (geometric mean over the period, expected with 100% stocks - as you rebalance, and of course you must do that, your actual return is going to be less than that). After fees, you're comparing 6.3% vs. 6.35% - doesn't sound like much.
You invest $500/month for 35 years, then withdraw over 30 years so you have nothing left by the end. Both deposits and withdrawals are adjusted for inflation.

With 0.20% management fee:
- when you retire, you will have $763,627.18
- that leads to a monthly payment of $4,726.64

With 0.15% management fee:
- when you retire, you will have $772,577.85 (+$9,000)
- that leads to a monthly payment of $4,807.26

80 bucks a month isn't a whole lot, but it's also nothing to dismiss entirely. Over 30 years, that's $28,800 less in payouts - in today's dollars. That should pay for a very nice trip around the world. Given that these are both rock bottom expense ratios...

With 0.50% management fee (this is the upper end for Vanguard, but it's still very low in a broad comparison where 1% is considered quite low):
- when you retire, you will have $712,355.15
- that leads to a monthly payment of $4,270.93

Now we're talking $530 a month for 30 years - $190,800 lower payouts over retirement. Adds up for sure.

Bottom line: expense ratios matter.

I also ran the numbers with 2% expense ratio and over the 30 years, you miss out on a little over $800k. Pretty decent house just about anywhere in the country that someone is getting for your money.


edit: also, just to reinforce the notion of inflation. All of the above is with real numbers. So you increase every deposit you make by the rate of inflation (geometric mean over a 35 year period is 4.13%) and the last deposit you make is about $1,700 in nominal dollars. Money will be worth less than a third of what it is today by the time you start to retire. So when you look at retirement savings books, I have yet to see one that really does this adjustment consciously. Otherwise, if you think a $4,800 nominal payment sounds cool - by the time of your last withdrawal 65 years from now, that's worth $345. Good luck living on that.

Tmac47_sl said:

Is there a camp on which is better for younger people to invest in?

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With a 401k, the money is deducted from your paycheck and you are not taxed on the amount you contribute. So, if you make 50k a year and contribute 6k, you are taxed as if you make 44k. You pay long-term capital gains tax when you withdraw it at retirement. There can be very substantial penalties for early withdrawal.

With a Roth IRA, you don't get the tax break up front, but you don't pay tax on the back end and you can usually withdraw it at anytime without penalty.

Most people say start a 401k, max your contribution. Then do a Roth and max it. I personally prefer the Roth because of my tax situation and I like the flexibility

Soriak_sl said:

Bottom line: expense ratios matter.

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Yeah, absolutely. I was just saying that once you're down to Vanguard-type MER's worrying about a couple hundredths of a percent difference is likely focusing on the wrong things. Transaction costs, proper allocation, rebalancing, taxes and the like are all going to have a far larger impact on portfolio value than a tiny difference in MER.

One important think to mention, if your employer offers 401k matching make DAMN sure you contribute to the max of whatever that amount is. It is free money.