Pretend you are a financial advisor...

S

Stuck_At_Work

1,000+ Posts
My friend came to me for advice on investing. I'm curious what y'all would suggest.

He is 28.
He recently bought a house (20% down, 5.8% APR on the rest).
He has paid off all his debt (besides his mortgage).
He owns his car out right.
He saves 12% of his income in his company 401k.
He has saved 10k as an emergency fund.

So... he has an additional 15k sitting in a savings account that he wants to invest. He doesn't want to day-trade. He wants to invest the money and re-allocate it every 6 to 12 months.

I suggested opening a Vangaurd or TRPrice account. Purchase three funds: US Entire Market Index, Rest of World Index, and Bonds Index. As he is 28, I suggested investing the money 60%, 25%, 15% respectively in those three funds.
 
for 28, he's so far ahead of the game it's not even funny.

does this kid have any fun at all?

as for your strategy, sounds fine. i wouldn't rush to purchase the domestic securities. given the current economic condition and the uncertainty of the election, the sidelines may be the best place to be for the next 10-12 months.

sure, some people will get it right, and if he just wants to plunk the money in and leave it there for a long time he's probably fine, but personally i think the best value has yet to come.
 
Since this seemed like a good thread..and not to hijack yours

I have $20K in an online savings account for emergency funds and in case I just want to walk out of my job at any point in time. I was planning on making sure I had 30K before I start allocating money elsewhere. Is the recommended 3 or 6 months for emergency fund?
 
there is no magic amount for an emergency fund. i wouldn't have less than 3, but it's up to you and your penchant for risk if you want to put away more than that. if you have a family i would have more than that, simply because i could eat crackers for a month if i had to, but i'd never expect my wife and kids (future wife and kids, that is) to do that.

if you're young, 3 months is probably fine, and much more than most others have put away. you can always go get SOME job if you're in really dire straits.
 
CFPs are given an actual formula for calculating an emergency fund. In short, you should have enough saved to pay off your non-discretionary expenses for three to six months. I always suggest 6 months. In fact, I am personally most comfortable with a 9 month cushion (and I have no dependants). It is really what you feel the most comfortable with.
 
If he's 28 and doesn't need the money short term, he should go 100% equities. I realize that this might not be the best time to go get in, but trying to time the market is just as risky.
 
Since your friend is pretty young, wouldn't it be in his best interest to choose a handful of stocks that may be devalued right now, but which he likes for the long run. Being as young as he is he can survive if he loses a lot of it, so why not take more risks? There are a lot of beaten down stocks right now, and he has an opportunity to get them at a bargain price and possible make 50-80-100%+ profits within the year. Sure the chances of that happening are slim, but again at this point in his life he can take some risks.

Now granted I don't know much of anything about investing, so take my "Advice" with that in mind...
 
I suggest he uses dollar cost averaging to enter some of the index funds you suggested.

Don't just dump the 15K in one day. Come up with a comfortable $$$ amount that he can keep investing each month, average it out with the 15K and slowly start growing his portfolio.

At age 28, I don't like the Bonds Index. I'd go Large cap index US, Small cap index US, and large cap international index. 100% stocks.
 
Great advice guys. I like the dollar cost averaging suggestion. I'll also tell him to avoid bonds for now.

I'll probably suggest he set up a direct withdrawl from his savings account monthly for the next year - maybe $1000 / $300 monthly into the Total US and Rest-of-World Indexes respectively...
 
assumptions... you are serious in the 'upgrade' comment ... and his friend didn't get to this point by being overly concerned with 'upgrading' just for the hell of it
 
Diversify, diversify, diversify!

Pick some energy stocks, tech stocks, blue chips, consumer stocks, REITs, etc.

Might want to wait a month or two until things settle down. Could be some good buying opportunities.
 
Here are some follow up questions for y'all...

1) A couple of y'all have suggested focusing foreign allocations on just Large-Cap foreign equities. Why not just the entire Rest of World? Too much risk in foreign small caps?

2) When I mean ROW, I mean ROW. Are y'all focusing your foregin investments in certain markets: EU, Asia, Emerging Countries (China, India, Brazil, etc.)?

3) I did the math a while back, and it appeared to me that investing in a Roth is only wise once you have maxed out your 401k. Is my math/logic incorrect?

4) You guys have suggested repeatedly that good buying opportunities will present themselves in the near future. Isn't market timing generally pretty risky?

5) I understand the concept of a REIT, but don't know jack about how to invest in them. Are there REIT indexes and are they worth it in y'alls opinion.
 
1) A couple of y'all have suggested focusing foreign allocations on just Large-Cap foreign equities. Why not just the entire Rest of World? Too much risk in foreign small caps?
-Large cap ROW is "risky" enough... small caps can be all over the place. (Look at FLATX over the past 5 years, these are the largest of the large in Latin America, still great growth).

2) When I mean ROW, I mean ROW. Are y'all focusing your foregin investments in certain markets: EU, Asia, Emerging Countries (China, India, Brazil, etc.)?
I have a true ROW through Fidelity (FDIVX), and a Latin America (FLATX) . A friend of mine has had great success with China funds... I just don't really trust them yet...

3) I did the math a while back, and it appeared to me that investing in a Roth is only wise once you have maxed out your 401k. Is my math/logic incorrect?
-Per my financial adviser, you might be incorrect...
1st- maximize your employers match... it's free money. Don't put more money into your 401K than you have to before you:
2nd- max out your Roth. eventually, you won't be able to contribute to it anymore (if you are single and make more than $95K, you can't max your Roth anymore). Also, the Roth grows tax free forever, and unless you think taxes will be lower in the future, you better pay them while they are cheap.
3rd- once you max out your Roth, you then try to max out the rest of your 401k.

4) You guys have suggested repeatedly that good buying opportunities will present themselves in the near future. Isn't market timing generally pretty risky?
-I don't believe in market timing. Sometimes I get it right, sometimes I get it wrong, I've stopped trying. My brother is successful at day-trading, so he does do a lot of "timing"... BUT he spends hours on this stuff. I don't have the time or energy for that, so I just always take the long term approach and use dollar-cost-averaging.

5) I understand the concept of a REIT, but don't know jack about how to invest in them. Are there REIT indexes and are they worth it in y'alls opinion.
REITs did great when real-estate was growing and growing. It's just another way to diversify. In the long run, we should see them grow again, but for now, a lot of REITs have really been hit hard by the housing crunch... and many believe the worst is yet to come...
 
REITs have to distribute 90+% of their "earnings" to maintain REIT status. They're basically a bond (a fixed set of earnings from RE properties). They give you the ability to ride the real estate market without purchasing a house, apartment complex, office building on your own.

REITs generally have specializations...some are focused on office, some on retail, some on resorts, etc.

I would strongly suggest maxing out the Roth IRA while you can. After you reach a certain income, you're SOL. And definitely max out the 401K, especially if your employer matches.
 
100% equites, dollar cost average into 60% foreign 40% domestic, rebalance in 2 years, in other words wait until the recession ends in the U.S. to re-balance. There is a ton of value in both U.S. and foreign funds, and the bottom hasn't been reached yet.
 
ahhh to be 28 again--
looking back 30 years I'd say besides a good interntl mutual fund and a good u.s fund, i would add a couple of stocks and forget about them
maybe something in
energy ( nu star is my current fav) altough exxon and something in alternative might be interesting
tech-ibm, or apple or something new and way too complicated for an old fart
medical-maybe a pharm
big cap multi like ge
Start with a small investment in the the picks and add to them over time- and reinvest the div
check out DRIPS
 
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