Last week, a few fellow bloggers shared their investment portfolios as an answer to a money question asked by SVB @ The Digerati Life (part 1 and part 2). Initially, I was reluctant to share my story, but on second thoughts I decided to let the cat out of the bag - just because it was much different than what other bloggers had shared.
Before you continue reading the story, I want to mention what “Under Accumulator of Wealth (UAW)” means. According to “The Millionaire Next Door” by Stanley and Danko:
All too often high-income producing UAWs spend countless hours studying the market - but not the stock market. They can tell you the names of the top auto dealers, but not the top investment advisors. They can tell you how to shop and spend. But they can’t tell you how to invest. They the styles, prices, and availability at various car dealers. But they know little or nothing about the various values of equity market offerings.
Now, read my story in light of these characteristics of UAWs (and in light of the other things I have written on this blog earlier).
My current portfolio will make some investing enthusiasts sick to the gut. Here is how it looks like:
Cash: 98%
Stocks (ETFs): 2%There are various reasons why it’s that way. The main reason is - I am not very *educated* when it comes to the stock market. Right now, I am in the process of learning more about how and where to invest so that my tax/fees burden is minimized and returns are maximized - but not yet quite there. In my opinion, people like me should not throw money in the stock market unless they know what they are doing (it’s like trying to win at poker without understanding how to play). So, as long as I am not comfortable with other investment options, the portfolio will sort of maintain its status quo. Also - for reasons that I will not elaborate - the cash is earning tax exempt interest at present, so it’s not that bad.
The other thing that has encouraged us to keep more cash is some anticipated uncertainty in our personal lives in near future. We foresee some specific events, in the coming year or two, which may require urgent and drastic financial actions on our part. Stock market presents too much risk (in our personal situation) in this short time span.
Does that sound cautious to you? or does it sound more like procrastination? 
I think the UAW description in The Millionaire Next Door really got me. I think I am starting to show all those characteristics - not good; and if that is the case, the story sounds like more procrastination and less *caution*.
The only bright part is that I do have good intentions with investments in future. Towards that, I am trying to learn something new about how to invest sensibly. Progress is slow, but hopefully I will get there. Here is a rough plan:
However, as we reduce the uncertainties in time to come, I am planning for a portfolio that may roughly look like this:
Gold (this might happen very soon): 5%
Cash: 15%
US Stocks (mostly in the form of ETFs): 40%
Foreign Stocks: 30%
Bonds (on experimental basis - I just want to try these things out): 10%My primary concern would be to get decent after-tax returns with sufficient stability and minimum headache (continuous market research). I don’t think I will be in it to “beat the market†- I just want to be as wealthy as I need to be.
Now, these thoughts are my *current* thoughts - when I am still a graduate student with no real *job*. I am sure my outlook will change after I graduate and start on a real job (possibly with a good salary). For now, I am just happy to have zero student loans and some positive net worth.
Do you think I am headed in the right direction with this?
I am not sure, but perhaps UAWs (like me) make *cautious* excuses to mask procrastination. If you have been (or are) in a similar boat we would like to hear your story.
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You may want to check out index funds. If you don’t feel any need to “beat the street”, and why should you since the street does so well in the long run, index funds mimic the S & P or the Dow. In fact, there are now many different types of index funds - including foreign ones, although the S & P trackers are my favorites. Trent, over at TheSimpleDollar.com, often refers to the Vanguard 500 (I think), which has an overall average return rate of 12% since they started back in the 70’s (I think).
When I finally have enough to put away for the long term, that is the direction I’m heading in. I just want something low maintenance, stable with a good enough return to beat inflation and index funds fit the bill nicely. I think I’ll probably have a little bit of a variety of them, and also have some bonds that I can turn to in years that the market is down. But I think you’re wise to hang onto your cash until you are sure you won’t need it for at least 7 years. Good luck.
Well how much money do you have? I made my first mutual fund investment when my net worth reached $17k. I had started contributing to a retirement fund (involuntary) two months before that. I was in my third academic position after a post-doc and a visiting prof position. I was 32 years old. This was just over 10 years ago. Before that I was either paying off debt or saving cash only. So unless you have accumulated much more than that I wouldn’t worry about the allocation yet.
Great to hear you’re getting into stocks, Golbguru. I’ll be getting into them myself in the next 6 months or so. Right now I’m just trying to read up (and use audio books) on them as much as possible.
In the meantime, I use http://www.simustock.com (a stock simulation program) to apply my knowledge in a near real environment. One of my simulation accounts has yielded an almost 70% simu-return.
Starting Balance $2,000.00
Cash Balance $0.59
Stock Balance $3,392.42
Liquidation ( 69.65%) $3,393.01
-Wilks
If you get into US stocks give a look at Vanguard Total Market Index (symbol:VTI). You don’t really need to know much except that you are investing in a lot of companies, and paying very little fees (as long as you can keep your brokerage commission down). For foreign exposure look at iShares MSCI EAFE Index Fund (symbol:EFA). With just these two purchases, you should have a strong stock foundation.
I think you made the wise choice. If you are not educated in the market or other investment vehicles, you should not be investing in them. Second, you alluded to it in the comments: risk. risk is an individual thing. if you feel your risk level is low, then you should invest accordingly. all this may be booed by plenty of people out there, but you have to do what is going to be comfortable for you and within your area of knowledge.
this doesn’t mean you can’t learn more and then switch when you do.
Don’t worry about what you are or are not invested in right now.
Read about investing. Read about the historical returns, what created those returns, and what you can learn. Most bloggers have a favorite book area, just check some out of the library.
I like Random Walk Down Wall Street myself. I promise, it’s really not that boring.
You write so much about money, you owe it to yourself! =)
First time commenting. My two cents - If you say you don’t know much about the equity market/investing, maybe you should read about more it before you get into it.
I am not saying you shouldn’t invest in the market, but you don’t want to get into something that you don’t understand.
If you want to ever have enough to retire you simply MUST get into something with some growth potential. That pretty much means stocks or real estate — and real estate is a little on the speculative side at the moment.
The problem is that inflation will devour your returns off of bonds or other interest-bearing investments. You’ll never save enough to retire that way.
Stocks have proven very good long-term investments. An index fund gives you low fees AND high diversification, so I would start there. For even more diversification, look towards ETFs that allow you to invest in foreign index funds. For example, I have a small (very small currently) amount invested in the Vanguard European Stock Index Fund (ETF shares). I think Europe is a nice stable market (not going to give stellar returns, not going to crash), and it gives me a nice buffer against a falling US dollar.
And more that anything else, you need to be taking advantage of your 401K or 403B if offered by your employer. Many employers offer matching funds for the money you put in your account AND you are investing PRE-TAX dollars. If you aren’t doing that and you are eligible you are passing up free money.
If you are going to be investing pre-tax, look at using an automatic investing program such as that from Sharebuilder (recommended to me by my credit union). It’s a good way to build a substantial investment portfolio over time at a reasonable cost.
Finally, remember that the power of compound interest works when you give it TIME to do so. Start early, finish rich!
All: Thanks for the feedback guys. I am sure to accelerate my learning process pretty soon. Hopefully with some concrete goals (and some fee-free investing options) I would see some stock investment after a few months (as uncertainties get ironed out). Will come back to your comments whenever I loose focus.
You said you anticipate events that may require urgent and drastic financial action on your part.
Enough said.
You’re doing the right thing. If that’s your situation, you want your money in cash. Period.
It’s never to early to learn about investing. First, you want to figure out if you have the interest and mental fortitude to be a true capital allocator. If not, low cost index funds are the way to go. Even Warren Buffett has recommended that.
If you do have the interest, I recommend that you start reading all the books you can about stock investing and feel free to stop by Fat Pitch Financials. We are actually working through a stock valuation course right now on the site that you might want to check out.
Time is wasting so you want to get started as soon as you have enough cash. Compounding is one of the most powerful forces in the universe, but it requires a lot of time. Good luck.
In today’s low inflation enviroment, cash is a reasonable investment if it is in a high yielding account. Don’t worry about missing a year or two of the stock market while you are getting educated on investing. Just don’t miss 30 years
I don’t think cash is a bad choice at all right now. Neither is gold. Some of those coins are pretty to look at as well.
Check out this link: this link. An 8 year old makes a simple, lazy portfolio that will average or beat the market. How? Owning the entire domestic and foreign markets. Low expense ratios + holding everything = you win in the end without a lot of work.
I get tired of youngsters falling into “paralysis by analysis” and losing out on the most powerful force they have going for them - time.
You don’t need to understand “the stock market”. Here’s what you need to know:
1. A share of stock is a piece of ownership of a company and therefore it’s future earnings.
2. A mutual fund is me and you putting our money into a pot (mutually funding the pot) and allowing managers to buy shares of a large number of companies which they pick either because they are part of a particular sub-sector of the economy (like the Standard and Poors 500) or because the research staff of the mutual fund believes them to be good companys.
3. This is diversification - or spreading around - of our money which reduces risk.
4. Over the last 75+ years, the stock market has averaged just shy of 12% annual rate of return. In something like 95% of the possible rolling 5-year periods the stock market has made money. 100% of the rolling 10-year periods have made money. So figure out how much your possible event is going to cost, set that aside, then:
5. Contribute to any available 401k plan up to the amount matched by the company and invest that money in good mutual funds. Then max out contributions to a Roth IRA. “401k”; “Roth IRA”; “SEPP”; and “Deductable IRA” are simply the rules or tax treatment for your investment - not the investment itself.
I just stated all this stuff you already know to get you off your dead boo-tocks.
Do it. Do it now. Stop dithering worrying that you might not be as conversant in stock jargon as people you have lunch with. Screw ‘em. They’re broke. Set it up, make it run automatically, don’t screw with it as you get “smarter”. If you’re actually getting smarter, you’ll realize it’s the simple stuff that actually works.
I envy your present allocation. I’m 92% cash / 8% stocks myself.
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