Wednesday, February 22, 2012

Get Started Investing

Many people consider investing their money, but they just do not know where to begin. One option is to go to a financial planner and earn a modest return, at what many times is a fairly high price.  Another option many people choose is to do nothing at all.  Between these two, obviously you should choose the first.  However, there is another way.  Index fund investing is easy, efficient, effective, and will cost you a fraction of what a professional would charge.  There are a few things to consider before you begin to put together your asset mix.  First, what kind of time frame are you considering?  You will need a minimum of five years to make my portfolio mix recommendation work for you (a minimum of 5 years).  You will also need to ask yourself how risk adverse you are.  If you are not sure how risk adverse you are, there are online questionnaires to help you figure this out. 

Next, we will determine how you should allocate your savings between stocks, bonds, and cash. 

For a normal amount of risk
·         Take (100-Your age).  The remaining number is the percentage of your savings you should allocate to stocks. 
·         Take (Your age/2).  This percentage of your savings goes into a bond index fund and an interest bearing checking account. 
For more risk—A larger return, or a larger loss
·         Take [{100-(Your age x .5)}/2].  This number is the percentage of your savings you should allocate toward both a foreign stock index fund and an American stock index fund.  You are just cutting your age in half.
·         Take (The remaining percentage x 60%).  This is the percentage you should allocate toward a bond index fund. 
·         The remaining percentage should be allocated toward cash in the form of an interest bearing checking account. 
For less risk—A smaller return
·         Take (100-[Your age x 1.5]).  This is the percentage you should allocate toward an American stock index fund.  For some older folks this number will be negative, in which case you should put no money in the stock market.  You are making yourself older by half of your life.
·         Take [(100-1st %) x 30%].  This percentage should go into a bond index fund. 
·         The remaining percentage should go into an interest bearing checking account. 

*Now let’s do an example of all three.* 
--Fred is a 40 year old who has $50,000 to invest, but does not know where to start.  Fred is investing for at least 25 years. Fred will use four investing mediums to achieve his financial goals:
1.      Vanguard Total Stock Market Index Fund (VTSMX): 10 year avg. return of 5.49%
2.      Vanguard Total Bond Market Index Fund (VBMFX): 10 year avg. return of 3.75%
3.      Bank of Bolivar Ultimate Free Checking Account: 2.97% return when qualifications are met.
4.      Vanguard Total International Stock Index Fund (VGTSX): 10 year avg. return of 5.86%

Example 1: Normal Risk
·         (100-40)=60%
·         60% x $50,000 = $30,000 in Vanguard Total Stock Index Fund (VTSMX)
·         (40%/2) = 20%
·         20% x $50,000= $10,000 in Vanguard Total Bond Market Index Fund (VBMFX)
·         20% x $50,000= $10,000 in Bank of Bolivar Ultimate Free Checking account
Example 2: More Risk
·         {[100-(40 x .5)]/2}= 40%
·         [(40% x $50,000)/2] = $20,000 in Vanguard Total Stock Index Fund (VTSMX)
·         $20,000 in Vanguard Total International Stock Index Fund (VGTSX)
·         (100%-80%)=20%, (20%x 60%)= 12% or ($50,000 x 12%)= $6000 into Vanguard Total Bond Market Index Fund (VBMFX)
·         Lastly, (8% x $50,000)= $4,000 in Bank of Bolivar Ultimate Free Checking account
Example 3: Less Risk
·         (100-[40 x 1.5])= 40%, or ($50,000 x 40%)= $20,000 in Vanguard Total Stock Index Fund (VTSMX).
·         [(100-40) x 30%]= 18%, or ($50,000 x 18%)= $9,000 in Vanguard Total Bond Market Index Fund (VBMFX)
·         (100-(40+18))=42%, or ($50,000 x 42%)= $21,000 in Bank of Bolivar Ultimate Free Checking account.

**As you can see, Fred can adjust his portfolio according to the risk he is willing to take and his age.  I chose Vanguard because it offers my favorite index funds and has a very low expense ratio with no up-front load fee.  Before you consider investing you should pay off any credit card or high interest rate debt.  You should also first set up an emergency fund with 3 to 6 months expenses.  I know that many people do not have $50,000 setting around to invest, this was just an example.  If you are starting small, save up $3,000 in your Bank of Bolivar account and open the Vanguard Total Bond Market Index Fund (VBMFX).  Save $3,000 more and open the Vanguard Total Stock Index Fund (VTSMX).  Then begin the process of investing a fixed amount of money every month and allocating it the way we discussed above.  This type of investing is not for a short-term gain, but should be done over a long period of time. I first read about index fund investing in Money Made Simple, which would be beneficial to read for more information. You will be well-diversified and will earn a modest return on your savings. If you do want to seek financial advice, I would suggest visiting Bank of Bolivar’s financial services offered through LPL.  The representative in Bolivar is Mike Campbell.  I hope this is helpful. I am not a professional financial planner and my ideas should be taken with a grain (or lump) of salt, but I do enjoy reading and writing about the subject.  


2 comments:

  1. When are you going to start doing financial planning so I can just hire you? Haha.

    ReplyDelete
  2. I've always heard you were supposed to "Talk to Chuck." So I guess we need to talk to you. ha ha

    ReplyDelete