beergut
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Post by beergut on Jul 23, 2017 12:35:05 GMT -5
invest conservatively early on?
If you're talking to someone who has exactly zero experience in investing, might it be better to tell them to go into conservative investments early on as they build their nest egg?
I know conventional wisdom says to put it all in the market, because if they're young they have a long time frame to make up for any mistakes, and the longer you're invested in stocks, the more dividends and growth you can earn. I completely understand that mindset.
However, if a newbie investor puts everything into stocks and suffers an early loss in a downturn, that can turn them off from investing forever.
If they invest conservatively as they build their savings, they will see small gains, but they will see gains, and are unlikely to ever see a loss in their investment.
We all know lump-sum investing is the way to go, so advising someone to save and invest conservatively until they've built up a solid nest egg (a year's salary? two years? five years?) can be sound advice.
The other advantage to taking a conservative approach early on is that it gives the newbie time to do research and learn before they jump in with both feet, as opposing to jumping in and learning from experience.
Obviously, you have to take risk tolerance into consideration, but telling someone to go conservative early on may be the way to go.
Does anyone know someone who started out conservatively (whether by choice or because they was the only option available), and ended up going big into the market later when they became more comfortable with investing?
I was reminded of this when watching the video on Earl Crawley, where he started with savings stamps, then savings bonds, then went to mutual funds, then went to individual stocks to build his fortune. He slowly went from conservative to aggressive, which might be the way to go for people new to investing.
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Blonde Granny
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Post by Blonde Granny on Jul 23, 2017 12:52:44 GMT -5
If someone has zero experience or knowledge about the stock market and other investment opportunities, the best thing I would suggest is to take a couple of classes at the nearest community college.
In my experience, a newbie like that sets him/herself up for a smooth talking insurance or annuity salesman to take them to the cleaners by getting them to invest their money in inappropriate investment vehicles. Knowledge is the key to good investing in my opinion....the more you know the best chance of making sound decisions. After all, no one is going to take care of their money as well as they can.
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Deleted
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Post by Deleted on Jul 23, 2017 13:05:04 GMT -5
invest conservatively early on? If you're talking to someone who has exactly zero experience in investing, might it be better to tell them to go into conservative investments early on as they build their nest egg? I know conventional wisdom says to put it all in the market, because if they're young they have a long time frame to make up for any mistakes, and the longer you're invested in stocks, the more dividends and growth you can earn. I completely understand that mindset. However, if a newbie investor puts everything into stocks and suffers an early loss in a downturn, that can turn them off from investing forever. If they invest conservatively as they build their savings, they will see small gains, but they will see gains, and are unlikely to ever see a loss in their investment. We all know lump-sum investing is the way to go, so advising someone to save and invest conservatively until they've built up a solid nest egg (a year's salary? two years? five years?) can be sound advice.The other advantage to taking a conservative approach early on is that it gives the newbie time to do research and learn before they jump in with both feet, as opposing to jumping in and learning from experience. Obviously, you have to take risk tolerance into consideration, but telling someone to go conservative early on may be the way to go. Does anyone know someone who started out conservatively (whether by choice or because they was the only option available), and ended up going big into the market later when they became more comfortable with investing? I was reminded of this when watching the video on Earl Crawley, where he started with savings stamps, then savings bonds, then went to mutual funds, then went to individual stocks to build his fortune. He slowly went from conservative to aggressive, which might be the way to go for people new to investing. I'm going to take issue with the part that is bolded. We all "know" that dollar cost averaging doesn't give you a significant edge overall, but my understanding is that is true when you are talking about a sum of money that has already accumulated. Are you suggesting, for example, that I should invest in my Roth IRA at the end of the year rather than monthly? Like your beginning investor, I don't have the whole sum at the beginning. My advice to this beginning investor would depend on the purpose of investing. If it is for retirement, I would suggest they start a Vanguard guard fund based on their projected retirement date (or later). Help them to understand that there will be highs and lows, and it is best, particularly as you are beginning, to set it and forget it. If it is for investment savings, I would suggest an index fund. I'd start the same discussion on highs and lows. I don't think losing money will scare them as badly as you do . . . unless they have an immediate need for the money. Then they will be thinking, "OMG, that is the downpayment on our house!" In cases like that, they have no business investing. Isn't the standard not to put it in the market if you need it in the next five years or something like that? By the way, I am still a beginning investor. The biggest service someone could have given me was to stay away from banks and firms like Merrill Lynch. I wish I had known about Vanguard from the beginning. ETA: I will call for Uncle phil5185, who certainly knows more about investing than most of us combined.
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Post by The Walk of the Penguin Mich on Jul 23, 2017 13:22:31 GMT -5
When I got my pension fund, I knew NOTHING about investing. So when I got a nice big check from my pension, I had to park it somewhere. At the time, TIAA was paying out about 5% so I parked it there until I could read up on investing. It was about this time that I went on the MSN money boards and started reading as part of my education. I gave myself about a year to figure this out because I would also be eligible to enroll in my 403b, and would need to figure out how to allocate that money too.
I started moving my IRA out of the TIAA fund into other investments. Half I put into a target fund, and the other half I invested in stocks, growth, blue chip, real estate, international and bonds. When I became eligible for my 403b, invested a combination of funds listed before (except the target fund). The original percentages are probably not anywhere near close to what they were when I invested and I know I need to rebalance.
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tallguy
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Post by tallguy on Jul 23, 2017 13:45:46 GMT -5
invest conservatively early on? If you're talking to someone who has exactly zero experience in investing, might it be better to tell them to go into conservative investments early on as they build their nest egg? I know conventional wisdom says to put it all in the market, because if they're young they have a long time frame to make up for any mistakes, and the longer you're invested in stocks, the more dividends and growth you can earn. I completely understand that mindset. However, if a newbie investor puts everything into stocks and suffers an early loss in a downturn, that can turn them off from investing forever. If they invest conservatively as they build their savings, they will see small gains, but they will see gains, and are unlikely to ever see a loss in their investment. I can only speak to my own experience, and even as an inexperienced investor I was still blessed with a logical mind and a decent understanding of money, but...no, not for me. My first market investments were in January, 1987. Nine months later, it went down 22% in one day. That certainly qualifies as an early and significant loss. There was much wailing and gnashing of teeth, as the phrase goes. My immediate takeaway from the experience was that the only people who truly lost money were those who sold and locked in their losses. For everybody else, time would allow them to recover as long as they stayed invested. I have been investing in every one of those thirty years since, and have never taken a dime out of the market. I certainly don't consider myself average, and it is possible that an average person might react differently than I did, but I would never tell someone to adopt a sub-optimal strategy. I would rather explain what makes the alternative a better one. And in fact, I recently enlisted my financial guy to help convince my son that one of his choices was too conservative for someone with forty years left to go. it is far better to give people the best information you can so that they can make the best choices for themselves.
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beergut
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Post by beergut on Jul 23, 2017 14:53:00 GMT -5
invest conservatively early on? If you're talking to someone who has exactly zero experience in investing, might it be better to tell them to go into conservative investments early on as they build their nest egg? I know conventional wisdom says to put it all in the market, because if they're young they have a long time frame to make up for any mistakes, and the longer you're invested in stocks, the more dividends and growth you can earn. I completely understand that mindset. However, if a newbie investor puts everything into stocks and suffers an early loss in a downturn, that can turn them off from investing forever. If they invest conservatively as they build their savings, they will see small gains, but they will see gains, and are unlikely to ever see a loss in their investment. We all know lump-sum investing is the way to go, so advising someone to save and invest conservatively until they've built up a solid nest egg (a year's salary? two years? five years?) can be sound advice.The other advantage to taking a conservative approach early on is that it gives the newbie time to do research and learn before they jump in with both feet, as opposing to jumping in and learning from experience. Obviously, you have to take risk tolerance into consideration, but telling someone to go conservative early on may be the way to go. Does anyone know someone who started out conservatively (whether by choice or because they was the only option available), and ended up going big into the market later when they became more comfortable with investing? I was reminded of this when watching the video on Earl Crawley, where he started with savings stamps, then savings bonds, then went to mutual funds, then went to individual stocks to build his fortune. He slowly went from conservative to aggressive, which might be the way to go for people new to investing. I'm going to take issue with the part that is bolded. We all "know" that dollar cost averaging doesn't give you a significant edge overall, but my understanding is that is true when you are talking about a sum of money that has already accumulated. Are you suggesting, for example, that I should invest in my Roth IRA at the end of the year rather than monthly? Like your beginning investor, I don't have the whole sum at the beginning. My advice to this beginning investor would depend on the purpose of investing. If it is for retirement, I would suggest they start a Vanguard guard fund based on their projected retirement date (or later). Help them to understand that there will be highs and lows, and it is best, particularly as you are beginning, to set it and forget it. If it is for investment savings, I would suggest an index fund. I'd start the same discussion on highs and lows. I don't think losing money will scare them as badly as you do . . . unless they have an immediate need for the money. Then they will be thinking, "OMG, that is the downpayment on our house!" In cases like that, they have no business investing. Isn't the standard not to put it in the market if you need it in the next five years or something like that? By the way, I am still a beginning investor. The biggest service someone could have given me was to stay away from banks and firms like Merrill Lynch. I wish I had known about Vanguard from the beginning. ETA: I will call for Uncle phil5185 , who certainly knows more about investing than most of us combined. No, when I talk about lump-sum investing, I'm talking about putting all of the money you have to invest in at one time in a lump sum, instead of trying to spread it out over a period of time in order to 'time the market' or to assuage concerns about a market correction.
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beergut
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Post by beergut on Jul 23, 2017 14:59:22 GMT -5
If someone has zero experience or knowledge about the stock market and other investment opportunities, the best thing I would suggest is to take a couple of classes at the nearest community college. In my experience, a newbie like that sets him/herself up for a smooth talking insurance or annuity salesman to take them to the cleaners by getting them to invest their money in inappropriate investment vehicles. Knowledge is the key to good investing in my opinion....the more you know the best chance of making sound decisions. After all, no one is going to take care of their money as well as they can. I'd recommend they read several books before I'd recommend a community college class on finance. I've been shocked at the ignorance of some allegedly-educated professors at local colleges, especially when it comes to finance and investing. I don't think the issue of insurance or annuity salesmen is more anecdotal than a widespread problem, simply because if you rip them off, you lose them as a customer.
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Deleted
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Post by Deleted on Jul 23, 2017 14:59:38 GMT -5
No, when I talk about lump-sum investing, I'm talking about putting all of the money you have to invest in at one time in a lump sum, instead of trying to spread it out over a period of time in order to 'time the market' or to assuage concerns about a market correction. Yes, dollar cost averaging. I know the terms. But you were suggesting that the inexperienced investor would do better to save up the lump-sum and then invest rather than investing, say, monthly as this money becomes available. Isn't it better to go ahead and invest rather than wait, assuming this inexperienced investor can meet the minimum?
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beergut
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Post by beergut on Jul 23, 2017 15:24:08 GMT -5
No, when I talk about lump-sum investing, I'm talking about putting all of the money you have to invest in at one time in a lump sum, instead of trying to spread it out over a period of time in order to 'time the market' or to assuage concerns about a market correction. Yes, dollar cost averaging. I know the terms. But you were suggesting that the inexperienced investor would do better to save up the lump-sum and then invest rather than investing, say, monthly as this money becomes available. Isn't it better to go ahead and invest rather than wait, assuming this inexperienced investor can meet the minimum? I'm not talking about DCA, though. I think you and I define dollar cost averaging differently. To me, if you have $100 to invest every month and invest it in the same stocks or index funds every month, that is DCA. What I'm referring to is you have a lump sum of $30k right now. Investing it all at once is lump-sum investing. Investing it $2500 each month to avoid volatility is simply trying to time the market. It is two completely different scenarios. As for your question, that is the purpose of this discussion. I'm trying to find it, but I read an article once on a study done that showed that being conservative early on in investing in order to build up a significant nest egg can be equally beneficial in investing when compared to an aggressive DCA approach.
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Deleted
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Post by Deleted on Jul 23, 2017 15:58:06 GMT -5
Not that it matters, but DCA is the correct term for both situations--investing monthly or taking a lump sum and investing part of it monthly to avoid volatility. Here's the Bogleheads definition: It doesn't really matter, but while our definitions might differ, we were both defining it correctly if partially.
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tallguy
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Post by tallguy on Jul 23, 2017 16:00:40 GMT -5
Yes, dollar cost averaging. I know the terms. But you were suggesting that the inexperienced investor would do better to save up the lump-sum and then invest rather than investing, say, monthly as this money becomes available. Isn't it better to go ahead and invest rather than wait, assuming this inexperienced investor can meet the minimum? I'm not talking about DCA, though. I think you and I define dollar cost averaging differently. To me, if you have $100 to invest every month and invest it in the same stocks or index funds every month, that is DCA. What I'm referring to is you have a lump sum of $30k right now. Investing it all at once is lump-sum investing. Investing it $2500 each month to avoid volatility is simply trying to time the market. It is two completely different scenarios. I fully agree that there is a big difference between the philosophy of dollar-cost-averaging and the effect of dollar-cost-averaging. I seem to differ with you though on the definition. DCA to me is more your $2500 each month when you otherwise have the option of doing a lump-sum. Investing it as you have it become available with your $100 per month is not. The EFFECT of it is DCA, but the PHILOSOPHY of it is not. Biweekly contributions from your paycheck result in DCA over time, but you cannot logically be said to be using the philosophy of DCA. You are simply making the investment as you can. DCA as a strategy is used to decrease risk, and the term can only be logically applied if you are choosing between alternatives. DCA as a result is due to periodic investments over time. Very different things, and two different definitions of the term.
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Deleted
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Post by Deleted on Jul 23, 2017 20:49:05 GMT -5
I advise to put it all in a target date fund and call it a day if it's a tax advantaged account, most newbies won't have after tax money to invest. I have a friend however that was a newbie and got a large windfall and advised him to go with Vanguards Personal Advisor Services and he did. He has over 1 mil invested in him and his daughters accounts.
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hoops902
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Post by hoops902 on Jul 24, 2017 9:02:52 GMT -5
Part of my recommendation to someone inexperienced HAS to relate to both their particular situation and how much they consider me an "expert".
Someone young with little money who will listen to me - Invest aggressively. They likely have very little money to start out with (they aren't throwing in a huge lump sum they've been saving). We're likely talking about some kind of 401k or other paycheck deduction. The individual amounts are likely to be small and easy to ignore for long periods of time. I'd tell them to set things up to automatically go into their investment and ignore it for the next 12 months. Someone older in the same situation gets a bit more conservative based on their age and retirement date (though probably still aggressive if they've gone that long without investing...they probably need serious growth).
Someone a bit older who may have more saved up to invest immediately - Invest a bit more conservatively. These people are probably investing a significant portion of their net worth in one big chunk and are unlikely to follow the advice of ignoring the investment for 12 months. I may also have them DCA (depending on how comfortable they are, we may DCA from the start from the current location, or invest conservatively and DCA into a more aggressive investment over time from the conservative investment).
If you can get someone to start a scheduled investing with each paycheck, it's also just generally easier to get them into something aggressive. They're pretty much always going to see their account balance going up, up, up early on, because any short term losses are offset by the fact they're putting money in constantly. Most people with no investing experience aren't doing much more than looking at the balance. By the time the balance is high enough that regular additions do not offset downturns, they're usually more experienced (and since most people would be spending the money instead of investing, there's always the "yeah it went down lately, but this is all money you would have otherwise never had to begin with").
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