amao20

Hi all,

I have two parts to my questions, so please bear with me:

Part A:
My cousin just had a baby, and I want to help the little one to get a "college" fund set up. Not really looking at a 529 plan, but instead would like to invest $5,000 into a mutual fund(s) and let it sit for 18 years.

The only problem is I have no idea how mutual funds or ETFs work. I have thought about investing that $5K in individual stocks like I do for myself, but I think it'd be better to open an account in my niece's name, that way I'm not tempted to touch the funds. How do I buy a mutual fund? I currently use Scottrade, but can I buy funds directly from the fund manager?

Part B:
So, having said that, is it a good idea for me to invest all (and I mean ALL, I only have enough money in my checking account for 1 month's living expenses, and I have no savings account) my money in individual stocks? I am 24, and know my portfolio is risky and volatile. So far, my picks have turned out well. I am heavily invested in Solar and Natural Gas, and tried to balance that with some undervalued picks in banks, tech, and re-insurance. I would say 70% of my money is high risk, and 30% medium to low risk.

In your opinion, is this too risky? I started investing in February, and have seen my portfolio go down 20% and up 30% in these past few months. I've read a few books that have strategies for portfolio allocation, but I feel they are too generic and do not fit the current market or my profile. What have your experiences been?

Thanks!!

sahtt

Regarding your neice I'd buy a mix of dividend paying large cap stocks and index funds. Anything else is either going to underperform the market or is going to require frequent rebalancing/maintenance. Mutual funds included.
Even if you have the above capabilities I'd suggest not getting that involved.

It sounds like you have little to no money in retirement like funds. At 24 you should be putting money in to a 401k system etc. and shouldn't have the majority of your investments in a stock portfolio you deem to be 70% high risk. In general, people underestimate the risk in their portfolio and their personal risk tolerances; an unfortunate combination.

I think it's pretty obvious you are way too overexposed based on what you've told us.

You can buy most indexes and ETFs just like stocks for the most part. Buy one share of some ETF with your broker if you want to 'test' it out.

If reputable professionals suggest a particular portfolio allocation/construction and you continually find it cumbersome or too broadly based, that's a good indication as any that you are probably not diversified enough. Diversification isn't just about defense/oil/financials/technology allocation percentages, it's about diversifying and balancing your risk.

magician

I'd agree with everything in this sentence except for the word "just".

Diversification isn't at all about defense or oil or financials or technology or foreign or domestic or fixed-income or derivatives or large-cap value or any other such grouping. Diversification is about risk: lowest risk for a given level of return or highest return for a given level of risk. Period.

Defense or oil or hedge funds or whatever is nothing more than a means to an end; if your goal isn't diversification of risk you're not likely to get an appropriate mix, no matter what labels you put on the assets.

PearlwhiteS2k

Well in my opinion having enough money for 1 month's living expenses isn't really going to help you much. I think you should have store away enough money for 6 month's living expense. Just in case it takes you that long to find a job etc.

magician

There's a reason that this is conventional wisdom. Listen to Pearl.

amao20

Thanks for the advice! So index funds - that's the same as "spiders" right? That sounds like a good idea, and I didn't think about investing in a general S&P 500 index. Are there maintenance or fund manager expenses associated with these? If so, how do they charge maintenance expenses? Do they just deduct it from the holdings, or do I need to send them a check every month/year?

I contribute 4% to my 401K and my employer matches, so I'm not completely forsaking my retirement. Also, the reason I don't keep much cash on hand is because I adjust the amount I contribute to my Scottrade account based on my monthly spending. Usually after rent, food, entertainment, I have some money left over that I don't want to just sit in my checking account, so I park it in Scottrade and earn a bit of interest if the money is not used to buy securities. If I need the money for any reason, then I can just request a withdrawal, which doesn't take more than a few days. The plus is that if I find an undervalued security, then I can buy a few shares without having to wait for funds being transferred from my checking.

I also usually use my credit cards to buy stuff, and then pay it off in full each month, which allows me to anticipate how much I'll need to leave in my checking account. And I earn cash rewards!

Part of the reason I ask about my portfolio balance is I'd like to get a better idea of whether I should sell my holdings and re-invest in a more traditional account structure. I suppose I want to hear horror stories of how bad stock allocation left some people with pennies to the dollar of their original investment. From what everybody's said so far, I think I should at least sell half of my riskier holdings and re-invest in new positions.

amao20

Yeah, I think I will start building a bit of an emergency fund and keep it in a money market or CD. This is a good wake up call

chroot

It's an absolutely terrible idea to invest every dollar you have in the stock market. How could there be any question about it being a terrible idea? I'd say you need three months' salary stashed away in a safe place, as a bare minimum, just to sleep well at night.

- Warren

FormulaRedline

Agreed. While waiting for some very large reimburements from my employer recently, I was operating on pennies in my checking account. I had more money than I earn in a year in the market, but I didn't want to sell and incur transaction fees since I knew I had the reimburements coming. Even so, I was always worried about my balance, irrationally so. I feel so much calmer now that I've got a good balance back.

magician

"Spiders" - SPDRs - are S&P 500 index funds.

There are a bazillion other index funds that aren't related to the S&P 500.

Take a look at http://www.indexfunds.com/ for more information than you'll ever want to know.