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Ask HN: Any good investments for those saving a substantial portion of income?

45 points by ctb_mg ↗ HN
Dear HN,

I am in my mid-20s and I'm banking over 50% of my pay each month. This adds up to about $50k in savings at the moment. I'm maxed up to match on 401k.

The poor interest rates in checking and savings just aren't cutting it for me.

I don't want to risk too much, but how can I better invest this money?

For me particularly -- my goals are a nice car (60k), retirement, and I'd like to be prepared to purchase a home (130k in my area), although I am not immediately interested in home ownership yet...

78 comments

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bybjorn
> although I am not immediately interested in home ownership yet...

You should be, as this is one of the best investments you can make. At least in my part of the world :-)

elharo
Depends on where you are, the cost of renting vs. owning, and whether you plan to move. If you expect to be moving in the next 5 years or so (more likely in your 20s than your 40s) then home ownership usually doesn't make sense.

Real estate is also a lot less liquid than stocks, and that can be a concern too.

elefont2
Past performance does not guarantee future results - That is true for all investment types, including home ownership.

Home ownership does have very advantageous tax consequences in the US compared to other instruments - e.g.: deductible interest, tax breaks on capital gains.

But it also depends on your stage of life. If there is a good chance you'll just randomly move to a different city or country in the next few years, then i would not recommend buying a home.

EliRivers
Which part of the world are you in? If I had to design a truly terrible investment, I'd end up with something that looked an awful lot like housing.
bluedevil2k
In the US I wouldn't call a home a terrible investment. It's not a great one either. The pluses are - tax privileges and the old mantra "you have to live somewhere", but the minuses are property taxes, lack of liquidity, and transaction costs. The problem when evaluating a house as an investment is that there are hundreds of markets, so no rule is good. Washington DC or San Francisco is a far different market than Austin or Dayton, OH.
EliRivers
I would. It's illiquid, not fungible, prone to bubbles, deteriorates all by itself, costs money just to own, laughable transaction costs, massively impractical to sell or buy in convenient units, generates no income (unless you rent it out, but most people don't - they live in it); just an awful investment. I literally struggle to think of another mainstream investment that is this bad.
aestra
That's what everyone in America was saying in 2006. Now there are millions underwater in their mortgages. Best investment indeed.

The demographics of the area you buy a house in can change dramatically which affect your house's price, even if the housing market is doing great as a whole.

There are tax advantages, however.

It also depends on the rental market in your area if you'd save more owning or renting. Owning also brings on additional stress with maintenance and repairs.

"I went to the Home Depot the other day, which was unnecessary... I need to go to the Apartment Depot, which is just a big warehouse with people standing around saying "hey, we ain't gotta fix shit!"" - Mitch Hedberg

elharo
This is easy. You want a low cost index fund. Vanguard has a number of good ones. The Vanguard Total Stock Market Index Fund is probably the best bet. 0.05% expense ratio for admiral shares, a bit more for investor shares. They're a few others that only cover the S&P 500, or include some bonds, or have more international exposure but at your age and savings level it's not worth agonizing over the differences. Just go with the broadest, lowest cost stock fund you can find.
cik
There are some things you can do, while you're searching - full disclosure of course, I do all these things.

First off, get a high interest savings account (or several) from your bank(s). In Canada, ING Direct does decent things (though there are better). At the very least, while you're figuring out what to do with your money, have it make more interest for you.

Secondly, look at preferred shares. They're less volatile than shares in their parent company, and they pay higher dividends. The obvious drawback being the rate of return over the long term is significantly lower than the indices themselves. Banks, at least in Canada are a great example of this, though the same is true of insurance, and power companies.

All investments bring risk, there's no such thing as a guaranteed return. And of course, investments in preferred shares are a risk, like any other stock. That being the case, they're a risk I can accept.

aestra
>First off, get a high interest savings account (or several) from your bank(s)

Online savings accounts give a higher interest rate than any B&M bank out there, not that the interest rates are actually high. Compare here: http://www.nerdwallet.com/rates

mcot2
Open a brokerage account and invest in index funds. That requires the least amount of effort and is shown to provide solid gains over time.

You may also want to accelerate your home purchase plans. This is also an excellent way to use spare cash and you will get a nice tax benefit.

60,000 on a car is just like lighting money on fire, but you probably already knew that. Try to get as close to 0% interest as you can and don't pay it off with the spare cash. The money is better off earning 5% in the stock market and paying a 1.9% car loan (if you can get it).

Tycho
Something like this maybe? Peer-to-peer lending (with risk-pooling) that cuts out the spread taken by banks

http://en.wikipedia.org/wiki/Zopa

bluedevil2k
I tried Prosper a few years ago, put in a few thousand dollars, spread it over 50 loans, and saw about a 4.5% return when factoring in IRR. I think I've read the returns from others are about the same.
rhgraysonii
Medium to high risk vanguard funds have done very well for me and since they are index based it is much lower risk than just day trading. http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-...
seivan
Do you pay a fee for them?
hibikir
Vanguard fees are about as low as they get in the business. They are not one of those companies that sell an easy, computer managed fund, and then charge you 4 times the market rate in fees for it.

The sleaziest I have seen was 401k providers that actually offer funds that have very low fees, and then it's the provider itself that tacks on their own management fees that are many times the size of those of the index fund. Yikes.

bluedevil2k
All the recommendations for low cost mutual funds are good, but I recently found Motif Investing (http://motifinvesting.com) - it's a really interesting way of investing in stocks, based on very specific sectors. For example, "cloud computing" or "beer". These types of investments would be difficult to do cheaply with any current mutual find or ETF. It's not something to put all your money into, but it's an alternative and possibly interesting way to invest (I am not affiliated with them in any way).

I would also offer a recommendation against an expensive car. Take it from someone who bought a really nice sports car - the novelty wears off relatively fast, and after that, you're just left paying hefty maintenance fees. Remember a car is to take you from point A to point B.

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coldpie
> Take it from someone who bought a really nice sports car - the novelty wears off relatively fast, and after that, you're just left paying hefty maintenance fees. Remember a car is to take you from point A to point B.

Sports cars are for motorsports. Take her to the track! I'm not exaggerating when I say track days are the most fun I've had in my life.

japhyr
A nice middle ground might be a motorcycle. I had a 600 sportbike for a few years, and it was funny riding an $8k machine (at the time) that could outperform most sports cars on anything other than a straight-line top speed test.

But you only want a motorcycle if you have good restraint. Sportbikes are so capable, it is easy to maim or kill yourself if you don't know how to hold back. They are just really capable bikes in the low rpms, and then they are high-end racing machines in the high rpms.

I got my motorcycle in my late 20's, after spending a lot of my life riding a bicycle. I don't think it would have been good for me to have a motorcycle in my late teens/ early twenties.

coldpie
I drive cars on the track in excess of 120 MPH, and I would never hop on a motorcycle to drive around the block. The fatality statistics are horrifying. Worse, you have to trust not only yourself but everyone else on the road not to send your unprotected body through a car radiator.

Good luck to you if that's your thing, but the price of failure is just too high for my tastes.

GFischer
How about riding the motorbike on the track? Best of both worlds? :)
edw519
I'm maxed up to match on 401k.

Max it beyond match.

At current returns and tax rates, investing pre-tax dollars will probably get you more bang for your buck that almost anything else.

seivan
In Sweden these kinds of schemes just pushes up the tax to the future once you take the money out.

And in Sweden pensioners are the hardest tax - making this a horrible deal.

rg81
Interesting. Most companies nowadays offer a "Roth" option for 401(k) which takes contributions with after tax dollars so when you are ready to get your money back out at 59.5, all of the growth is tax free. You only have to pay taxes on what your employer matches.
inyourtenement
For myself (young-ish, high-ish income) I've determined that Roth is a bad deal.

Conceptually, Traditional and Roth are about equal. Paying taxes now vs paying them in retirement is a wash, all else being equal. But with a Traditional 401(k), the tax savings are at my highest marginal tax rate. In retirement, I would not expect to be in the same tax bracket.

arielweisberg
A Roth is a better deal than post tax investing. It's not either or depending on income.

The advantage of a Roth is that you control it and it isn't in expensive employer controlled funds. I say max out your Roth and then max out your 401k. If your spouse works, max out their Roth IRA as well.

Definitely take advantage of any tax incentives being offered over post tax investing.

edit I misread. I would take the employer offered 401k with the 17.5k contribution limit. Get the money out there earning for you.

You can do your own Roth IRA. That is what I am talking about doing separate from your employer. I would max that out first assuming the funds are better.

I prefer today dollars (401k) over future dollars (Roth) so the 401k is more attractive to me modulo terrible fund selection. edit

inyourtenement
Oh, I should have clarified. I was thinking of Roth 401(k) vs Traditional 401(k).

I do have a Roth IRA because there are income limits for the tax deduction from a Traditional IRA. And as you say, any tax-advantage is worthwhile.

aestra
In the US, your capital gains grow tax free, making it an awesome deal. You only pay when you take the money out.

We also have Roth IRAs which are tax free when you take it out. You pay tax when you put the money in.

I would suggest the OP creates an (Roth?) IRA and maxes that out too.

rg81
Agreed, you can put up to $17,500 in your 401(k) for 2014. This is a great way to meet your retirement goal.
ktavera
AA+ rated municipal bonds can have great rates of return, low risk and usually the capital gains are tax-exempt. You can purchase bonds through online brokers (I use TD Ameritrade). There of course are other bonds; corporate, treasury and CD's you can set up in bond ladders to generate income and reinvest after maturity into another bond but those are generally subject to standard tax rates.
bluedevil2k
I would caution against bonds, especially US Mutual bonds, right now. It's a common belief (which of course, could be wrong), that interest rates have to rise in the next few years, which would greatly decrease the price of these bonds, resulting in losses. Also, many munis (and therefore their bonds) have outstanding debts through pensions or overspending that makes repayment dicey at best. Even the AA+ rated ones - don't forget, S&P rated all the mortgage bonds at AA+ as well, and look how those turned out.
refurb
You are correct that bond values will fall if interest rates rise, but bond prices are inversely correlated with stock prices, so they are a great way to diversify risk and maximize return.
bluedevil2k
Not true at all! Over the past 85 years, the correlation between stocks and bonds has ranged from -93% to +85%, with an average of 10% and a standard deviation of 40%! That indicates they are only very slightly correlated, and not enough to create a general rule.

http://media.pimco.com/Documents/PIMCO_Quantitative_Research...

refurb
Thanks for sharing that.

However, that paper only looked at the correlation between the S&P500 and long-term treasuries. A well diversified portfolio should have a mix of bonds including commercial bonds.

The disclaimer in the paper points this out: Bonds are represented by long treasuries (Ibbston) which should not be interpreted as a full sample representative of the bond market. Different asset class proxies will have different results.

The data that I've seen on stock-bond correlation shows a pretty consistent negative correlation over the 1927-2010 time period. It's not perfect, I admit, but it serves you well when you're trying to minimize risk.

bluedevil2k
I've also heard the saying "in a panic, all correlations move to 1". Basically, when the market goes down like in 2008, everything goes down.
ktavera
I don't think you can compare MBS ratings with municipal bond ratings. Mortgage backed securities were a derivative of a pool of bundled bad loans, meaning the underlying asset was toxic.

Municipal bonds are not really derivatives, there is no underlying asset that backs it except for the repayment history from the borrowing entity. If I buy a muni bond slated for an affluent county in New Hampshire to build a new high school then my risk is considerably lower than buying a security where you are dependent on a group of individuals with unknown repayment ability actually completing the terms of their loan (MBS). They are completely different animals

As far as municipal defaults, sure it happens. But very infrequently. Even with piling up liabilities municipal entities generally are able to pay on their bonds even if it means issuing more bonds because if they default, all their liquidity dries up.

chiph
Look into an Health Savings Account (HSA). Unlike a Flexible Savings Account, what you deposit can stay in there past a year and lets compound interest work for you. When you reach retirement age, you'll have a nice fund to pay for medical expenses that medicare won't pay for.

Caveat: Only suitable if you don't have any ongoing expensive medical costs (diabetes, children, etc).

aymeric
Has anyone tried http://wealthfront.com or heard anything about it?
smartician
I read this article and the comments, and was appalled that the Executive Chairman of a wealth management company doesn't seem to know the difference between marginal and effective tax rate:

https://blog.wealthfront.com/college-vs-retirement-savings-s...

I'd stay away.

refurb
Wow! I had seen that article a while back, but never read then comments. The marginal vs. effective tax rate thing is something he should know.

Also, he seems to like to extrapolate trends that include the cost of tuition being $500K in 20 years. Sure if you straight line the recent growth, but is that really likely?

jafaku
I'm a little surprised no one suggested Bitcoin.
gebe
He asked for (relatively) low risk alternatives though.
jafaku
Invest little money then. That could still become a significant retirement fund for him after a few years.

That said, I think Bitcoin is low risk if you secure your coins properly. I don't think there is much risk of the price going down to zero.

seivan
Cheap/Free Index Funds
refurb
Do some reading: Intelligent Asset Allocator by William Bernstein[1]

The book is actually a quick read even if you're not a math whiz (which I'll assume you are). It goes through a review of how to allocate your money across a number of investments and explain why it makes sense not only from a theoretical perspective but also based on historical returns in the stock market.

You can also pick up other books by William Bernstein that cover the same thing in different degrees of detail.

[1] http://www.amazon.com/The-Intelligent-Asset-Allocator-Portfo...

meric
Put a portion in cash. At some point the market will have another downturn. The 1987 stock market crash occurred 7 years after the 1980's recession. The mini-bear market in 1994 happened 7 years after the 1987 stock market crash. The dotcom bust occurred 7 years after the 1994 mini-bear market. The GFC occurred 7 years after the dotcom bust and it is currently the 6th year since the GFC.

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...

Does it look like a good time to put all your money into a S&P500 index fund?

bluedevil2k
That's the problem, you can never tell when it's a good time to invest or a bad time. You think people thought it was a good time to invest in March 2009, when the Dow was at 6500? Many people pulled all their money out, thinking the drop would continue. Those who bought were happy. There's an equally likely chance the market will go up 10% in the next year as down 10%. And, there's definitely no pattern to the market.
meric
I suppose you're more of a theory type than I am.

For the record, I invested every dollar I had but $100 into the market between March and May 2009, though it was not much (several thousand) as I was but a humble student. I also bought TSLA at $28 and SCTY at $12, and I still hold both of them.

conroe64
The 1994 mini-bear market? You're shoehorning the data a little to match your theory, don't you think?
meric
Actually, no. The S&P 500 was 20% higher in Jan 1994 than in Jun 1994.

I'm not saying it has to be around 7 years, I'm just saying it's generally not a good idea to start investing all your money into the stock market when it's at or near all time highs.

There's even an urban dictionary word for it. "BTFATH" - Buy the fucking all time high. http://www.urbandictionary.com/define.php?term=BTFATH

inyourtenement
Don't time the market. Timing the market gives you two chances to screw up -- when you decide not to invest, and then when you decide the time is right.

Or to put it more concretely, there is a long chain of "all-time highs" before the last all-time high. You would miss out on all that investment time if you avoided the market based on all-time highs. And then a correction comes -- but is it the one you were expecting or is there a bigger correction in the wings?

In the end, one never knows. None of the rules of thumb are reliable. And you can shoot yourself in the foot far more by trying to time, than by just buying and holding.

meric
You're timing the market if, for whatever reason, you haven't invested in the past 5 years, and now that the market is at all time highs, decide to allocate 100% of your assets into the market.

I hold my suggestion to the OP, keep a portion in cash.

inyourtenement
That's not really true, and not what people mean by "timing the market." Thinking the market generally goes up and one should invest in it is not timing, no matter when you think it. Repeating the phrase "all time high" as though it indicated the future is precisely timing.

It's been shown that if you have a lump sum of money, it's most often better to dump it all in the market as soon as possible, rather than gradually buying in.

Of course you shouldn't put 100% of your money in the stock market, your advice was reasonable.

meric
I still think, unless you're investing a constant amount of money every X period, you're timing the market, since you're still subconsciously or consciously picking when to invest into the market depending on time.

The pitfall with "Thinking the market generally goes up and one should invest in it is not timing" is, the thought only occurs after the market has gone way up, rather than occurring unbiasedly between instances when the market has gone way down or way up.

ct
Look into selling covered calls or vertical spreads for part of your portfolio as recurring monthly revenue.
mrfusion
I'd be interested in learning more. Can you explain it, or point us to some reading material?
emacdona
Everything you said makes me think you are heading in the right direction except for the 60k car :-) Spend 30k on a lightly used car if you want "nice".

It sounds like you have three different goals, and they break down neatly into: 1) short term: car 2) medium term: house 3) long term: retirement

First: If you can afford to (and it sounds like you can), max your 401k. Your 401k is a vehicle that allows you to "borrow" money from the government and earn interest on it (by being able to postpone taxes). Personally, I invest 100% of my 401k in an S&P 500 index. I have Fidelity, so my fund is Spartan 500 Investor Class (FUSVX). Use whatever S&P 500 index is available to you, though. If you still have money left, put it into a Roth IRA. Same deal: index fund. That covers your long term goal.

Now, for the house. I'm not sure what to say here. Most of my personal savings is also in the Spartan 500. If you've got a sliding window of 5 years to buy a house, I'd recommend the same. Convert to something more stable (bonds?) when you've made some money... then hold on to it while you're waiting to buy a house. However, consider buying one right now with little money down. Prices are stabilizing and interest rates are still historically low.

Finally, short term. You're young, so you probably won't listen (and honestly, that's okay -- I'm not picking on you): don't buy a 60k car. Spend 30k on a used Audi or BMW if that's your thing. Personally, I would recommend spending 23k on a used Honda. You will be amazed (maybe) at what 23k gets you for a used Honda. Same deal as the house, though. Buy it now, with little money down. Interest rates are really low.

Good luck. Mid 20's and already talking about saving half of your pay check. You'll be fine. Just max that 401k. And please don't get a 60k car :-)

coldpie
Great advice here. Definitely get into an index, or a handful of mutual funds. Your bank savings account is losing you money. I'm 100% into mutual funds and honestly I should just switch over to the index you're using, emacdona (I'm also at Fidelity). Everything I've read suggests indexes do at least as well as funds, and it's truly "set it and forget it".

About the car: I agree that 60k is ridiculous, but don't get the Honda. Get a car you like. Or do get the (used) Honda, and also a car you like. I bought a 2007 Z4 Coupe for less than 24k back in 2011. Taking her up to the track is literally the most fun I've had in my life, and it's emerging into a full hobby as I'm trying to get into ChumpCar this year. Motorsports is a great hobby. I wrote a short article about it a year ago:

http://www.smokingonabike.com/2013/03/27/programmer-looking-...

Life is about fun. If you have financial security in the bag, enjoy it while you've got it.

emacdona
coldpie, you are absolutely right: if cars are a hobby, get one you will enjoy driving. And like you alluded to, there are plenty of options well under 60k.

However, if all you're looking for is to get from point A to point B with a sunroof, heated seats, and low mileage... you can do all that for under 25k in a Honda that will last you over ten years. If you want a little more zip, spring for the V6 ;-)

Gobitron
Yeah, agreed on the car thing. Last year I bought a used '09 Accord V6 fully loaded for $17.5k with great maintenance records and low miles. My other car is an '08 Outback, which I bought in '09 for $18k and it had extremely low miles.

You DO NOT need to spend over $20k to get a great, reliable used car. I am guessing your standards for fun to drive might be different than mine, but an Accord V6 has plenty of power and you just never have to worry about maintenance.

vishnugupta
While I will not be able to advice you about the choice of investment owing to my nationality, I highly recommend reading following books. Cover-to-cover if you can.

1. The Intelligent Investor by Benjamin Graham. 2. Irrational Exuberance by Robert J. Shiller. 3. Thinking, Fast and Slow by Daniel Kahneman.

OK, here's advice anyway :). Please, please do diversify your investments across different classes of products ; Equity, Debt, assets such as Gold or land and so on.

The proportion may vary according to your risk appetite, but do diversify.

bavcyc
Read Graham's Intelligent Investor, there are also books which provide examples or slight alternatives to Graham's approach. Also sites similar to Mr. Money Mustache may provide guidance that is helpful to you (or not).

Regarding the home purchase, consider loaning yourself the money from the 401k rather than paying someone else interest.

leftcoaster
Take this question to the bogleheads forum.