How to Invest $100k

[valueventures]

Hi All,

 

I have followed this forum for a while and am continually impressed with your insight.  I am seeking your thoughts on my personal finance matters.

 

I am in my mid-twenties and have ~$100k in my bank account. I had originally planned to manage a portion of this through active investing but, given my fairly demanding work schedule, it is difficult to find time to individually research and select stocks. Also, while I do believe there is value in active investing, I am starting to see indexing as a viable strategy (reading A Random Walk Down Wall Street really struck a chord with me).

 

How would you advise me to invest ~$100k (allocation to equity vs. bonds, amount to invest in each, which index funds to buy, etc.)? In terms of liquidity needs, rent is my only major expense and I live a frugal lifestyle. I don't anticipate any major upcoming spending needs. I have held off on investing recently since the market seems overvalued but, given that one cannot reliably time the market, I feel that now is as good of a time as ever to put money to work.

 

Thanks in advance for your help!

[frommi]

Welcome. Don‘t listen to anybody especially from here. If you already know what to do, do it. If not read and decide for yourself. Own your decisions and your mistakes.

[s8019]

I think the best way is to conduct a poll. And do the opposite of course otherwise it may not make a lot of sense  :)

 

My answer - if it is not your profession then probabilistically speaking the optimal way is an equity index. All world ex US (you may add US later). It’s better to spend saved time on something actually productive, like improving your work skills etc.

[SHDL]

There is some truth to what frommi said.

 

But while you learn more about investing and decide what to do, you may want to consider buying T-bills and/or Series I Savings Bonds, assuming you are US based. With those you can currently get ~2.5% annual returns virtually risk free. That is likely a no-brainer vs leaving your money in a bank account.

 

I personally did something like that and then 2008 happened. You may have similar luck.

[EliG]

Hi OP,

 

Are you familiar with the Bogleheads community? It is the place to go for indexing advice.

 

https://www.bogleheads.org/forum/index.php

https://www.bogleheads.org/wiki/Main_Page

 

Indexing is the right strategy for ~95% of the general investing public, so you are on the right track.

[Gregmal]

If you have any interest in owning real estate, do it now. You are in the perfect spot, and most don't realize it until it's too late. What I mean is that you have great resources for someone your age. Most go buy their primary residence. Once you do, you are f*cked because then any future properties are either labelled as 2nd homes or investment properties, which subject you to the Wall Street money machine scheme. You get nailed with all sorts of additional requests, must put up 15-20% minimum, and, just because, usually pay at least 75 basis points more just bc its not your "primary residence". However if you can rent now, then buy a property you want to own as an investment, but live there for a month or two until you find a quality(with tenants, always choose quality over quickness) tenant on a long term(2+ year) lease, you're golden. Especially if you can swing a 15 year mortgage. You can apply for this loan as a first time homebuyer(not sure if there are still breaks), put down 3.5% or even in some cases nothing, AND get a super low "primary residence" rate. The beauty is that you close on this, find a good tenant, and then still be eligible to buy your next property as a "primary residence" and get all the breaks once again.

 

Otherwise, in regards to your question, I won't tell you what to do. I'll just list what I did as I was in pretty much the exact same spot as you.

 

First, the $100k. Is this earned and saved money, or inherited/gifted money? If you've earned and saved that much by your age, you can be really aggressive with it because you will obviously earn much more over the years and relatively speaking thats not a lot of money. Anyhow, here's what I did.

 

3 accounts

1 brokerage

2 online savings getting ~1%(now even better as with a Barclays for instance, you're getting 1.9%+ for a savings account.)

 

Brokerage I put 50k and allowed myself to leverage this up to 1.5x as long as I owned at least 80% high quality, low risk ideas

 

Savings 1- I called my real estate account. I put 30k in it and I bought an income property. Years later I did a number of these and as it stands by the time I'm in my 40's the sub $100K I invested in real estate in my 20's should have a face value near a $800K, assuming zero property value appreciation. As long as the mortgage gets paid every month you're golden

 

Savings 2- I kept 25K in cash as a just in case fund.

 

As I continued to earn more I just proportionally funded these accounts. It's more or less a variation of the old school stocks/bonds/real estate equation, with a consideration for the fact that you can be more aggressive when you're young.

[LongTermView]

If you have any interest in owning real estate, do it now.

 

Gregmal makes a great point here.

 

Peter Lynch talks about this in One Up On Wall Street:

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Before you buy a share of anything, there are three personal issues that ought to be addressed: (1) Do I own a house? (2) Do I need the money? and (3) Do I have the personal qualities that will bring me success in stocks?

               

 

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The banks let you acquire it for 20 percent down and in some cases less, giving you the remarkable power of leverage. (True, you can buy stocks with 50 percent cash down, which is known in the trade as “buying on margin,” but every time a stock bought on margin drops in price, you have to put up more cash. That doesn’t happen with a house. You never have to put up more cash if the market value goes down, even if the house is located in the depressed oil patch.

               

 

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Because of leverage, if you buy a $100,000 house for 20 percent down and the value of the house increases by five percent a year, you are making a 25 percent return on your down payment, and the interest on the loan is tax-deductible.

 

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As a bonus you get a federal tax deduction on the local real estate tax on the house, plus the house is a perfect hedge against inflation and a great place to hide out during a recession, not to mention the roof over your head.

               

 

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The old Wall Street adage “Never invest in anything that eats or needs repairs” may apply to racehorses, but it’s malarkey when it comes to houses.

 

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There are important secondary reasons you’ll do better in houses than in stocks. It’s not likely you’ll get scared out of your house by reading a headline in the Sunday real estate section: “Home Prices Take Dive.” They don’t publish the Friday afternoon closing market price of your home address in the classifieds, nor do they run it across the ticker tape at the bottom of your TV, and newscasters do not come on with lists of the ten most active houses—“100 Orchard Lane is down ten percent today. Neighbors saw nothing unusual to account for this unexpected decline.” Houses, like stocks, are most likely to be profitable when they’re held for a long period of time. Unlike stocks, houses are likely to be owned by the same person for a number of years—seven, I think, is the average. Compare this to the 87 percent of all the stocks on the New York Stock Exchange that change hands every year.

[valueventures]

Thanks for the help!

 

@EliG: Bogleheads seems like it could be helpful and I'll take a closer look.

 

@Gregmal: I appreciate the suggestion. The $100k is a combination of inherited money and earned/saved money. My annual salary is ~$80k and should increase 5-10% per year. Do you know of useful resources for getting into real estate investing?

 

@LongTermView: Thanks for pointing that out. I read One Up on Wall Street a while ago and had forgotten these points. I'll circle back to the book.

[Gregmal]

Thanks for the help!

 

@EliG: Bogleheads seems like it could be helpful and I'll take a closer look.

 

@Gregmal: I appreciate the suggestion. The $100k is a combination of inherited money and earned/saved money. My annual salary is ~$80k and should increase 5-10% per year. Do you know of useful resources for getting into real estate investing?

 

@LongTermView: Thanks for pointing that out. I read One Up on Wall Street a while ago and had forgotten these points. I'll circle back to the book.

 

Where the 100K came from is important IMO simply because if 95K is inherited and 5K a year is one's realistic savings ability for the near-medium future, your goal should be more so consistent and stable compounding of the principal. If, such as seems to be your case, you have a great job and live a frugal lifestyle, and you're spitting off 25K+ per year of investable cash with the expectation to do even better every year, then you should definitely be much more aggressive during your early years. Look to hit home runs, or take on moderate leverage(the latter being my preferred way of doing it).

 

As far as real estate investing, again just speaking personally; I have always had an interest and a background in this stuff. So just naturally you know the areas you frequent/live. If you've been there a while, you probably have a decent network. I know contractors, real estate agents, business owners, lawyers, clerks at town hall, HOA boards, etc where I live. So you utilize these resources, along with checking the Zillow/Trulia listings, attending open houses, even just driving around and seeing what's going on where. It sounds like a lot but after awhile it because second nature.

 

Also, look for areas you'd want to live if you made half of what you do. Something I've always liked is looking for lowest level entry into highly desirable areas. Also, perimeter locations on the outskirts of the trendy areas. Never buy raw land, never buy the nicest house on the block. Kind of a rule of thumb I have is to only buy stuff that I'd consider living in at some point(past or present) in my life. Put yourself in the shoes of others. Look for areas with good school systems that have a respected police force and reputation for safety. If you own properties near where you life, managing them is also really easy. Property managers typically want 10%, which if you're carrying a mortgage is basically your profit for the first 1/3 of the loan.

 

You'll also learn many of the rules that apply to investing in stocks also applies to real estate. You might like that property in the bad area because it's cheap, and projects to have a fat cash flow, but you'll kick yourself when you have a deadbeat tenant that destroys the place, or doesn't pay rent, or forces you to waste thousands in legal fees. Buy quality and have patience. That's why I suggested if you currently rent, find something you are cool living in for the transition period. This way you can thoroughly vet a prospective tenant and get one that will work. If you play you cards right and do a 15 year mortgage, you could put down 3%, live there for a year until you can find a quality tenant for a 3-5 year lease, and that right there knocks out 25-40% of your mortgage.

[DocSnowball]

There is some truth to what frommi said.

 

But while you learn more about investing and decide what to do, you may want to consider buying T-bills and/or Series I Savings Bonds, assuming you are US based. With those you can currently get ~2.5% annual returns virtually risk free. That is likely a no-brainer vs leaving your money in a bank account.

 

I personally did something like that and then 2008 happened. You may have similar luck.

 

What are the best options in T bills and/ or Series I Savings Bonds that will not lose much value with rising interest rates or inflation?

[SHDL]

What are the best options in T bills and/ or Series I Savings Bonds that will not lose much value with rising interest rates or inflation?

 

With I Bonds you get protection of principal plus inflation adjustments (plus favorable tax treatments), which is great.  The catch is that there are quite a few restrictions: you have to be a US person to buy them, you can't put in more than $10k/year, you lose the interest if you sell too quickly, ....  I use it as a place to keep my rainy day funds.

 

With T-bills you will not lose your principal if you hold until maturity (no matter what happens to interest rates), but you will not get inflation protection (beyond what the yield at the time of purchase gives you). 

 

(BTW, when I say "risk free," I mean "risk free under any reasonable circumstance."  If Trump instructs the Treasury Department to default on its debt then all bets are off.)

[Ross812]

For cash:

 

Look at ICSH 3 month average duration and yielding 2.56%. VMMXX (Vanguard money market fund) is better than most savings and money market accounts offered by banks at 2.1%. SUB and MUB are good if you are looking for tax free income. VCSH has a 3.42% with an average duration of 2.8 yrs. Alternatively you can build a 4 year CD ladder on IB yielding 3.1% right now; this is the least liquid option, but has the highest risk adjusted return.

 

Actively managed funds:

 

You will have a hard time finding a better blended mutual fund than Wellington.

 

 

[winjitsu]

Legit the easiest, lowest fee way to manage your money is to choose a Vanguard (or Schwab or others) target retirement for your age (something like 2055 / 2060). It starts with a large equity allocation, but allocates more and more to fixed income as you get older.

[BG2008]

Mike Tyson once said that "everyone has a plan until they get punched in the mouth," have you ever experienced financial losses before?  Do you know how you personally react to experiencing 1) mark to market paper loss and 2) permanent impairment.  You probably want to explore this a little better before you make your allocation decisions. 

[Jurgis]

For cash:

 

Look at ICSH 3 month average duration and yielding 2.56%. VMMXX (Vanguard money market fund) is better than most savings and money market accounts offered by banks at 2.1%. SUB and MUB are good if you are looking for tax free income. VCSH has a 3.42% with an average duration of 2.8 yrs. Alternatively you can build a 4 year CD ladder on IB yielding 3.1% right now; this is the least liquid option, but has the highest risk adjusted return.

 

Do you have an opinion about ISTB and FLOT vs your choices?

[SharperDingaan]

Very, very boring - but what's wrong with just using the money to pay down your mortgage?

Then if you want to invest - do it with the montlhy interest that you will be saving as a result. You'll get practice, & if you're investment goes to zero, you dont really lose anything.

 

SD

 

[apparat]

If you have any interest in owning real estate, do it now. You are in the perfect spot, and most don't realize it until it's too late. What I mean is that you have great resources for someone your age. Most go buy their primary residence. Once you do, you are f*cked because then any future properties are either labelled as 2nd homes or investment properties, which subject you to the Wall Street money machine scheme. You get nailed with all sorts of additional requests, must put up 15-20% minimum, and, just because, usually pay at least 75 basis points more just bc its not your "primary residence". However if you can rent now, then buy a property you want to own as an investment, but live there for a month or two until you find a quality(with tenants, always choose quality over quickness) tenant on a long term(2+ year) lease, you're golden. Especially if you can swing a 15 year mortgage. You can apply for this loan as a first time homebuyer(not sure if there are still breaks), put down 3.5% or even in some cases nothing, AND get a super low "primary residence" rate. The beauty is that you close on this, find a good tenant, and then still be eligible to buy your next property as a "primary residence" and get all the breaks once again.

Interesting, but don’t you need to stay in the property for 1 year as your primary residence before being able to rent it out? Overall not a big deal but wanted to be sure I understood what you’re proposing.

 

When you apply for your next mortgage to finance a primary residence purchase, is rental income counted directly against your mortgage payments or is it added to your debt/income ratio (which wouldn’t be great)?

[Gregmal]

If you have any interest in owning real estate, do it now. You are in the perfect spot, and most don't realize it until it's too late. What I mean is that you have great resources for someone your age. Most go buy their primary residence. Once you do, you are f*cked because then any future properties are either labelled as 2nd homes or investment properties, which subject you to the Wall Street money machine scheme. You get nailed with all sorts of additional requests, must put up 15-20% minimum, and, just because, usually pay at least 75 basis points more just bc its not your "primary residence". However if you can rent now, then buy a property you want to own as an investment, but live there for a month or two until you find a quality(with tenants, always choose quality over quickness) tenant on a long term(2+ year) lease, you're golden. Especially if you can swing a 15 year mortgage. You can apply for this loan as a first time homebuyer(not sure if there are still breaks), put down 3.5% or even in some cases nothing, AND get a super low "primary residence" rate. The beauty is that you close on this, find a good tenant, and then still be eligible to buy your next property as a "primary residence" and get all the breaks once again.

Interesting, but don’t you need to stay in the property for 1 year as your primary residence before being able to rent it out? Overall not a big deal but wanted to be sure I understood what you’re proposing.

 

When you apply for your next mortgage to finance a primary residence purchase, is rental income counted directly against your mortgage payments or is it added to your debt/income ratio (which wouldn’t be great)?

 

From my experience, and I know several who have had it work exactly like this, is that if you currently have no ownership of a primary residence, you can apply for a loan as a primary residence. The second the loan is finalized, you can do whatever you want. I suggested he live there a couple months simply to save on rent until he found a quality tenant.

 

Following the rental agreement being signed, one in their mid 20's or whatever can go back to renting, or staying with their parents(easily the most cost effective way), and then immediately, or whenever they feel like it, go seek out another property. As long as you present the contract proving the other one is rented, the next one can be coded as a primary residence rather than an investment property. If you're total cost of the first property is $1500 a month, and you get $1600 in total rent, the mortgage equation gives you credit for the additional $100 a month in their debt to income equation.

 

The above is typically rare because most people don't have the funds to do this in their mid to late 20's, and those that do, typically look to buy their own home before buying an investment. But if you can do it, you'll save a ton of money on stupid fees that apply to 2nd homes and investment properties.

[sundin]

I'm in a very similar situation but in my late 20's. I think the idea of buying is largely a great investment choice, especially with the 5% or so down. I would certainly rent out and live with my parents for the time being.

 

Considerations on my end are primarily to do with  the housing bubble in Tor and where the current credit cycle seems to be. Forecasted interest rates probably don't bode well for prices in the near term.

 

The other benefit is realizing primary residence exemptions for land transfer taxes and or other available credits depending on where you're from.

 

[Ross812]

For cash:

 

Look at ICSH 3 month average duration and yielding 2.56%. VMMXX (Vanguard money market fund) is better than most savings and money market accounts offered by banks at 2.1%. SUB and MUB are good if you are looking for tax free income. VCSH has a 3.42% with an average duration of 2.8 yrs. Alternatively you can build a 4 year CD ladder on IB yielding 3.1% right now; this is the least liquid option, but has the highest risk adjusted return.

 

Do you have an opinion about ISTB and FLOT vs your choices?

 

FLOT may be superior to ICSH, I looked into it a while ago and ICSH was providing higher returns when ishares dropped the management fee but FLOT send to have closed the gap and has even less interest rate exposure.

 

VCSH has a better yield but lower credit quality vs ISTB. VCSH isn't a free lunch and would react more to a sharp market drop, 4% standard deviation vs 1.4%.

 

I think brokered CD ladders offer the best risk adjusted returns for individual investors. It is a market that isn't open to institutions. You get b rates on CDs issued by A to AA rated banks and FDIC insurance.

[bskptkl]

Open Capital One bank account for the $500 bonus https://www.doctorofcredit.com/capital-one-500-money-market-account-bonus/

Take money out after a week or so...

Move on to other bank account bonuses - that website has an exhaustive list.

[Jurgis]

For cash:

 

Look at ICSH 3 month average duration and yielding 2.56%. VMMXX (Vanguard money market fund) is better than most savings and money market accounts offered by banks at 2.1%. SUB and MUB are good if you are looking for tax free income. VCSH has a 3.42% with an average duration of 2.8 yrs. Alternatively you can build a 4 year CD ladder on IB yielding 3.1% right now; this is the least liquid option, but has the highest risk adjusted return.

 

Do you have an opinion about ISTB and FLOT vs your choices?

 

FLOT may be superior to ICSH, I looked into it a while ago and ICSH was providing higher returns when ishares dropped the management fee but FLOT send to have closed the gap and has even less interest rate exposure.

 

VCSH has a better yield but lower credit quality vs ISTB. VCSH isn't a free lunch and would react more to a sharp market drop, 4% standard deviation vs 1.4%.

 

I think brokered CD ladders offer the best risk adjusted returns for individual investors. It is a market that isn't open to institutions. You get b rates on CDs issued by A to AA rated banks and FDIC insurance.

 

Thanks.

[apparat]

@Gregmal Got it, that makes sense! Thanks for explaining.