Request for financial advice

[oruacat2]

I'll lay out a bit of background information, and then I'd appreciate any insight/input as to what might be the best investment options for my financial goals.

I work in the cash-heavy restaurant industry, and I want to start saving some money for the future so I'm not eating cat-food or rummaging through dumpsters. I have $600 to get started, with the goal of depositing a minimum of $100/month into the nest-egg for the rest of my life (but more so long as I'm still bartending/once my car is paid-off/until I leave school). There will be the occasional larger lump-sum (tax refunds, Christmas cash, B-day money, etc), but $100/month will be the absolute minimum.

I don't plan on touching this money for any reason for about 30 years. Basically I want to forget about it, except for that monthly deposit. I'm a bit gunshy regarding these financial companies who charge a transaction fee every time they move your money around, so "deposit and forget about it" will be my investment strategy with this fund. Once I get "a real job", I'll start a 401k or something, but this will remain separate.

Should I just go the standard savings account route? Should I look into an IRA, or a Roth IRA specifically?

Any advice will be greatly appreciated, and "thank you" in advance.

Kenny D.

[UK78ALUM]

Kenny - check your PMs. Thanks...

Dave

[sardiscat]

$600 isn't enough to get you into most investments, so you'll probably have to start out with a savings account until you have a larger balance. But you should open an IRA right away, and you should be able to find one through a bank so your savings account can be part of it. Whether you should open a standard IRA or Roth IRA is something to decide. A Roth IRA is funded with aftertax money but you never have to pay income tax on the interest and other earnings that your investments accumulate. You get to deduct from your taxable income any money you put into a standard IRA (thereby reducing what you pay in income tax), and the interest accumulates tax free until you start withdrawing it. If you pay a lot of income tax, I prefer the standard IRA. If you don't pay much in income tax, the Roth is definitely the better way to go. You can accumulate a lot ofearnings in 30 years, and never having to pay tax on it will be sweet. When you have several thousand dollars in savings, you will be able to get into stock mutual funds. Over a long period of time, you'll makea much higher rate of return on stocks than youwill simply by earning interest, but investing in individual stocks is a gamble if you don't avidly follow the stock market (or even if you do). If you do have information about a company that indicates it will start doing a lot better in the near future and the price of the stock has not already exploded, investing in the stock of that company may get you the best return you can get anywhere, and you can buy individual stocks with any size investment (assuming you have enough money to cover the cost of at least one share). Investing everything in the stock of one company is also the riskiest way to invest, so all the pros strongly recommend against it. (If you only have a small amount to invest and have a 30 year time horizon, though, it's not as much of a risk. You just have to be right in your assessment that the stock you invest in will go up rather than down, which you can only be sure of if you know something about the company or choose to buy at the right time. The end of October is a greattime to buy stocks of good companies, because mutual funds' fiscal years end in October and fund managers sell off their stocks that have not performed well so their end of year reports won't show their investors that they invested money in stocks that didn't do well. All that selling drags the whole market down with it, with the resultthat the stocks of many sound companies can be bought for less than their fair value at the end of October). As for mutual funds,for the past 2 or 3 years, those that invest in emerging marketsare currentlygoing up the fastest,with those thatinvest in small capitalization stocks doing second best. That all runs in cycles, though. Safest (and least expensive--the fund managers charge you fees)are funds and ETFs thatare indexed toa facet of the stock market, such as theS & P 500.

One rule recommended by rich folks is to pay yourself first. That is, if your plan is to save $100 per month, put the first $100 you make each month into your savings, live on what you make after that.

[gerntz]

First, congratulationson making that important decision.

Most investment house/mutual fund familiess today require $2-3K minimum to open an account, even IRA. So until you reach that amount total a savings account is about what you can do.

Considering your 30 yr timeframe, I'd say an IRA is the way to go for tax savings - when you can meet the account minimums. Assuming your Fed tax is 15% bracket, maybe even 25%, putting in a Roth - after current income taxes -IRA is the way to go.

I did go on Fidelity Investments' site. They have a no IRA account minimum IF you allow them to withdraw $200/mo or $600/Q from you bank account directly. I didn't check if there is an account management fee.

As far as investments once you meet an account minimum, with your timeframe I'd go 100% equities/stocks, & until you have $10-25K, mutual funds to get a variety of stocks. I'd go with index funds - funds that match a market segment - and would pick the high growth segments (Not sectors like tech, heath, financial, etc). Those tend to be small caps and micro caps, value & growth.

Best of success.

[Mountain Cat]

If you make a low income now, a Roth is great because you shelter yourself away from higher taxes later in life when you may have a high income.

The great thing about IRA's is that you can trade as often as you like without worrying about the impact of capital gains or income taxes. The only thing you need to worry about is the transactional fees and if you are trading at the right time based on the company and economic position.

In today's market with low commissions and info available on-line, I would look at individual stocks, rather than Mutual funds. Individual stocks will likely have a better return, especially based on your buy and hold ideology. Most of my portfolio is buy and hold. I do occasionally buy stocks that I intend to turn over after they achieve certain goals; this is however based on industry expertise that helps me to make better decisions about who the winners and losers are likely to be over a 6-18month window.

In your situation, I would mostly stick with Blue Chips for your first 20k or so, and learn a few lessons yourself. Something I do is track the 52week averages of established companies that are not likely to fold, and then buy which ever one is the lowest compared to it's 52week average. Since you are going to hold it for a long time, you don't care if it takes it 5yrs to recover and you can make a nice return that way. Likewise, I occasionally sell off the same type of stock when they are high compared to the 52week average and use that money to buy other devalued stocks. I also look at the 3 & 5yr curves and try to understand if the company is likely to regain a past positioning soon.

Happy trading.

MC

[gerntz]

Invest, don't trade.

[Mountain Cat]

gerntz wrote: Invest, don't trade.
I couldn't agree more. "Time in" is more important than "timing". I typically hold stocks at least 2-3yrs because I look for devalued stocks and put long term money on them. I have some that I've owned for 10yrs and wouldn't sell them today.

[beachedkat]

Invest in "The Bogleheads' Guide to Investing" at your local bookstore, or find a library that has it. Read the book. Follow the advice. Stay the course. And you will never have to live on cat food. ;)