Advise for a rookie: If you did it all over...

[WineAndCheese]

Hey guys this is my first post. I was browsing the forum and everyone seems extremely kind, helpful, and knowledgeable.

So I love money and I'm entering the world of investments. I'm 22 and a math major graduating in December. I intend to obtain an MBA and sell my soul for a high paying job.

As my first investment move I opened a roth IRA at Fidelity; I maxed it out for 2007, and I am about to put in a couple thousand for 2008. However, I don't know where to begin when it comes to evaluating mutual funds (I think that's where I should be putting my money).

So... who wants to live vicariously through me? If you were 22 again and had some spare time and money to begin investing, what would you do? How would you learn to evaluate companies and understand interest rates across the board? Is there a book you would read? Is there a class you would take? Is there a website you would visit every day?

In addition to the roth IRA money ($6000ish until I make more taxable income this year), I have another $5000 sitting around that I should probably be investing and don't know what sort of account to open, or where to open it.

Thanks for reading. Any advise would be sincerely appreciated. I grasp and learn very quickly (especially math) and bow down to you, my mentors. How should I begin my training?

[jIM_Ohio]

Check my blog- right from the first post.

I would suggest equity income funds as the core to an investment strategy. They shoot off 2-3% in dividends, which really helps in down markets.

Fidelity has an equity income fund or two (or three). Look for one which is open to new investors, has reasonably low expenses and solid long term performance.

I would also suggest learning about asset allocation (mix of stocks and bonds), and the various types of stocks to own (growth and value, large cap, mid cap, small cap and foreign).

If you search threads for asset allocation or rebalance you will see many prior discussions on this.

My asset allocation (I am 35 yo) is
43% domestic large cap (all in T Rowe Equity Income- PRFDX)
15% domestic mid cap (T Rowe Mid Cap Growth RPMGX and T Rowe Diversified mid cap growth PRDMX)
15% domestic small cap (T Rowe New Horizons PRNHX and T Rowe Diversified small cap growth PRDSX)
15% International Large cap (T Rowe International Growth and Income TRIGX)
10% International small cap ( T Rowe International Discovery- PRIDX)
2% bonds (T Rowe Spectrum Income RPSIX)

I sell 1% of large cap to bonds every 6 months as a gradual move to a 90%-10% equity/bond mix or 80-20 equity bond mix.

[Scanner]

In addition to the roth IRA money ($6000ish until I make more taxable income this year), I have another $5000 sitting around that I should probably be investing and don't know what sort of account to open, or where to open it.

You need to define goals, young Padawan, - obviously, the Roth is retirement.

The other $5000. . .

Do you have a goal of owning a house/condo? If so. . .I am one to recommend Vanguard's Wellsley Fund or Janus Balanced until you get 2 years away and then just switch it to a vanilla savings account.

If you are a high tax bracket and don't mind a year or two of loss. . .muni bond funds may make sense.

I grasp and learn very quickly (especially math) and bow down to you, my mentors. How should I begin my training?

You must learn the ways of money, not Math, young Padawan.

You must tame your feelings and be mindful during the markets. . .they could be your undoing.

[sweeps]

I'm 22 and a math major graduating in December. I intend to obtain an MBA and sell my soul for a high paying job.

Jim has covered the technicals and Scanner has covered the holistics.

I was just curious about this item. Have you done the cost/benefit analysis on getting your MBA? Are you going for it right out of undergrad or going to work first? My MBA has benefited me, but I waited a few years before going and let my employer pick up most of the tab. Also IMO, if you spend some time in the workforce first, you gain a lot more from your classes than if all you've ever been is a student.

[zetta]

Here's a couple of books to start with:

• All Your Worth -- set up your finances so you have 20% of your income to invest.
• The Complete Idiot's Guide to Getting Rich -- to help you set your goals for how much to save each year, and how much your "financial freedom" goal should be
• The Intelligent Asset Allocator -- explains what Jim_Ohio is talking about with the asset allocation
• The Boglehead's Guide to Investing -- basics on mutual funds

I've had no luck in finding a book that helps me wade through the actual selection of particular funds, so if you find a good one, please come back and post!

[tripods68]

For a math major, you should be reading basic finance theory or principle of finance. Also read the financial management institution which helps understand the working capital cost and leveraging of companies. All these books are excellent for starters entering MBA program. Once you read some of these books you will learn basic fundamental of evaluating stocks, bonds, mutual funds and the understanding of debt leverage, risk, and ratio analysis.

Good luck

[noppenbd]

I began investing during the boom-boom rah-rah days of the dot-com era. I made a few investment mistakes out of the gate:

1) I bought single stocks (mostly techs) in my retirement portfolio. I now only buy mutual funds or ETFs.

2) I sold the stocks after the market tanked, pretty much at the bottom. I now try to minimize selling, and basically take a hands off approach to my portfolio.

3) Subsequent to that I invested my IRA monies in a full-service brokerage, where they sold me C-class shares with very high expense ratios (1.5-2%). One of those funds was Legg Mason Value Trust, which has had about 3 really bad years in a row now. I finally decided to bite the bullet and move my IRA to a low cost provider, where expense ratios are around 0.5%.

4) After a mixed record with picking mutual funds, I saw a lot of times where I was chasing performance. Oftentimes I would look for funds with a great return over the last 5-10 years. Many times overperformance is followed by underperformance so you may end up buying high and selling low. I now invest almost exclusively in index funds because I do not have to worry about management style for the funds and hopefully I will be able to avoid chasing performance this way.

[WineAndCheese]

Wow... thank you all very much for these meaningful responses. This gives me a lot to go on. Really... thank you!

As for buying a house/condo/townhouse, I would like to purchase in 5-6 years with no more than a 15 year mortgage.

I was just curious about this item. Have you done the cost/benefit analysis on getting your MBA? Are you going for it right out of undergrad or going to work first?

I have not decided yet. Let's operate under the assumption that I will not be paying for it either way. The schools that I will apply to for said MBA are UT, Texas aTm, and Rice. While I see value in working for a company that will put me through an MBA, I also see value in knocking out my schooling all at once and landing a great internship during the summer in the middle of the MBA.

[feh]

You'll also need to determine how much risk you are willing to endure in your investments.

Given your young age, money that you'll be saving for retirement (won't be touching for a very long time) could be (should be, IMO) invested in higher risk/higher return mutual funds, if you can stomach the swings.

[jc3900]

WineandCheese:

Did you get a minor in finance or have you taken a lot of business classes? If so it could be possible to land a job where the cost of an MBA would be stomached by your employer.

What area do you see yourself going into with this said MBA?

Since you are a math major, have you considered Actuarial Science? AS pays really well and the hours you work arn't exactly (selling yourself to the devil).

[humandraydel]

I second The Bogleheads Guide. Another good one is The Four Pillars of Investing by Bernstein.

Are you independent or do your parents support you? If you are independent, you may want to keep the $5k in savings. If they would support you in an emergency and you have a long horizon for this money, you could take more risk.

If you invest the $5k in stocks, be cognizant of taxes. Index funds, especially Total Stock Market funds, are about as tax efficient as you can get and are ideal for taxable accounts. You certainly can't go wrong with Fidelity's Spartan Total Market Index (FSTMX).

As for "evaluating mutual funds"...my answer is: don't. Buy the whole market with index funds. History has shown that most mutual funds don't beat the market (index funds). Plus, index funds are cheaper!

[replimaster]

Sir Rookie;

All of the above advice is sound, IMHO. You have much to learn, but are young enough to withstand the mistakes you will inevitably make. Be happy, and absorb like a sponge.

I might add a couple of great books I purchased and reference still; The Coffehouse Investor and The Morningstar Guide To Mutual Funds. Both are available online at Amazon (among other sites obviously) inexpensively. C.I. will give you a great new way to look at investing and life itself. TMGTMF is a wonderful and easy to understand reference to the world of mutual funds. I recommend both very highly. BTW, Morningstar.com is a site you should bookmark and learn to use (the book will guide you through if you have troubles). It gives you a wealth of information at your fingertips. But... you MUST learn what all those pretty graphs and numbers represent: your future, good or bad.

May God bless you on your journey.

Dave:

[cptacek]

I would suggest "The Intelligent Investor" by Benjamin Graham. It is a very old book, but you can get one that has been updated with more recent examples. Benjamin Graham is the person who taught Warren Buffet how to invest.

Even though it is a 'stock picking' book, what I got out of the book is that I should invest in mutual funds most of the time. But it gives you a great understanding of what you are buying when you buy stocks and bonds (you are not buying a random number in the paper or on the computer screen, you are buying a piece of a company)

I would also suggest learning patience and diligence (not saying that you don't have either...if you already have both, great!) With your math background you will be able to evaluate your investment and lifestyle choices to set yourself up get the best possible return on your money, but it will still take a long time and persistence to pull it off.