Where to park extra savings?

**disneysteve** · 03-14-2009, 06:17 PM

A few comments in no particular order:

You don't have an adequate EF. 3 months of expenses is a minimum. Suze Orman advises 8 months. I'd work on at least getting it to 6 months.

I would use a MMF or CD for money I expected to need in 2 years. Forget about transferring back and forth between a MMF and a bond fund. Every time you sell shares of a bond fund, that is a taxable event, which is not true of the MMF. That would create an accounting headache at tax time.

Why do you want to get into individual stocks instead of mutual funds? The "buying is good" comment applies just as well to funds as it does to individual stocks. In fact, even better since you get instant diversification. You can buy the whole market (through something like Vanguard Total Stock Market Index) or any segment of it and you can do it with small monthly investments and zero commission.

**Phatphoeater** · 03-14-2009, 06:30 PM

Stocks are sexier and I'm willing to accept that my portfolio of ~10 stocks may lose to an index fund on appreciation. Some of these individual companies are in the >5% yield territory now. With an index fund wouldn't that be diluted with the rest of the companies? Is this too short-sighted? I must admit I am a bit of a gambler.

I will definitely get that EF funded a bit more, as I'm getting a nice tax refund.

**disneysteve** · 03-14-2009, 06:40 PM

I've got nothing against dabbling in individual stocks. I do it myself with a small portion of my portfolio. The vast majority is in funds.

There is no reason that you have to put money in every month. You could accumulate cash in your MMF for 2-3 months and then buy stock. That would lessen the impact of the commission.

**Phatphoeater** · 03-15-2009, 06:32 AM

After going back and actually doing some research, I found a Vanguard fund (VHDYX) which currently yields 5.3X%. All with an ER of 0.35%. I'd have to invest $3500 at a time with sharbuilder's $12/mo plan to get that kind of commission rate and thats not even counting the backend. I'd give up the ability to pick and choose but over the next 30 or so years I think I'd give up alot of ground in fees since I wouldn't be able to make that ER go away investing $1k/mo.

After sitting down to do this little exercise I also looked for a calculator to look at the commission cost over 30yrs wwwdotcpf.gov.sg/cpf_trans/ssl/financial_model/expense_cal2.asp
Amount invested : $12,000
Annual return : 8.00%
Projected expense ratio is : 1.20%
What if the expense ratio is : 0.35%
Net market value after Difference
1 year $12,816 $12,918 $102
5 years $16,674 $17,348 $674
10 years $23,168 $25,080 $1,912
15 years $32,192 $36,257 $4,065
20 years $44,731 $52,416 $7,685
30 years $86,361 $109,547 $23,186

Messy formatting but after 30yrs $23k+ loss

**KTP** · 03-15-2009, 07:17 AM

You are in a high tax bracket like we are if you can't invest in a roth. For that reason, maybe individual stocks or spiders makes sense?

I could see someone investing in just 10 quality stocks and doing quite well...just open an etrade account or something with $7 trades.

Things like:

Walmart
Exxon
McDonalds
Google
J&J

etc.

These companies are not going to return 30% a year, but they probably won't be the next Enron or HomeGrocer either. The tax benefit of owning individual stocks or spiders is you do not realize a taxable gain other than dividends until you sell the stock. So in a sense, it is in a tax defered account!

**Phatphoeater** · 03-15-2009, 07:32 AM

Thanks for a different perspective. Even with a relatively low turnover within the vanguard fund i cited above there will be capital gains/losses to report every year, right? I hadn't though of that. The approach you outline is exactly what I wanted to do, gathering quality companies with beaten down prices that provide good yields for the long haul.

To drive down the fees though, I'd have to sink my cash into 1 company per month rather than divide up each month's allotment. Is there a problem with going the 1 company per month path rather than dividing up the monthly investment into multiple companies? The rising fee percentage becomes an issue when dividing the monthly investment.

**KTP** · 03-15-2009, 08:55 AM

If you want to really diversify in stocks without having to have to buy a small number of a lot of companies which would drive up your investment costs, look into spiders. It is a bank trust held account of a share of all companies in the S&P500 and is traded like one stock under the symbol SPY. It tracks the S&P500 / 10. ie, when the S&P500 is 750, the SPY shares are $75. You get dividends from the companies held by the SPY trust just like if you owned that percentage of the individual company.

Of course by owning 500 companies you are going to get some dogs along with some top performers, but if you are worried about diversity, might be a way to go. With an index mutual fund, you can accomplish the same thing, but they may generate taxable gains during each year, where the SPY shares will not (except for dividends).

**Crombo25** · 03-15-2009, 02:40 PM

Hi -
We are nearly exactly the same in terms of background (I am in my early 30s). I'm looking to do the same as you and looking to invest some of my extra savings.

I'm looking into the "Index plus a few" strategy. It almost sounds like it's the route you may look into. To help with the "security" and diversification I was looking to put say 60-70% of each buy into an index fund and the remaining 30-40% into stocks of 1 or 2 companies of my choosing. I hear this is a great strategy to start and/or keep your money somewhat secure.

As I learn more, I will look into other strategies.

Best of luck to you and I'll watch this thread for other wonderful advice given.

**Phatphoeater** · 03-15-2009, 03:57 PM

Depending on the broker you go with and the absolute dollars that make the 30-40% portion, fees may eat you up. That's why I was looking at going to 50% or $1k/mo to minimize the fees but would be forced to make 1 company investment/mo. Using a brokerage like Tradeking a $1k trade would require a 0.5% fee which seems reasonable to me. I figure at the end of 12 months I'll have a portfolio of 12-ish companies.

After Steve's post, I was certain about going the index fund route, but KTP brought up the issue of yearly cap gains/losses as the fund turns over assets. I plan on buy and hold, so holding those 12 companies with the added compound growth of reinvested dividends is what I'm shooting for. I've got a few weeks until my next paycheck to sort this out, so I'm hoping for more input here.

**Phatphoeater** · 03-18-2009, 05:05 PM

I have access to a 403b and a 457, which can both receive up to $16,500/yr. I have only been maxing out the 403b without thinking it necessary to contribute any further. This thinking led me to have this $1900/mo surplus.

When I started this thread, I intended to buy and hold high div yield stocks until I retired 20-25yrs from now. It does make more sense to invest the same pre-tax dollars in the 457, right? I understand that I'll have to use funds instead of individual stocks but this is a no brainer, right? I also learned that there is no penalty for withdrawal before age 59 1/2. Another bonus, as I was concerned about having money tied up in things to which I don't have access.

Strange as it may sound, I had this realization after looking at my anticipated 2009 taxes and looking at ways to get closer to the 25% marginal tax bracket!

edit: For every $1k in pre-tax dollars, I'll only have to reduce my monthly take home by $490 after adjusting my withholding. This has to be a no brainer. Am I wrong?

Where to park extra savings?