Tax-deferred investing is awesome for getting used to the crazy world of investing. I don’t know about you, but I didn’t learn much of anything about investing from my parents, in high school, or in college. I developed some pretty good savings habits and frugal ideas, but not about what vehicles to put that money I saved in.
My first retirement accounts (that I opened while in college) are in 5-year certificates that, when they mature, will roll into more 5-year certificates. I include those in my cash asset allocation and just leave them be.
I started putting money into my employer’s 401(k) pretty soon after I started working full-time a few years ago. I started maxing it out in 2011, which was a great decision. It is now valued at over $30,000 and is a good chunk of my investment portfolio!
1. I have had some interesting adventures with investing in my first few years post-college:
2. I invested my 401(k) in NINE different funds.
3. I opened my Roth IRA with $5,000. I had no idea that you could contribute any less! I thought it had to be $5,000 exactly.
4. I eventually learned the difference between index funds and actively managed funds and why I should stick with index funds.
5. I experimented with ETFs and decided to stick with index funds.
6. I started to learn about asset allocation. I eventually learned that it isn’t really an exact science and it’s really hard to gauge my interest/acceptance of risk without experiencing a significant downturn.
Starting out investing in tax-deferred accounts has been a really great blessing. I have a pretty reasonable sum of money in my 401(k) and Roth IRA at this point. I was able to make strange decisions, mistakes, and good decisions without any tax consequences whatsoever.
One of the “problems” with having reasonable sums of money is figuring out exactly what to do with it. Where to put it. Whether to keep it or to give it away. Having this problem when you’re young and haven’t really had any education in these matters is worse. I’m starting to figure out that for a lot of these decisions, there is no one “right” decision, but many “good” ones and I just have to pick one.
Since I sold off some stock and ETF shares in the fall to improve my down payment, I’ve replaced the dollar amount that I “borrowed” from myself, but I haven’t invested it in anything. I’ve just left it all in a money market fund in my taxable account at Vanguard. With the raise last month, I’m now putting some money in there monthly in addition to with my quarterly RSU vests. But I’m still waiting. I’ve decided that after the July RSU vest, I will finally invest the money into stocks and re-balance my Roth IRA and 401(k) accordingly. At that point, I will have over $10,000 sitting in my taxable account, waiting. Hopefully, at that point I will be a bit more confident in my decision.
My taxable account will not be an insignificant portion of my overall investment portfolio. I estimate that it will be valued around $13,000 by the end of 2012 and that I will add another $10,000 – $15,000 to it in 2013, almost as much as I will put into my 401(k) that year. I’m trying to tread cautiously in trying to decide what to do with this money.
I’ve decided that a cash/bonds allocation of only 13% is more risk than I am comfortable with. My portfolio is currently sitting at about 28-29% cash, so I’m going to instead up the target cash/bonds allocation to 24%. I still want to split international/US stocks 50/50.
This is what my ideal portfolio would look like with the forecasted overall amount at the end of 2012:
- 17% Vanguard Total Stock Market Index Fund (Admiral Shares!)
- 13% Vanguard Total Stock Market Index Fund (Investor Shares)
- 11% 5-year certificates
- 13% Vanguard Retirement Savings Trust
- 38% Vanguard Total International Stock Market Index Fund
- 8% Vanguard 500 Index Fund
(Percentages are of the overall portfolio, not within each individual account.)
Readers, how did you get your feet wet with investing? Did you start in tax-deferred accounts or taxable accounts? What was the silliest investing move you made when you first started out investing?