Ada writes in:
Like you, I think the stock market is near the bottom right now and will go up greatly in the next three to five years. I have some extra cash (about $10K) but I don’t know exactly what to do with it to get on board. How would you do it?
In fact, I’m already doing it. My wife and I made the decision to start investing much of our long-term savings for a home into stocks because we both feel that the market is at the bottom right now and is poised for a big rebound in the next five to ten years.
So, what are we doing?
What Are We Investing In?
Most of our investment is going into index funds. For those unaware, index funds are a way to invest in a lot of stocks at once at a cheap price. A given index fund is usually governed by a simple rule - all stocks in the S&P 500, for example. Index funds have long been lauded as a great way to easily diversify at a very cheap cost.
We’re investing all of our money equally into two funds - the Vanguard Total Stock Market Index (which basically covers all domestic stocks) and the Vanguard Total International Stock Index (which broadly covers all international markets). In other words, the money is as diverse as we can make it.
At the same time, there are a number of individual companies that my wife and I particularly believe in for one reason or another (Apple being one, for example). While we both recognize that individual stock investing is a risky proposition, we also know that our investment choices reflect the things we believe in.
So, we’re allocating a small portion of our overall investment into a diversity of individual stocks - 20, to be exact. Each month, we’re automatically investing a small amount into each of these twenty stocks. Our investment amount in individual stocks is about 25% of the amount we’re putting into index funds.
Who Are We Investing With?
Our index fund investments are handled by Vanguard. We’ve trusted them for years - they’re known for their low-cost index funds and their reliability, which is exactly what we want. They’re also managing my Roth IRA, which they’ve done quite well.
Our individual stocks are being managed by Sharebuilder, which we decided on after a fair amount of hand-wringing. Their automatic investment plans were simple and reasonably priced (without any of the factors that made us nervous about the few brokers that undercut Sharebuilder in price), plus we weren’t restricted in our investment choices (as many of the companies we wanted to invest in didn’t have direct plans for investing). Since we’re planning on just doing automatic investing until the time comes that we actually need the money and then we’ll sell all of it (no market timing here), the actual management of the money for tax purposes will be pretty straightforward, too.
Isn’t This Risky?
Undoubtedly it is. That’s why we’re not putting any of our emergency fund, any of our retirement, or any of our short-term saving goals at risk. The money we’re investing here is money that we will only tap in the long term (ten or fifteen years or so) for the place in the country we’ve always dreamed of. Ideally, the stock market will help take us there a bit quicker than we might be able to otherwise, but if it doesn’t work, we’ve not really risked anything that affects our day-to-day lives, then or now.
Also, this plan merely reflects what we’re doing. You might want to be more conservative with your own savings for long term goals like this, and you certainly wouldn’t want to do anything like this with money you will need to rely on in the future.
We’re only able to start doing things like this because we’ve cut our spending drastically over time and we live by a mantra of spending less than we earn. Because of that, we can now make choices like this, paving the way to our dreams.
The Simple Dollar chronicles a man's road to recovery from "total financial meltdown." As author Trent Hamm puts it, "The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two." We'll post a couple of entries a week, but you can check out his writing daily at www.thesimpledollar.com