Any ideas to invest around $4000 annually?

[BD85]

Starting in Nov ill be able to invest 4 dimes annually.I was looking at roth IRA's, seems safe way to invest and grow my investment. On the internet there were calculations that predicted if i invest 4000/yr for the next 40 yrs (im 20 so 40 yrs will take care of the 59 1/2 rule) with a avg growth rate of 10% the total will be a little over 2 million. Seems too good to be true. Also, will it be a problem if this money is made under the table? And once im in a high tax bracket is it wise to start a regular IRA?

I also think i should set up a savings account for emergencies so i dont pay taxes and penalities for tapping into the IRA's. Any suggestions to what invest the IRA in: stock, mutual funds, bank?

I hear that Bush wants to impliment a Life Savings Account in 06 and is even better than a roth. What ive heard is that max contribution is 5000, you dont need an income, no max income, and no penalities for taking it out (you can use it for school, house, retirement). Any down side to this LSA? Have you heard if it will pass or the chances of it passing?

Real estate is an idea as well but i dont have enough knowledge or bankroll yet, that will come along down the road.

I heard people suggest put money in mutual funds, but ive also heard im better off with an index fund. And then someone commented that it is unwise to invest in the index because for the next decade it is expected that the market will decline? I know i am only 20 and have yet to experience many successes and failures of life and that is why im asking you, who has, to help me step in the right direction.

[alekhine8]

You need to figure out what your financial goals are. First, you should probably setup an 'emergency' fund of three to six months of your living expenses before you start investing any significant amounts of money. You can put this money in certificates of deposit, money market accounts/funds, government bonds, or even an interest-paying checking account.

Besides that, a Roth IRA is a great way to go - provided you want this money to go to retirement and keep your hands off it for 40 years. I would recommend putting it all in either stock funds or some kind of retirement index. For example, Vanguard has funds that are "Retirement 2015", "Retirement 2025", and has these going up to 2045. They aren't bad too - just make sure whatever you pick isn't more than 20%-25% in bonds as they will lower your long-term return. They lower your risk too, but if this is retirement money, you have a long time to wait out the market downturns.

By the way, you can only contribute to a Roth IRA if you have earned income (must have $4,000 of earned income to make the $4,000 annual contribution) - so that could be a problem.

Who knows with regards to life savings accounts - for now, assume they wont materialize.

[gvibes]

10% may be a little optimistic, but not horribly so.

TR 2045 would be a good place to park it until you've read some books like A Random Walk Down Wall Street and its type.

[michiganfan9]

Depends on your age. I'm 15 and invest about 4k annually but mines all in individual stocks. Soon I could dump some cash into a roth IRA so by the time i'm retired i will have over a million dollars. Definitely set up investment goals. You can't invest if you don't have any goals. Look into some bonds or hedge funds if your looking for some slow steady growth or do your homework, run stock screeners and much more, get inside a company and follow warren buffett's strategies if you are picking individual stocks like i am.

[James Boston]

[ QUOTE ]
Look into some bonds or hedge funds if your looking for some slow steady growth

[/ QUOTE ]

What hedge fund will let you in with $4K?

[michiganfan9]

Then look for individual stocks that have a book value greater than trading value.

[James Boston]

Hedge fund & Individual Stock...2 completely different things.

[ QUOTE ]
Then look for individual stocks that have a book value greater than trading value.

[/ QUOTE ]

What?

[michiganfan9]

It means that its currently undervalued.

[James Boston]

Book value is the total value of a companies assests. In other words, what the company claims they would be worth if they liquidated everything they had. "Claims" is the key word. Book value can also be inaccurate. As to whether or not a company who's book value exceeds market cap is undervalued, I don't know. It depends on the company. However, if a company is valued at less than its net assests, you can be sure something isn't right. It may still be a good buy in some cases, but it's not as simple as you make it out to be.

[michiganfan9]

I know what your saying but that is the basis for Warren Buffett. Read his checklist at Forbes.com His main thing is finding undervalued stocks or in essense book values greater than trading value that still have a proven track record.

[adios]

...

[James Boston]

Warren Buffet discounts the value of all future cash flows back to their present value to determine INTRINCIC, not book, value.

[RocketManJames]

Book value is a fairly "old" metric. Old in the sense that many older companies actually have a lot of assets such as equipment that might comprise a lot of the company's value. Newer companies tend to have less book value, since newer companies tend to have a larger service-component (since the world is slowly migrating more towards a service-based economy). A service-based company would have very little book value, for example. But, this alone should not be enough to preclude it from being a worthwhile investment.

Also, while book value is a hard number, the true value of the book value figure is quite subjective. True liquidation value is never at full book, and depending on the type of assets, the actual liquidation value can vary by quite a bit.

And, the whole thing about hedge funds and $4k made no sense.

-RMJ

[michiganfan9]

But if the book value was greater than trading wouldn't it still most likely be undervalued?

[James Boston]

[ QUOTE ]
But if the book value was greater than trading wouldn't it still most likely be undervalued?

[/ QUOTE ]

In some cases, maybe. Like RocketMan said, many companies today are more service oriented. They have fewer liquid assests, and mainly the quality of the service is what matters. If they are trading below the book value of a company that already has a small amount of assests, the market basically thinks their service sucks and they aren't making money.

To go further, would you buy a company if you thought, at best, it was only worth what you could sell the assests for? I wouldn't. Given two options. You can pick 2 companies that have an equal amount of book value. One is trading at half of the book value and has x in cash flow. Two is trading at above book value, but has 15x cash flow. Which one do you think will be worth more in the long haul?

[michiganfan9]

I'm sry about that. i dont' really know much about hedge funds and don't know why i posted that. I apologize.

[scottgiese]

While it's true that $4k per year contributed and a growth rate of 10% per year gets you to $2M in 40 years, bear in mind that $2 million in 40 years is only gonna buy what $500k buys today (assuming inflation of 3.5%, which is about average).

That's good, but it ain't exactly easy street, just so you know.

You obviously aren't really experienced in investing, so I'd definitely recommend sticking to index funds for a few years at least. The S&P 500 is a popular index you can buy easily enough under the ETF (exchange-traded fund) with ticker "SPY". You buy and sell it just like a stock, but it tracks the S&P index. Mutual funds by and large underperform this index, mostly because they charge fees.

You can take out any amount up to the amount you've contributed from a Roth IRA for any reason, tax-free and without penalty. Profits, you can only withdraw without penalty after 59 1/2.

<<And then someone commented that it is unwise to invest in the index because for the next decade it is expected that the market will decline>>

Whoever said that, don't take investing advice from them. Expected by whom, exactly? Not by the holders of the S&P index and its components -- not many people invest to actively *try* to lose money.

Which is not to say that the S&P 500 won't drop over the next 10 years. It might, but the market doesn't expect that. It's pretty rare to get a negative return on this index over that long a period.

[Delphin]

The most typical advice for investing your IRA money assuming a 40 year horizon would be to go 90-100% stocks.

A decent split would be 50% large cap, 20% small cap, 25% international, 5% cash or equivalent.

For large caps, an S&P500 index is the easiest way to go (which invests in the 500 largest US companies), but you can also pick from the many other mutual funds available that invest in large cap stocks. You can get similar indexes for small cap and international stocks, or pick and choose from the hundreds of mutual funds available in these areas.

Many funds offer $500 minimums or less for IRA accounts, so you can spread it out over a few funds to lower your risk. Investing 333.33 a month might be better than putting all $4k into the market on any one particular day during the year. Do some research on "dollar cost averaging" to find out some of the benefits.

[wickedgoodtrader]

Put it in Jones Soda (JSDA)... I'm thinking it could be a 10-20 bagger over the next 10 years.

[gvibes]

[ QUOTE ]
The most typical advice for investing your IRA money assuming a 40 year horizon would be to go 90-100% stocks.

[/ QUOTE ]

I think one would need an extremely high tolerance for risk to be 100% invested in stocks. I go 75/25 myself at age 26, and I feel I have a high risk tolerance.

[Sniper]

If you can't take risks in your 20s, when can you take them?

Depending on the specifics of your financial situation, you might even consider moving the 25% you currently have in presumably "safe" investments to "speculative" investments to juice your returns.

Now is the time to do it.

[Delphin]

[ QUOTE ]
[ QUOTE ]
The most typical advice for investing your IRA money assuming a 40 year horizon would be to go 90-100% stocks.

[/ QUOTE ]

I think one would need an extremely high tolerance for risk to be 100% invested in stocks. I go 75/25 myself at age 26, and I feel I have a high risk tolerance.

[/ QUOTE ]

You have a much lower risk tolerance than you think. At your age, assuming you have some cash set aside to get you through an emergency (2-3 months expenditures is typical), most investors would not be willing to sacrifice the potential gains for lower risk at your stage in the game.

I am 27 and married with substantial savings (including 401k and IRA accounts for retirement as well as personal brokerage accounts) that are always 95+% invested in equities (mostly mutual funds).

The stock market averages around 8-10% annual returns when you look at 10+ year periods in the post depression era. Most investors are not willing to give up those levels of returns when they will not need access to the money for 20+ years. You will not get those kind of returns in CDs, treasuries, bonds, or any of the other lower-risk investment vehicles.

You are trading win/rate for lower variance in poker terms. When you have 40 years left to make money, variance shouldn't be that important. You want to maximize the return you get over those 40 years, and that requires investments that have some volatility. If you are the type who can't sleep when any of your investments are in the red, then it obviously isn't for you. If you are truly interested in getting the most out of your money with a long term perspective, then investing primarily in equities for the first couple decades is a no-brainer.

To simplify long term investing, a lot of companies now offer funds with target dates. Most of the longest horizon funds are targeted at the date 2040 at this time. These funds make sense for young investors who don't expect to retire until 2040 or later. A quick sampling shows that these funds are invested 85-100% in stocks.

100% stock

http://wwwrs.massmutual.com/Retire/PDFFolder/profiles2/RM3637At.pdf

90% stock

http://personal.fidelity.com/products/funds/mfl_frame.shtml?315792101

88.8% stock

http://quicktake.morningstar.com/Fund/Snapshot.asp?Country=USA&Symbol=RRTDX&hsection=&pm ts=

88.3% stock

http://flagship4.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0306&FundIntExt=INT

85% stock

http://www.schwab.com/public/schwab/investing/investment_products/mutual_funds/schwabfunds/schwab_fund_category_pages/asset_allocation_desc.html

[michiganfan9]

I agree, the only reason why i have 100% of my money in stocks is because i'm 15. Sure in maybe 10-20 years from now i'll put it in some mutual funds or bonds or whatever. As well as a roth IRA.

[Delphin]

[ QUOTE ]
I agree, the only reason why i have 100% of my money in stocks is because i'm 15. Sure in maybe 10-20 years from now i'll put it in some mutual funds or bonds or whatever. As well as a roth IRA.

[/ QUOTE ]

Mutual Funds and Roth IRAs aren't types of investments.

Mutual funds are just a way of letting someone else pick your investments for you. Some mutual funds buy only stocks, some buy only bonds, some buy both, and some buy neither. When you are investing only a little money, mutual funds are actually one of the best investments you can make because they allow you to diversify with very little money.

The first money I invested in anything other than a savings account was $500 in a mutual fund when I was in 7th grade. That $500 got invested into 20+ different stocks, which changed as the fund manager saw fit. I didn't have to research each of those stocks or decide when to buy or sell any of them. I also didn't have to invest all of that money in the stock of one particular company. Those are the advantages that mutual funds offer. When I say I'm invested in 95% stocks, I mean some individual stocks, but mostly mutual funds that invest in stocks.

A Roth IRA is just a type of account that you hold investments in for retirement. The primary advantage is that any money you make on investments in a Roth IRA is not taxed by the government. The drawback is that you cannot withdraw money before retirement age without a penalty, and there is a limit to how much you can contribute in a year. I wouldn't wait 10-20 years to start an IRA either. Once you have a job and income, a roth IRA is a great idea. I have been maxing my Roth IRA every year since I was 16.

[Sen. VernonTrent]

And you can take that to the bank.

[michiganfan9]

[ QUOTE ]
[ QUOTE ]
I agree, the only reason why i have 100% of my money in stocks is because i'm 15. Sure in maybe 10-20 years from now i'll put it in some mutual funds or bonds or whatever. As well as a roth IRA.

[/ QUOTE ]

Mutual Funds and Roth IRAs aren't types of investments.

Mutual funds are just a way of letting someone else pick your investments for you. Some mutual funds buy only stocks, some buy only bonds, some buy both, and some buy neither. When you are investing only a little money, mutual funds are actually one of the best investments you can make because they allow you to diversify with very little money.

The first money I invested in anything other than a savings account was $500 in a mutual fund when I was in 7th grade. That $500 got invested into 20+ different stocks, which changed as the fund manager saw fit. I didn't have to research each of those stocks or decide when to buy or sell any of them. I also didn't have to invest all of that money in the stock of one particular company. Those are the advantages that mutual funds offer. When I say I'm invested in 95% stocks, I mean some individual stocks, but mostly mutual funds that invest in stocks.

A Roth IRA is just a type of account that you hold investments in for retirement. The primary advantage is that any money you make on investments in a Roth IRA is not taxed by the government. The drawback is that you cannot withdraw money before retirement age without a penalty, and there is a limit to how much you can contribute in a year. I wouldn't wait 10-20 years to start an IRA either. Once you have a job and income, a roth IRA is a great idea. I have been maxing my Roth IRA every year since I was 16.

[/ QUOTE ]
I meant that I was going to start a roth IRA now. We just learned about them this year and if I start putting about $2,000 annually for the next three years I should have approximately a million dollars when i'm allowed to take it out.

[James Boston]

[ QUOTE ]
if I start putting about $2,000 annually for the next three years I should have approximately a million dollars when i'm allowed to take it out.

[/ QUOTE ]

please explain

[michiganfan9]

I haven't looked at it throughouly but my business teacher said that if I deposit $2000 into a roth IRA for the next 3 years it should be worth around a million dollars when i'm allowed to take it out. I'm 15 now so when if i deposit 6k by the time i'm 18 that's about 37.5 years that it will be multiplying.

[michiganfan9]

I don't know the exact percent rate for a Roth IRA I should've looked it up.

[James Boston]

[ QUOTE ]
I don't know the exact percent rate for a Roth IRA I should've looked it up.

[/ QUOTE ]

There's no such thing as an "exact percentage rate for a Roth IRA." A Roth isn't even a type of investment, it just denotes the taxation. A Roth can be stocks, bonds, CD's, mutual funds...whatever. And I think $6K into a million is a bit of a stretch in the time period you've mentioned.

[Delphin]

[ QUOTE ]
I haven't looked at it throughouly but my business teacher said that if I deposit $2000 into a roth IRA for the next 3 years it should be worth around a million dollars when i'm allowed to take it out. I'm 15 now so when if i deposit 6k by the time i'm 18 that's about 37.5 years that it will be multiplying.

[/ QUOTE ]

$2000 a year for 3 years and then stop. Assume 8% return per year, which is a good long term average for the stock market.

link (http://img8.echo.cx/my.php?image=ira2k3years7ra.png)

Contribute the maximum allowed each year for 35 years. Assume 8% return per year, which is a good long term average for the stock market.

link (http://img8.echo.cx/my.php?image=iramax35years6na.png)

[RocketManJames]

[ QUOTE ]
I don't know the exact percent rate for a Roth IRA I should've looked it up.

[/ QUOTE ]

Others have stated some of this, but I'll list out a few points for you to investigate and/or digest.

1) Roth IRA is not a type of investment, it is a special account that you're allowed to put a little bit into each year that has tax advantages.

2) You can't put any money into the Roth IRA if you didn't have earned income for the tax year. I mention this, because you're 15. I don't know the rules in Michigan, but in many states you can't legally hold a real job at that age.

3) At some point in your life, you will hopefully make enough where you are no longer allowed to put money into the Roth IRA. When this happens, your Roth IRA stops growing from new cash injections, and can only grow from investment gains. If you hit the Roth IRA income limit early in your life, then the Roth IRA really doesn't play that large a factor any more. If it doesn't happen, by all means, keep on contributing.

4) You probably misunderstood your teacher regarding the $3K for next 3 years and letting it sit for 38 years and having $1MM. You'd have to be getting roughly 13-14% annualized return to achieve this. This is incredibly difficult. If you did not misunderstand your teacher, then your teacher is completely wrong.

5) Why you'd only want to put in $3K is odd. If you heard this recently from your teacher, then it is very possible the teacher doesn't even contribute to a Roth IRA. Why? Because, the contribution limit got bumped to $4K starting this year, and will get bumped again to $5K in 2008.

6) I think it's great that you're 15 and have a definite interest in the financial markets and retirement planning. I was the same way at your age. I bought my first mutual fund (Vanguard 500) in high school. But, one thing you should not do is give advice to those wanting to learn about investing when you're obviously lacking the proper knowledge at this point to provide sound advice. Don't take this the wrong way... you're 15. You're way ahead of the vast majority of your peers.

-RMJ

[michiganfan9]

It could be I soley based that on what my business teacher claimed, which probably wasn't very credible.

[michiganfan9]

[quote


6) I think it's great that you're 15 and have a definite interest in the financial markets and retirement planning. I was the same way at your age. I bought my first mutual fund (Vanguard 500) in high school. But, one thing you should not do is give advice to those wanting to learn about investing when you're obviously lacking the proper knowledge at this point to provide sound advice. Don't take this the wrong way... you're 15. You're way ahead of the vast majority of your peers.

-RMJ

[/ QUOTE ]
I appreciate your post and will try not to respond to others investment questions and probably should be doing the opposite. Sry about the name but I actually live in the suburbs of chicago not michigan. I just love the B-school and want to attend it someday.

[michiganfan9]

Thanks for the post, turns out my business teacher has absolutely no clue on what he is talking.

[handsome]

[ QUOTE ]
By the way, you can only contribute to a Roth IRA if you have earned income (must have $4,000 of earned income to make the $4,000 annual contribution) - so that could be a problem.

[/ QUOTE ]

My only income comes from poker/casinos. Does this count as earned income? Also, I'm trying to open an account at BrownCo but they ask for employment information (occupation, employer's name, address) and financial information that I'm not sure about (income, estimated net worth, liquid net worth). I'm still a college student. Can someone please help me out here?

[alekhine8]

Gambling winnings do not count as earned income to determine your allowable distributions to a Roth IRA.

As far as opening an account at Brown, just tell them you are a college student. If thats a problem for them, find another broker - there are plenty out there.

[srolle]

buy lots of TZOO.

[handsome]

[ QUOTE ]
Gambling winnings do not count as earned income to determine your allowable distributions to a Roth IRA.

As far as opening an account at Brown, just tell them you are a college student. If thats a problem for them, find another broker - there are plenty out there.

[/ QUOTE ]

So the only way I can put money into a Roth IRA is to get paid $4,000 through a "real" job?

[alekhine8]

Looks like you're stuck. Per fool.com (pretty good reference):

To make a Roth IRA contribution, you must have earned income. Earned income is generally income you receive from working -- as compensation for your labor in one form or another. It's reported to you on a W-2 form, or you report it on Schedule C (Business Income) or Schedule F (Farm Income) with your normal tax return. Earned income generally does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains. Remember also that earned income also doesn't include foreign earned income that is not taxed by Uncle Sam by virtue of the foreign earned income exclusion.