Stock Market newbie asks simple question . . .

[Bokonon]

Between having a real job for once (damn did grad school last a long time), and lovely lovely poker, I finally have a little disposable income . . . which I'd like to keep relatively liquid.

I'd also like it to make more than 1% interest. A friend suggested that for now I sock it (it = ~6k for now, but I imagine it'll be going up around 2k/month) into a stable value fund or a bond fund using E-trade.

Sounds good to me, I said. But which fund? For now, I want minimal risk and maybe a 4-5% return on my investment. Is that an unreasonable expectation? Any suggestions about where to start or what funds to consider? I'm really quite lost.

[blueboles]

IBD.
that should set you straight.
This is just my opinion, other may differ. also, i have no professioal credentials.
Best of luck,
kelley

[Ashe]

Investing short term is always a gamble. For security, throw it at a saving account or money market fund. If you do a search on the web you could probably find one paying over 2%. There's a site that give you the best rates, but I can't remember it.

If you really wanta get into the market, I'ld go with a Vanguard index fund, probably a stock fund. You can go directly through them or buy their spiders that trade like stocks.

[AcesUp]

Presumably you got good at poker because you studied and read the information offered by knowledgable people. I would suggest that you do the same thing with your investing, as it's likely to lead you to more important financial prosperity (or lackthereof) than poker ever will.

Pick up a good book on investing and asset allocation. Learn about "efficient frontiers," which is an investing strategy used to maximize return while minimizing risk.

If you view investing as a long-term proposition, the key is diversification. While it's possible to "time the market" or "pick a winning stock" in the short-term, in the long-term the best thing you can do is diversify with a bunch of negatively correlated assets, and let appreciation and compound interest take its course. Others may tell you to learn how to "play the stock market," and while it's certainly possible to make money by just picking stocks, what you'll eventually find is that the risk/variance is very high and the ultimate annualized return is less than a highly-diversified investment with much less risk.

While it's a bit difficult to diversify with only $6K, it's certainly not out of the question. Vanguard (as well as a number of other mutual funds) now offer "asset allocation" mutual funds that will diversify your investment across a number of asset classes (treasury investment, corporate bonds, domestic equities, foreign equities, emerging markets, precious metals, etc). I would start there, and as you increase your total net worth, start diversifying on your own, based on your own risk/return/variance preferences.

If you're looking for a good book, unfortunately there are none that I feel offers everything you might want to know on the subject. But, a good place to start is "The Intelligent Asset Allocator," by William Bernstein.

Of course, if you're just looking for a short-term investment with minimal risk and high liquidity, you should consider an ING Direct savings account (no minimum investment with the highest savings interest rate I know of), a short-term CD (though you won't get much more than in the ING savings account), or perhaps some short-term treasury bonds.

[adios]

"Sounds good to me, I said. But which fund? For now, I want minimal risk and maybe a 4-5% return on my investment. Is that an unreasonable expectation? "

Yep at least how I define minimal.

"Any suggestions about where to start or what funds to consider"

With an amount of 6k you'll have to take more risk than you probably want to in order to get 4% or 5%.

[AceHigh]

If you are willing to take more risk, you might want to look at some REIT's. NFI, IMH and ACAS all pay yields of 11% or greater. I especially like NFI and there current yield is in excess of 15%.

[MtnDave]

Why do you want to be so conservative when you are so young? Now is the time to take risks with your investments as you have time on your side.
That's what I did when I got out of Graduate School and it worked in the long run as I was able to retire early.
However, I would also like to second the recommendation of REITs (with some, you can roll over the interest) and also suggest the California Tobbaco bonds as a low risk alternative.

[Bokonon]

Thanks to all who responded! Questions/comments:

1) What's an REIT?
2) What's an IBD?
3) What's a 'spider'?
4) I don't have the time at the moment to learn an entirely new skill, and I
am loathe to toss a bunch of $$ into the market before I know exactly what I'm
doing. It'd be pretty ironic for me to be a shark at the poker table only to turn
around and be a fish in the market!
For instance, I should probably learn what an REIT is. And an IBD. And a 'spider'.
I also have a 401k now and a friend recommended that if I'm going to make any risky investments I play around with *that* first. Sounded reasonable to me. Down the road I *do*
plan on not being so conservative with my non-401k $$; for now, though, I was
hoping that I could just get a bigger return than 1% without having to put much
thought into the matter. Looks like I was incorrect.
5) I'll definitely check into The Intelligent Asset Allocator, Aces. Can anyone
else recommend any reading? I'm quite sure they've got a "Stock Market for Dummies"
book out there -- I really should pick it up, eh?

[AcesUp]

First, just like poker, it's not a very smart idea to start playing if you don't understand at least the rules of the game. This includes terminology and basic principles.

As it sounds like you're starting fresh (you don't know what a SPDR or REIT is), I would suggest picking up a copy of "The Idiot's Guide to Savvy Investing" or the "For Dummies..." equivalent. While I wouldn't suggest using those for determining an ultimate portfolio or investment strategy, they will at least give you an overview of all the major investment vehicles (equities, treasury notes, real estate, precious metals, etc) and the trade-offs and correlations of each.

Next, start reading some of the major discussion groups over at The Motley Fool online (www.fool.com). They have some of the consistently best generic and specific investing advice I've found on the Internet.

Lastly, read "The Intelligent Asset Allocator" to put all the pieces together.

Total lesson plan will cost about $50 (for the two books), and take a couple weeks. The time and money you spend will far outweigh the savings from just jumping blindly into the investing world.

In terms of your 401(k)...

I would *NOT* suggest using your 401(k) as an opportunity to start experimenting with the market. If anything, continue putting money away in your 401(k) every pay period, preferably allocating it to an aggressive index fund or mutual fund. Consider this your nest egg for retirement. While it seems like you have lots and lots of time to make investing mistakes and keep starting over, the reality is that if you start your 401(k) at the age of 35 (or start over if you lose a lot of it), at retirement you'll have about half the amount you would have had if you started at 25. Compound interest is pretty amazing in this respect.

So, while there is definitely some truth to not having to be overly conservative with your 401(k) at your age, don't look at it like play money either.

If you want to play around with investments, keep aside some cash (like you're already doing), and use that. But, consider my advice above about reading a book or two first. Just because you *CAN* learn to play poker by sitting down in a $50/100 game doesn't mean you *SHOULD* learn to play poker that way; the same goes for the stock market.

[AcesUp]

By the way, the answers to your questions:

First, a quick overview of how a mutual fund works:

You give a mutual fund company some money, they pool that money with money that other investers give them, and they use all the money to buy a bunch of stuff (that stuff could be stock, bonds, gold, or whatever). They break the total holdings of the mutual fund into shares, and you get a certain number of shares of the fund for the money you invest (just like a stock). When the holding of the mutual fund go up or down, the price of each share goes up or down proportionately. The mutual fund manager may be buying and selling stuff in the fund on a daily basis, but you're trusting that he or she is buying and selling intelligently, and ultimately trying to make you money (by increasing the share price of the fund).

Now on to your questions...

1) REIT (Real Estate Investment Trust). An REIT is essentially a mutual fund that invests in real estate or real estate vehicles. Some REITs invest in land, some invest in commercial properties, and some might even invest in mortgages or bonds issued by mortgage companies. Investing in an REIT is a cheap and easy way to invest in real estate.

2) I have no idea???

3) A SPDR is one example of an ETF (Exchange Traded Fund). An ETF is very similar to a mutual fund, but is more like a stock. Mutual funds often don't cost anything to buy (but you do pay a yearly fee while you hold it); with ETFs, you pay a trading commission just like a stock. ETFs are generally made up of a whole category of equities. For example, you can get an ETF that is made up of all the stocks on the Nasdaq or S&P 500. So, think of an ETF as a mutual fund that you buy through your stock broker (as opposed to a mutual fund company).

[RollaJ]

IBD=Investors Business Daily. A financial newspaper published daily. More geared towards individual investing than the WSJ. ...........j/k Wall Street Journal