Investing small amounts?

[Juustin]

Hey everyone. Sorry if this is a vague question, but I'm just curious about this.

I have a modest amount of money in my savings account. I own a home, so I obviously want to save money just in case of an unexpected emergency. At the same time, I feel like it's silly to have ALL my savings just sitting in an account collecting some tiny amount of interest.

Are there any sorts of investments that are worth looking into if you're only looking to invest say $5K or so? Or does it simply not make sense with all the fees you'd end up accruing.

I'm not looking to be a buried in money in 5 years from this. I'm just trying to stay ahead of the game. I'm 27, so I feel like if I start now, I can opt for more safe and sturdy gains, since I don't want a huge level of risk, as I can't afford to lose that money.

I'll post the disclaimer for you: I am not going to invest a large chunk of my money in something just because someone on an internet message board says to (though I realize the average poster here is a lot more intelligent than most message boards). I'm just looking for someone who may have been in a similar situation to offer up some tips so I can investigage further.

Thanks!

[fuelair]

Can't give you a specific rule but a general one that is usually good to follow is never invest more than you can afford to lose. I suspect you cou;ld get into a mutual fund with 5K or less and those usually perform better than banks. End of my great ideas: Good luck!!

[Alric]

The one variable that makes the biggest difference on how well people retire is how early to start investing. 5k is an excellent amount to invest in a mutual fund. Considering you are 27 if you don't foresee needing the money any time soon I would invest it in a relatively high risk fund. I look Vanguard mutual funds due to their small expense. Stay away from known names like Fidelity or Merrill-Lynch. Needless to say maximize your 401k first.

I tend to stay away from individual funds because of risk but if you are going to buy one stock buy AAPL, today....

[Juustin]

Yeah, I don't know if this is my "retirement" money really. I started a 401k at 21 and I've always put the max I was allowed, and my company matches and does profit sharing, which comes to about twice what I put in, so after 6 years I actually have a pretty good amount in there. This is more along the lines of money to sock away for when we decide to sell our house and get something nicer, or something along those lines further down the road.

I did have a couple people recommend emerging market accounts, saying they've been doing great for them. However, the people that recommended them were both fairly young, and might have been basing it on a year's performance, and I've heard some people say those accounts might end up being a bubble.

[Alric]

Risk in mutual funds is a known quantity and is a measure of variability over time. It answers the question of what is the likelihood that if you need the money at a particular point will be at a favorable price for you. In this case bond funds would be the least risky and emerging funds would be more risky. If you are thinking of using the money in just a few years you should buy a low risk investment, like a bond or large cap fund.

[Francesca R]

If you were in the UK the best recommendation by far would be an ISA (http://en.wikipedia.org/wiki/Individual_Savings_Account) because it is completely tax-free no matter what its future growth, and because the business is sufficiently competitive that the fees on many index-tracking funds are less than 0.5% PA. ISAs are intended to encourage investment in about the size you mention since the upper limit on investment in any UK tax year is £7,000. One can invest more than that in mutual funds (called OEICs here) but not free of potential tax liability.

Sorry I don't know if there retail products in the US that are equivalent to this.

[Juustin]

Good to know.

Also, another general question. We took out a mortgage for our house at 22. We've been making a lot of extra principal payments and have already knocked a few years off a 30 year mortgage, and if we keep going at the same rate it would be paid off by about the time we're 33/34 (assuming we don't sell the house before then). Is it wiser to keep making extra principal payments, or put that money into investments? Our mortgage rate is 5.5%.

[Loss Leader]

I'm just looking for someone who may have been in a similar situation to offer up some tips so I can investigage further.



$5,000.00 is a nice amount to stick into a New York Municipal Bond fund. It's a very safe investment and it grows tax free. You won't make tons of money but you won't lose your nest egg, either. Look for a fund that doesn't charge a fee to buy and whose sale fees drop after a year.

Good luck.

[Francesca R]

Also, another general question. We took out a mortgage for our house at 22. We've been making a lot of extra principal payments and have already knocked a few years off a 30 year mortgage, and if we keep going at the same rate it would be paid off by about the time we're 33/34 (assuming we don't sell the house before then). Is it wiser to keep making extra principal payments, or put that money into investments? Our mortgage rate is 5.5%.I would pay down the debt first. Since you opened with a query about investing $5K, a sizeable increase above this, financed by borrowing, probably takes you into a qualitatively different risk bracket from what you're intending.

[HarryKeogh]

Is it wiser to keep making extra principal payments, or put that money into investments? Our mortgage rate is 5.5%.

I'd be interested in hearing answers to this as well. My mortgage rate is 7% and at the rate I'm going I'll pay off my 30 year loan in about 6 years total. I figure it's like earning 7% (though each year my interest deduction is less and less) and to beat that in the market I'd have to find something that had a return of over 7% to compensate for the taxes one pays on capital gains.

I still send max contributions to my Roth IRA every year though (no 401K at work).

[Francesca R]

I'd be interested in hearing answers to this as well. My mortgage rate is 7% and at the rate I'm going I'll pay off my 30 year loan in about 6 years total. I figure it's like earning 7% (though each year my interest deduction is less and less) and to beat that in the market I'd have to find something that had a return of over 7% to compensate for the taxes one pays on capital gains.You need to earn more than 7% net of fees and all taxes to make it worthwhile. And even then, it would only really be worthwhile if it was guaranteed to return >7% after fees and tax (since your interest cost is guaranteed to be 7% net, until it resets). Since few investments return 7% net with no risk, it involves successful speculation or good luck. :)

[balrog666]

I suggest you go with mutual funds, particularly in the Fidelity or Vanguard groups. Both are top of the line fund families. Up to you how much research you want to put in to it.

But you can invest in a variety of 5-star funds (tech, financial, index, emerging markets, etc) for $250-$3000 each.

You can also set up continuing automatic purchases very easily (as little as $25-50 month).

And it is very easy and simple to take money out or put more in.

__________________________________________________ ______

Alternatively you can go with a nice blue-chip DRIP (dividend reinvestment investment plan) with a specific company or set of companies. And you can set up the same kind of low monthly purchase for little or no fees.

Here's a link: Motley Fool - DRIPS (http://www.fool.com/DRIPPort/DRIPsIntroduction.htm)

[Ohmer]

Good to know.

Also, another general question. We took out a mortgage for our house at 22. We've been making a lot of extra principal payments and have already knocked a few years off a 30 year mortgage, and if we keep going at the same rate it would be paid off by about the time we're 33/34 (assuming we don't sell the house before then). Is it wiser to keep making extra principal payments, or put that money into investments? Our mortgage rate is 5.5%.

One thing you have to keep in mind is flexibility. It makes good sense to pay down the mortgage. However, you will have to refinance the house to get your money out. If your put your money in a mutual fund, it will usually be easier to get it out if you need it. You can't realize any real benefit from paying the mortgage down until you have it completely payed off or you refinance. It's a judgment call that only you can make.

[The Central Scrutinizer]

I generally keep about 6 months in cash.

I assume the $5K is over and above your cash reserve? If so, I'd stick it in an index fund. It's really not enough to bother with individual shares.

As far as paying off the mortgage? Only do that if you don't think you can earn a return that is superior to the interest rate on your note. I have, and think that I will continue to do so, so I don't pay down the mortgage.

[bigred]

The one variable that makes the biggest difference on how well people retire is how early to start investing. Excellent point that cannot be repeated often enough. Time can be your best friend or worst enemy when it comes to investing.

5k is an excellent amount to invest in a mutual fund. Considering you are 27 if you don't foresee needing the money any time soon I would invest it in a relatively high risk fund. I agree, but the OP stated a desire for low risk. Justin, if you think you will need this money within the next few years, do NOT invest in high-risk anything.

I look Vanguard mutual funds due to their small expense. I agree their expenses are hard to beat!

stay away from known names like Fidelity or Merrill-Lynch. Sorry but I consider this poor advice for several reasons. For one, it makes no sense to stay away from a brokerage because they're well-known (PS Vanguard is well known too). Second, generally speaking, no one company is inherently better or worse than another, or at the very least, it's HIGHLY subjective. Third and more specifically regarding Fidelity, they aren't a giant in the mutual fund biz for nothing (not that size is everything ;)) - they have an unmatched array of funds to choose from and competitive expenses. I also highly recommend their web site and online brokerage, btw, regardless of where you invest.

Needless to say maximize your 401k first.Absolutely.

I tend to stay away from individual funds because of risk but if you are going to buy one stock.............don't. :cool: And for exactly the reason you said: risk.

Given the desire for low risk, I would suggest a CD or money market; last I saw the best rates were in the 5% range - not bad for a short-term gain and very low risk (in fact none whatsoever for a CD).

[Huh-What?]

Good to know.

Also, another general question. We took out a mortgage for our house at 22. We've been making a lot of extra principal payments and have already knocked a few years off a 30 year mortgage, and if we keep going at the same rate it would be paid off by about the time we're 33/34 (assuming we don't sell the house before then). Is it wiser to keep making extra principal payments, or put that money into investments? Our mortgage rate is 5.5%.

I have to go against the grain on this one. Consider that the market (US) has had an average return of around 12% for the last twenty years, your very young, and the tax benefit of your mortgage interest (assuming AMT is not an issue), then it would be silly to pay the bank extra money. Put that money in an index fund (assuming you do not have the time/desire/are comfortable researching individual companies). Why?

* Your too young to get hung up by the dips in the market. In the long run you will make a better return on your money.
* Extra principal payments make no return for you other then the small amount of interest you saved. Again the amount of savings over the next 30 years will be dwarfed by the returns you would have received from conservative investments.
* Liquid. Equity is not as liquid as money in index funds.
* The equity in your home has ZERO influence on the value of your home. Over the next 5-30 years the value of your home will be influenced by local market conditions. When you go to sell chances are your profit will be influenced greater by the market conditions then the amount of extra payments you made.

[bigred]

PS disregard my 5% remark above, I was more out of date than I realized. :(