Investment showdown -- beyond the Roth, SDP, & TSP

[JS]

Zach, my advice to you is to build a portfolio of solid dividend paying stocks. (I am a dividend whore.) My rule of thumb is pretty easy: PE less than 15, yield at least 2.5%, and business I feel is around for the long haul. (Utilities, wireless providers, trash companies, etc.) I would reinvest the dividends until you hit that 50-52 year mark you want to retire at then keep the stocks but enjoy the dividends.

How do you "build" this porfolio? Do you do recurring monthly investments in your hand-picked basket of stocks, or do you grab a few ETFs? Or are you dumping huge chunks of money in quarterly or something? I ask because if you buy a bunch of stocks/ETFs monthly, the transaction costs will eat your ass alive. Buying stocks/ETFs is more economical when only doing a few purchases a year.

The alternative is to invest in a mutual fund that fits your parameters (there are many). You can do the monthly/bi-monthly, etc. deposits without incurring any transaction fees of commission costs. The downside is the management fee, which you have to strive to keep at a minimum. Either way, the man is going to take a good slice of your hard earned money, whether or not you make money, and whether or not you do all the legwork and research yourself.

[Termy]

Great question. I buy only quarterly or when the market drops. (Don't try to accuse me of attempting to "time" the market; if you are in it for the long haul in an era where cash in the bank is almost useless, you aren't assuming much more risk by buying when you sense the market is down.) I won't bore you with variances etc, but a portfolio of 6-8 dividend paying stocks like I suggest is no more risky than a mutual fund that invests in 100's of stocks. And you don't lose 1-2% a year (which is huge in the long run.) I wouldn't be anti-mutual fund is they just did one of two things: 1) beat the market or 2) didn't charge outlandish fees (in the long term) for doing next to nothing. Again, though, I am just a boring investor who loves dividends. Get rich slow works!

[Day Man]

Any suggestions on long term investments but not quite as long term as retirement? I've got IRAs maxed for myself & wife, plus a good amount in Roth TSP and a 529 for the kid. So I figure I'm looking good come age 60. But I don't want to work until then. I'll probably punch from USAF around age 50-52 and would prefer not to work after that so I'm looking for some options to supplement a military pension and get me by until 59.5.

I'm not a huge investment guy so right now I'm thinking of just opening a mutual fund account to throw in whatever's left after the tax-advantaged retirement & college funds... But I'd love to what some other folks are doing, although I think real estate is out - I don't have the patience to be a long distance landlord.

zb

Low risk/low reward

[JS]

Great question. I buy only quarterly or when the market drops. (Don't try to accuse me of attempting to "time" the market; if you are in it for the long haul in an era where cash in the bank is almost useless, you aren't assuming much more risk by buying when you sense the market is down.) I won't bore you with variances etc, but a portfolio of 6-8 dividend paying stocks like I suggest is no more risky than a mutual fund that invests in 100's of stocks. And you don't lose 1-2% a year (which is huge in the long run.) I wouldn't be anti-mutual fund is they just did one of two things: 1) beat the market or 2) didn't charge outlandish fees (in the long term) for doing next to nothing. Again, though, I am just a boring investor who loves dividends. Get rich slow works!

But it sounds like you just have a personal investment account (I do too, but more for fun, not as my primary nest egg). The big problem with that is you get no tax benefits at all, correct? In other words, you paid taxes on the dough you put in, and you get the privilege of paying taxes on any profit that you might eek out. I know we have bashed it to fucking death, but the Roth is good because you don't pay taxes on those returns, and the 401K/IRA is good because at least you get a nice tax break on the money going in. We do both in our family - 401K up to the max the wife's company matches, and the rest in Roths for the time being with my having tax-free income from the military.

[Bayou_Eagle_Driver]

Not sure if this has been mentioned, but as of Oct 1, National Guardsmen are eligible for Roth TSP contributions. Woohoo....

[Termy]

But it sounds like you just have a personal investment account (I do too, but more for fun, not as my primary nest egg). The big problem with that is you get no tax benefits at all, correct? In other words, you paid taxes on the dough you put in, and you get the privilege of paying taxes on any profit that you might eek out. I know we have bashed it to ######ing death, but the Roth is good because you don't pay taxes on those returns, and the 401K/IRA is good because at least you get a nice tax break on the money going in. We do both in our family - 401K up to the max the wife's company matches, and the rest in Roths for the time being with my having tax-free income from the military.

I wrote that assuming that TSP and Roth were already maxed out leaving you with no tax-free/deferred options. Regardless, if you want some income in your 50's from investments, by definition they have to be in taxable accounts. Remember dividends are taxed at capital gains, not your income tax rate so the "bite" isn't all that bad.

[Whitman]

Checked my TSP today for the first time in a while, it's showing 23.32% return over the last 12 months. For comparison, the dow is only 14%. In the short time I've had a TSP account, I'm very happy with the below average expense ratios and above average returns.

[nsplayr]

What's your TSP portfolio look like? Don't see any of the funds coming even close to 23% over the last year...highest performance in the last 12 months was the I fund at 18 and change.

[schokie]

What is the source of your data? According to TSP.gov the I fund earned 24.1% over the past 12 months, the S fund had 31.08%, C fund 19.35%, F fund -1.43%, and G fun 1.67%.

I'm currently 40% in C and 60% in S. I moved into those about 6 months ago out of the L2040. However, I'm still at 18.76% according to TSP's Personal Investment Perfomance calculator which subtracts out monthly deposits and only reflects investment earnings. I could have done better by going 100% S, but I wanted more exposure to large cap stocks vs mid cap to minimize some volitility and risk.

[nsplayr]

I invest in in Virginia's 529. It's has fairly low fees and a solid history of performance (though not the best in either category), however I plan to live in VA long-term so the state income tax deduction benefits are well worth it's minor shortcomings in other areas.

Highly suggest you look into direct-sold plans run by states, and in particular if you are currently or know in the future you're going to live in one state long-term. Especially if that state has state income taxes or offers other offsets for 529 contributions.

Edited October 31, 2013 by nsplayr

[JS]

I was just listening to Clark Howard the other day and he was talking about this. He says that Utah has the most phenomenal plan in the country, and as others compete and get better/cheaper fees, Utah's only gets better. At a glance, it looks like the management fees are about 1/3 or less than my current USAA plans. I am going to process the rollover paperwork next week.

https://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/

Not sure about your state, but I am in a low income tax state, and when I calculated the state taxes I would save by deducting my 529 contributions, it came to something like $40. I would much rather shave off almost 1% of management fees, which really adds up, especially when the accounts grow to the tens of thousands of dollars.

[nsplayr]

Agreed, Utah is perennially one of the best. Running my numbers the income tax break should be about $230 off my state tax bill every year based on expected income and max contribution; there's no way to beat that with relatively small differences in fees. The projected difference in management costs over 10 years is between $67 and $325 (depending on exactly what you invest in and how much is in your account) between the Utah and VA plans.

Good advice for folks to check out Utah's plan though and in general I'm a huge fan of the direct-sold state 529 plans if that's not obvious already. If you state has no income tax and offers no benefit for buying into their own plan then by all means go with a highly-rated plan from another state that offers the lowest fees.

Edited October 31, 2013 by nsplayr

[Striper_WSO]

My advice is to max out a Coverdell Savings Account before putting money in a 529. The contribution limit is only $2000, but the account functions much like a Roth IRA (after-tax contributions). You also get to choose what type of investment to put the money into. The money can be used before college for private schools too.

[nsplayr]

Why do you like a Coverdell better than 529 other than, as you sort of alluded to, potentially more diverse investment options and the ability to use for K-12 rather than just college? I haven't really found any additional plusses when compared to 529s; I guess it depends on if your goals are primarily saving for college or saving for K-12 and if you really want to gnat's ass specific investments.

From what I understand, 529s have a higher contribution limit, are easier for multiple parties to contribute to (i.e. grandparents, aunts/uncles, etc.), and the money is treated the same as in a Coverdell i.e. after-tax contributions that grow and be withdrawn tax free and can be used for education expenses. On top of that, I think the 529 is much more flexible and has less limitations both in how you use it and how much you as a parent can make while contributing. Many dual-mil O-3s or O-4s would potentially make too much to qualify to contribute to a Coverdell. If you're saving for college I don't see how a Coverdell offers any advantage over a 529.

Good discussion/comparisons of Coverdell vs 529 here and here, and an article about giving Coverdells a second look here.

[Spur38]

I purchased, for my daughter, through the Nevada Secretary of State and the Nevada Pre-Paid Tuition program. Like other 529 programs it is an advantage to purchase at an early age because of the cost differential and the obvious increases over time. You could possibly do better with a stock or other type of investment but the satisfaction that youve taken care of the kids college costs goes a long way! Not sure how other states rules work but the NV PPT can be applied to any out of state university but only at the highest NV fee per credit. It can also be transferred to another family member or even canceled and refunded if the little scrotum decides not to attend..

My daughter is now in her senior year and I will use my 36 months of VA education credits to support her advanced degree starting next year. It all has given me extra points for staying out late and carousing with my buddies when I feel the need. It didnt help at all with my job of ensuring that the garbage is out for Monday morning pick-up however!

[LockheedFix]

Since this is my favorite place for investment advice, I thought I'd run this one by you guys. I'm PCSing overseas soon and we are shipping my wife's vehicle. Rather than pay to store my truck on my own dime, I'm thinking about selling it (I should be able to get $13K-$16K) for it. My plan is to stash that money away somewhere and use it to buy a new truck when I come back to CONUS in three years. I was thinking of maybe putting it in an S&P 500 index fund, but even that seems risky (I did something similar the last time I was OCONUS and I came back in the fall of '08. I needed the cash so I lost a couple grand when I took it out.)

Are there any somewhat low risk ways to make better than 3-4% a year for three years? Or should I just put it all on an oil stock and go for broke? Any other options I haven't considered would be greatly appreciated, too.

Edited November 4, 2013 by LockheedFix

[MilitaryToFinance]

In this market environment there is no low-risk way to make better than 3-4% a year. Typically people look at the 10-yr treasury as a risk free rate which is currently sitting at 2.6% but calling that risk free is a joke right now. We are in the middle of the largest bond bubble ever seen and in 3 years it is highly unlikely your bonds will still be at their current price. I would look for some decently priced stocks with good dividend yields. Sturm, Ruger(RGR) sports a 4% yield right now in a strong growing business. Philip Morris International (PM) also has above a 4% yield with a strong business. There are others out there as well. Bottom line is you have a negative real return on savings accounts and CDs, bonds are a massive bubble waiting to explode, you're really only left with stocks or commodities to invest in. And the reality is most people on this forum are nowhere near qualified to have an intelligent view on commodity prices.

[Jaded]

Dividend stocks are less volatile than the overall market.

3 years is not a long enough timeline to invest in much of anything.

[Swizzle]

Master limited partnerships companies, especially any petroleum pipeline type... They have great dividends

Can't go wrong right now with America producing more oil than ever and them needing to ship it through pipelines to export it

[mudhen69]

Since this is my favorite place for investment advice, I thought I'd run this one by you guys. I'm PCSing overseas soon and we are shipping my wife's vehicle. Rather than pay to store my truck on my own dime, I'm thinking about selling it (I should be able to get $13K-$16K) for it. My plan is to stash that money away somewhere and use it to buy a new truck when I come back to CONUS in three years. I was thinking of maybe putting it in an S&P 500 index fund, but even that seems risky (I did something similar the last time I was OCONUS and I came back in the fall of '08. I needed the cash so I lost a couple grand when I took it out.)

Are there any somewhat low risk ways to make better than 3-4% a year for three years? Or should I just put it all on an oil stock and go for broke? Any other options I haven't considered would be greatly appreciated, too.

Write me a check for 15K and I'd be happy to give you 17K in 36 months (4.4% annual return)...25% penalty and no return if you want your money back before 36 months.

Or: Open a brokerage account with "insert major investment bank here" and find a large cap stock with a decent dividend (2-3%) and low share price (20-50). I use Google stock screener and pick a stock using the aforementioned criteria...have been doing pretty well (8-15% depending on which stock you look at).

Sure there is some risk, which at my age I perceive as fairly low given the return I'm getting. I just hope I time my withdrawal prior to the zombie apocalypse and the collapse of the US financial market.

Not a stock broker.....annnnnnnnd debate on Obama's financial policy and the benefits of burying gold, rice and dried beans in your back yard....go....

[MilitaryToFinance]

Or: Open a brokerage account with "insert major investment bank here" and find a large cap stock with a decent dividend (2-3%) and low share price (20-50). I use Google stock screener and pick a stock using the aforementioned criteria...have been doing pretty well (8-15% depending on which stock you look at).

A low stock price does not make a stock cheap. I highly suggest you learn more about stock valuations before you lose a large amount of your savings buying "cheap" stocks.

[mudhen69]

A low stock price does not make a stock cheap. I highly suggest you learn more about stock valuations before you lose a large amount of your savings buying "cheap" stocks.

Never claimed it did,.

Lower stock price=more shares=more volume and/or more ability to diversify

With $1K I can buy one share of Google and open myself to all the risks that come with one owning stock in only one specific company...or with my $1K I can buy 10 shares @ 20/share in 5 different stocks in different sectors and mitigate my risk.

Among other things already mentioned, I also try to pick stocks in the 10-20 P/E range. Just my personal investment strategy...it works/has worked for me. Personally, if there are two companies with the same market cap, dividend yield and P/E, I am going to pick the one with the lower share price.

[HU&W]

In this market environment there is no low-risk way to make better than 3-4% a year. Typically people look at the 10-yr treasury as a risk free rate which is currently sitting at 2.6% but calling that risk free is a joke right now. We are in the middle of the largest bond bubble ever seen and in 3 years it is highly unlikely your bonds will still be at their current price. I would look for some decently priced stocks with good dividend yields. Sturm, Ruger(RGR) sports a 4% yield right now in a strong growing business. Philip Morris International (PM) also has above a 4% yield with a strong business. There are others out there as well. Bottom line is you have a negative real return on savings accounts and CDs, bonds are a massive bubble waiting to explode, you're really only left with stocks or commodities to invest in. And the reality is most people on this forum are nowhere near qualified to have an intelligent view on commodity prices.

This is solid advice given current market conditions. Only thing I'll add is to look into buying your next car before coming back stateside. There are great incentives (I've seen up to 20% off) for being stationed overseas and most include shipping/delivery in the states.

[Day Man]

Never claimed it did,.

Lower stock price=more shares=more volume and/or more ability to diversify

With $1K I can buy one share of Google and open myself to all the risks that come with one owning stock in only one specific company...or with my $1K I can buy 10 shares @ 20/share in 5 different stocks in different sectors and mitigate my risk.

Among other things already mentioned, I also try to pick stocks in the 10-20 P/E range. Just my personal investment strategy...it works/has worked for me. Personally, if there are two companies with the same market cap, dividend yield and P/E, I am going to pick the one with the lower share price.

I think mappleby is trying to say that you are severely restricting yourself from owning "good" stocks if you are filtering by stock price. I bought Boeing well above $50, and it is up over 80% since. Of course, I also bought a stock at $10 and now it's down ~80%...but hey, whatever works for you

Edited November 24, 2013 by day man

[JS]

A low stock price does not make a stock cheap. I highly suggest you learn more about stock valuations before you lose a large amount of your savings buying "cheap" stocks

Very true.

Lower stock price=more shares=more volume and/or more ability to diversify

Not true. Diversity is not based on having an equal amount of shares of different stocks. Diversity is based on diversifying risk, and has to do with things like Beta, Alpha, risk-free return, modern portfolio theory, and all the other standard metrics like P/E, EPS, etc. That's why this individual investing stuff is not for the faint of heart of for amateurs. If you were to actually have a professional mathematically crunch the numbers of your portfolio and come up with an overall Beta or other metric for risk, you will likely have much less diversification than you think by doing it on your own.