long term investing strategy

[dotcb]

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I'd like to hear different people's perspectives...

Outside of monthly living expenses, mortgage, and paying debt, how would you approach long term investment?

After your monthly bills are paid, let's say you have a sum of money X left over, say $10,000 dollars - How would you divide and invest this money?

Let's say you want to use the $$$ for long term gain, not a vacation or a new car. Let's say you already have an emergency fund in place, mortgage paid, and no debt. (I wish)

How would you divide your investment $$$ among various types - 401k, individual stocks, mutual funds, index funds, CD's, gold, whatever. The more details the better - what companies would you use, would you use a financial advisor or do it yourself?

 

[link2swim06]

Vanguard is always pretty solid.

Also robot-investors like betterment look a lot cheaper than a financial advisor.

 

[CliveStaples]

You mean like retirement investing? And since you say "I wish" I assume this means you actually do still have debt.

1) Invest in your 401(k)/403(b) up to your employer's match (if applicable, the match gives you free money after all) invested in low cost index funds that track the Total U.S. Stock Market, Total International Stock Market, and Total Bond Market indices or the closest available funds with an asset allocation (breakdown between stocks and bonds, such as 70% stocks and 30% bonds) that is appropriate for your retirement time horizon. You may decide to overweigh your asset allocation in this space more heavily towards one fund if it is much cheaper than the other funds, such as only buying an S&P 500 index because the international and bond market funds available in your 401(k) are prohibitively expensive.

2) Save in a bank account an emergency fund of whatever makes you feel comfortable - most would say between 2 and 6 months living expenses.

3) Pay off high interest debt, such as credit cards and student loans that are above 5-6%. These high interest debts provide a stable "return" on your investment that you should collect on before investing in riskier endeavors.

4) Invest in a Roth IRA (and if you think you do not qualify based on income, you can simply invest in a traditional IRA and then perform a traditional to Roth IRA conversion, which has no income limit) with low cost index funds that track the Total U.S. Stock Market, Total International Stock Market, and Total Bond Market indices to maintain the asset allocation you selected prior. You may decide to overweigh stocks in this account since a Roth IRA full of stocks will outgrow a similar account full of bonds and withdrawing from a Roth in retirement is tax free (so a bigger chunk of what you have invested can be withdrawn tax free).

5) Invest in the remainder of your 401(k)/403(b) space, in the same distribution that you did before. Also, consider this step to pay off medium interest debt (3-5% like lower interest student loans or a mortgage) in lieu of bond investing - paying off this debt provides a guaranteed return on your investment that is comparable to what you would expect from investing in bonds.

6) If applicable (meaning you have a qualifying high deductible health insurance plan), invest the maximum amount of your Health Savings Account with the same asset allocation you have set for yourself.

7) If applicable (meaning you have children you want to assist with college expenses), invest the maximum amount of your 529 plan per child with the same asset allocation you have set for yourself.

8) Invest the remainder of your savings in a taxable investment account with the same asset allocation that you set for yourself. Also consider paying off your low interest debt (less than 3%) so you can call Dave Ramsey and yell it him on the radio 🙂.

So this is my skeleton of a financial plan. Always invested in low-cost index funds. Closer to retirement I think I'll consider the merits of being more heavily invested in diversified bond funds versus buying CDs - ultimately the both are designed to be the "fixed income" portion of my portfolio which cushions my financial status when I'm depending on my savings to provide my daily standard of living. My plan for my asset allocation is to remain very aggressive (Anywhere from 90/10 to 80/20) until I transition to "part time" which is when I'll shift to 50/50 or 60/40 in anticipation of retirement.

No financial advisor. No individual stocks in the search of a home-run. No speculative commodities like gold or silver. I'm boring.

 

[em1234]

Yup, exactly what that guy/gal said.
I was just starting to type the exact same plan since my hate fire is currently being fueled by the Cubs pitiful performance, but clive just saved me a lot of time.

judging from the original post, the OP might benefit from some more basic training. The white coat investor has a great section (under "start here"->beginners) on his website to help you out. The whole site is solid gold, and written for people who start with a knowledge base of a financial kindergartner. I knew nothing about personal finance when I graduated residency in 2011, and now confidently manage my family's finances/retirement, as well as many of my friends and partners.

I work at a community site that has residents rotate through and every time one asks, "what's the one thing you wish someone had told you before started in the community?" I tell all of them to start reading the WCI blog. They know plenty about medicine, but almost none of them know anything about what they are going to do when their paychecks quintuple-octuple when they graduate. Every new doc needs more extensive training in how to handle their finances/debt, which they don't get in residency and is more important than which fracture do I really need to call the orthopedist about.

first lesson quick and dirty:
Think of retirement investing like packing for a trip...
Investment vehicles (401k, SEP-IRA, Roth-IRA, traditional IRAs, HSA) are the luggage
investments (stocks, bonds, mutual funds, index funds, Gooooooold) are the clothes.
The clothes go inside the luggage.

I second basically clive's whole plan...No financial advisor (if I could survive medical school and residency I can certainly tackle personal finance), 3 month emergency fund, index funds (Vanguard has always worked well for me), exploit every tax advantaged account available to you (if you aren't maxing out your 401k/SEP/etc-you don't have $X to invest as you like, you really have X-howevermuchspaceisleftinyour401k dollars to invest), kill your debt, use triple tax advantaged plans (HSA and 529) if they are applicable to you, no gold for me either.



Go Cubs,
1234

 

[The White Coat Investor]

I wrote a book about it once and a few articles on the internet. 🙂

The basic approach is max out all available tax advantaged accounts (401(k), personal and spousal backdoor Roth IRA, HSA if possible, profit-sharing plan, defined benefit/cash balance, 403(b), 457 etc etc) then if you wish to invest more, do it in a taxable account.

As far as investments inside those accounts, low-cost stock and bond index funds + some real estate is the very reasonable approach I take which has been successful so far. A plan to pay off your debts at some point is also important.

Want more details on my plan? Here it is: http://whitecoatinvestor.com/evolution-of-the-white-coat-investors-portfolio/

 

[DeadCactus]

Along with TWCI's writing, I would recommend "The Intelligent Investor" by Benjamin Graham. Between Graham for general investment knowledge and TWCI for physician specific nuances, you'll have a much stronger knowledge base than the vast majority of your peers. Most physician's sadly leave their financial education to whatever nonsense they pick-up in 5 minute chats in the doctor's lounge...

 

[Hercules]

My plan is pretty similar to others posted. I am 6 years out from residency and have one alternate investment not mentioned yet in the form of timber. I was looking for passive income outside of the stock market and considered timber vs rental properties. I farm timber in a neighboring state that has some nice government incentives that cut my planting and prep costs in half as well. I like having the land and it's a pretty boring passive income plan with profits that are taxed at long term capital gains rates. I also have 20% ownership of an urgent care. My student loan rates are locked under 2% so I have no intention of paying those down at any kind of accelerated rate.

I keep 6 months living expenses in cash (my wife stays home so I am the only source of income right now), max out my 401k and HSA, contribute to 529s, and also have a chunk of cash set aside for a down payment on a new house (have been in house search mode for 2 years now after 4th child was born).

My asset allocation (not counting the timber, the urgent care, or the real estate for the UC):
14% US small cap
14% US mid cap growth
14% US large cap blend
14% US large cap high yield
14% Emerging markets
28% Bonds intermediate term

My allocation could probably use a little tweaking (heavy on large caps and bonds) but I think it's the discipline of maintaining those ratios as opposed to finding that one magic formula that results in long term gains.

I use all index ETFs with very low expense ratios and no load (Vanguard and iShares).

 

[EctopicFetus]

If you have some time I think real estate is a great option. There are some interesting alternative options but unless you really understand it I would avoid it at all costs. My rental property is generating about 15-18% return on my investment and that doesnt include appreciation. I dont think that is typical but I got lucky. If you look hard are very disciplined in house hunting and are willing to put a little money in up front you could do well.

 

[NinerNiner999]

All great plans above. Diversify into broad index funds for various categories with very low expense ratios. Don't try to time the market (this recent "correction" and potential QE-related downturn forecast is a great example why). Make consistent and balanced regular investments, and re-balance each year into the ratio that fits your risk profile.

Also, there are various options for you based on Employee versus IC income. As an IC, I opted not to set up any tax-deferred account with the plan that I won't touch my investments for many, many years (until retirement). Since I'll only be taxed on the gains I capitalize (sell), and I don't plan to live an uber-extravegant lifestyle, My annual tax rate will be low. No need to worry about being tied to mandatory withdrawal dates, IRA Caps, and other mandatory fees/withdrawals. I have one very young child, so after 8 years of practice now and finally my first 2 commas invested, I will take several years to continue to accumulate interest for my child's college tuition, which by then will be re-allocated to a lower-risk profile. I'll pay the regular income tax as needed (or divert that year's investment income to the college fees).

I'm not an advocate of paying off a home if the rate is less than 4 percent. I'm locked in at a rate of 3.3% and put down a significant portion of the home's cost when I bought it. It gives me the best of both worlds - more free capital to invest, and very (VERY) low monthly payments, which I could easily profit on by renting if I move. In a sense, my home is my REIT fund.

Start with 3-5 CORE investment funds (Vanguard, T.Rowe Price, etc), and get to your first million. After that, diversity further if you want (and assume risk) by purchasing solid dividend-paying stocks (IBM, J&J, PG, etc). Or, you can keep the same core funds for your entire career. If well diversified, expect a regular (and boring) 6-7% average return annually. A physician's income is similar to winning the lottery - you've already won the payout, no need to aggressively (and dangerously) gamble with investment schemes.

Also, don't buy whole life. Term life will do with a good will. If you expect to live to 40, either set your account up jointly with your spouse, or tag him/her as a beneficiary to assume the account if you die. No estate taxes, and no fancy legal paperwork. Easy minimum $1M inheritance.

Just my $0.02

 

[Old_Mil]

Along with TWCI's writing, I would recommend "The Intelligent Investor" by Benjamin Graham. Between Graham for general investment knowledge and TWCI for physician specific nuances, you'll have a much stronger knowledge base than the vast majority of your peers. Most physician's sadly leave their financial education to whatever nonsense they pick-up in 5 minute chats in the doctor's lounge...

I am going to second.that book. It is how Warren Buffet made his millions (well, before he became really rich and started to lobby the government for contracts)...