AskDong

I have been living in this country for the last 7 years and I’m now ready to start investing. I don’t have clue where or how to start. I’m very risk adverse and I have all my $ on a saving account ( I know..it is no good). Can you give tips for real beginners? How to even think what % of your income should go to investing while you have your 6 month cash in case of a rainy day.

Thank you so much!

-Andrea

Great question.  Starting to invest is hard to to do, especially if you’re risk averse.  There’s no simple answer as how and what should invest depends very much on what you’re planning to do with the money.  A 25 year old who’s saving for summer house versus a 60 year old who’s putting the last few dollars toward retirement are going to want to do very different things.

I’m going to make a few assumptions:

• You’re relatively young (25-35?)
• Already have at least 6 months of an emergency fund

I don’t mean to be trite, but you should save as much as you can.  More importantly set goals for your savings.  Don’t save just to save.  Save for retirement, save for a house, save for charity.  It doesn’t matter what your saving for, but having number is important.  By setting a goal, you’ll not enjoy the process of saving more, but have a better idea how to manage your investments.

Given that it sounds like you’ve already managed to put money to savings, I would first max out your retirement accounts (401k, Roth IRA), and once that’s done funnel what extra savings you have towards brokerage or mutual fund account.  Another reader asked me a similar question a few months ago and I gave my rule of thumb how to prioritize investment accounts.  Since you’re starting, I would recommend opening an account with either Fidelity or Vanguard.   I opened a Vanguard account last year myself to take advantage of their low fee index funds.

Once you have an account open, it’s a question of picking funds.  The best place to start is with a total stock market index such the Total World Market Index, VTWSX. A fund like that gives you instant diversification.  After you get the hang of mutual fund investing, you can then start diversifying with other funds and making sure your asset allocation is good.  i.e. you have enough stocks versus bonds.

The one other issue I want to address is that your risk aversion.  Most people are risk adverse.  I’m risk adverse.   However, I do want to warn that often what seems like the safe choice is actually the riskier choice in the long run.   Remember your time horizon.   If you don’t need the money for 20 years, the volatility should not really be an issue.  This is not to say that I’m strict adherent to the buy and hold strategy as I think it’s a little foolish to just “buy and hold” without any concern to what’s happening in the world or your personal life.  Rather, I advise to make measured choices (or have a good adviser) and don’t be afraid to invest just because something can lose value.

I hope this helps.  However, in truth while starting to invest is easy, taking the time to do it properly takes some time.   I’m not even talking about picking stocks, but just getting a feel for where you want to go.

Gabriel Ask

Dong, I am debating whether to sell my house or rent it. I purchased my house late 1999. Then, two years later I refinanced my house to obtain a lower interest rate thinking that this would be my last house. I owned 109,000 and my house is currently valued at approx. 147,500 with an equity of aprrox 35,000. I have 13 more years to paid off the house./
Should I see the house or rent it?
Thanks.

Gabriel

Gabriel, I had similar decision to make about 3 years ago when I decided to move from my old Condo. I quickly decided that I wanted to rent it out. That was the right decision for me, but not necessarily the right one for you. I made the following considerations.

• The property was in area that is very easy to rent out. It’s in the city, and there many many renters every year looking for a place in the area I owned my condo.
• I was able to cover most of my costs through rent. My conservative rule of thumb is that annual rents should be at least 10% more than annual expenses. To be honest this is not true for me.
• I had decided long ago that I wouldn’t mind the burden of being a landlord. I don’t mind answering calls, and making arrangements for repairs as they come up. This last point is the most important one to consider. I have had great tenant, and the apartment has been mostly trouble free. Yet, at the same time I have to acknowledge the mental burden of being a landlord has been greater than I thought. Because it’s not my full time job, the added stress of knowing that something can come up is actually more acute. And, I have a great tenant. I can’t imagine what it would’ve been like had the condo had major problems or if I had a tenant that was unreasonably demanding.
• Part of my long term investment strategy is owning property. I knew from 1st day I purchased my condo that I would someday convert it into a rental property. That’s what I did after 4 years.

Was it the right choice financially? If I were evaluating the decision right now, the answer would be no. Had I sold three year ago I would’ve sold into a better housing markett. However these decisions should not be evaluated purely on the basis of investment timing. Timing is always a game better played in hindsight. The more important question financially is how it fits in one’s overall investment strategy, and cash situation.

• Do You Need the Money? If you need the money to finance another home purchase, then you should sell. It’s not a good idea to put yourself under more financial duress than you can handle.
• What else are you invested In? Are you already well invested in the stock market? I’m not believer that Real Estate is the only place to make money. I think it’s great place to do so, but so is the stock market. It’s best to have eggs in different baskets.
• What’s the current Interest Rate Environment vs. your Mortgage? If you’ve been able to lock in a great rate that is well under current market rates, this is when renting can make a great deal of sense. Let’s say for example Gabriele locked in a 5% 15 year Loan, and current rates are over 6.5%. By selling, Gabriel would give up that rate. If Gabriele can rent out his place, and earn a healthy amount over 5% then that’s “free” money Garbriele would be leaving on the table. Unlike companies, individuals are generally not in a position to borrow money at competitive rates except when it comes to property, especially property originally purchased as a residence. This borrowed money gives leverage which magnifies both losses and gains.

Crunch the numbers. Make sure you’re ROE (return on equity) is more than acceptable. Above is simple example of s such a calculation. Play with different scenarios. I also can’t stress this enough, if you do want to rent out the property make sure you want to be landlord. While it’s possible to hire a professional property manager, this is likely to eat most of the profits associated with having a rental property. Landlording isn’t for everyone. Hope this helps.

I have two questions that while not the same are related.

Don Asks:
Dong, I have a question in regards to finance. I currently have 15k sitting in savings and would like do something more than earning a lousy 3% interest can you recommend any safe investments. I do have some money in a single stock but it isn’t doing too well.

Thanks ,
Don

Another Reader, Papa Max asks:

My wife and I just had a baby a few weeks ago. Now that the dust has settled a bit, we were wondering what you would advise on putting away money for her. I know that the 529 accounts are all the rage right now but we’d like to set up a more flexible account as well so that the money can be used for things other than college. Any ideas?
-Papa

Let me first attack the 2nd question. I agree with Papa Max that flexibility is important, but like everything in life there are tradeoffs. A more flexible account such a standard brokergage account does not provide the same tax advantages that a 529 Account would provide. 529 accounts while funded with after tax dollars are sheltered from taxes on gains when used for higher education expenses. To properly answer Papa Max’s question requires a better understanding what he currently has in savings and what other savings he’s continuing to make. For instance my own hierachy of savings is the following:

1. Emergency Fund (6 months of basic expenses)
2. 401K upto company match
3. Roth IRA
4. 401K beyond company match upto the maximum allowed
5. ND IRA if ineligible for Roth IRA
6. Vanguard Mutual Fund Account
7. Brokerage Account

Were I to have children I would slot

• 529 Plan
• Coverdell Education Savings Account

between the ND IRA and my Mutual Fund and brokerage account investments.

While Papa Max is correct to point out that 529 accounts are all the rage, the Coverdell Education Savings Account should not be forgotten. Coverdell Acccounts offer greater flexibility in terms of use as it can be used for a greater range of education expenses; Kindergarten through Higher Ed tuition, books, computers. 529 accounts only allow for money to be used for higher education tuition. The advantage of the 529 Accounts are however multi-fold. The contribution cap is much higher over 100k vs 2k for the Coverdell. There is not income phaseout. Contributions are state tax deductible in some states. I did a little digging a while back, but still haven’t thoroughly researched the different 529 options out there.

The other point is that when it comes to savings it’s not one and only one. For example in my own savings while I would fund fully items one through five before proceeding to fund the next item, the savings after that I can and do choose to fund concurrently at varying levels.

So now that someone has decided to open investment account (be it a 529 account or standard brokerage account), where to put the money? That’s a tough question. The investment options are limited by the different state plans, and depending on which plan one might not have much to select from. Since I want to answer Don’s question, and don’t enough about all the variations of 529 plans, I’ll try to answer the question broadly.

Fifteen thousand is not enough to invest in individual stock, in my opinion. It’s not enough money to allow for the proper level diversification when you consider transaction costs. Because there is minimum transaction cost regardless of how many shares one buys or sells, those transaction costs are a significant part of portfolio of that size. For instance let’s say I tried to diversify across 15 different stocks and it cost me $10 for each different company stock I traded. That’s $150 out of $15,000 or nearly 1% of my portfolio, and then another 1% if I were to sell for a roundtrip cost of 2%.

So with $15,000 I would definitely recommend mutual funds or exchange traded funds. These are still stock investments with all the risks associated with equity investments but diversified. The question then becomes which mutual funds? There is no safe investment that will guarantee more 3%. If I knew of such an investment I would be thusly invested. Instead I hold a few different mutual funds, and stocks, and have 5% loss for the year to show for my efforts.

All that said, I think it’s a pretty good time with markets down this year to make some solid index fund investments. I’m advocate of Vanguard and believe it’s Total World Market Index, VTWSX, is a great a place to start investing. While I do talk about investments, this blog is very much NOT an investing blog. I believe there are those who can time the market and pick winners in the stock market, and in my dreams I’m one of them. However, the real key to investing is just to do it. Pick a well diversified fund such VTWSX or it’s ETF equivalent VT and start socking money into it. There are no guarantees, but most likely you’ll be rewarded for your patience.

I am moving into my condo in Brookline at the end of the month and have two important questions. I was told by my brother Steve that
you would be the best one to answer them.

1. I need to get cable and internet. I have not decided if i am going to get a land line yet. Any thoughts on who i should use? Comcast seems like the obvious choice.
2. I need to buy a TV. I do not want to spend more than $350 or so. Any suggestions? I am assuming that I should get an HD TV at this point, but am not sure.

Thanks,
Sara

Sara congratulations on the new condo. As for your first question, I think Comcast is OK, but far from the most economic choice. I personally have Dishnetwork and have found it more affordable. Of course the drawback is that you need to install a satellite dish, something that many condo associations do not allow. In addition to satellite providers like Dishnetwork and DirectTV, Brookline is also serviced in some areas by RCN.

The satellite providers are almost always cheaper than the cable providers. Doing some quick digging, I found the following. The basic packages at Dishnetwork and DirectTV start at $24.95 and $29.95 for a basic package with local channels. Comcast start at $29.95 for only the first 6 months and only if order on the web. I couldn’t find an offer for RCN without entering a valid address.

The real advantage of going with a cable provider versus a satellite provider is the ability to get bundled Internet services, often at a discounted rate. In the same way if you’re lucky enough to live in area that offers Verizon FIOS service, you have another option for bundled internet, cable, and phone service. The rub with all these bundled services is that the best deal often forces you to get a phone line as well. Landlines are so 1980. I think if you can avoid it, forgo the landline. That said, there are still some very good offers for bundled service that only include cable and internet.

• Verizon Fios: $96 for HD Cable and FIOS Internet
• Comcast: $78 for HD Cable and Internet for 12 Months
• RCN: $75 for Cable and Phone and High Speed Internet

Non Bundled HD Cable Packages

1. Dishnetwork: $30 for HD Cable (TurboHD Bronze)
2. DirectTV: $40 for the Family Package plus HD
3. Comcast: $40 for the Digital Starter Package and HD

The key with many of these offers is that they are only available to new customers, or every X months. Financially it often makes sense to switch providers every two years. I’m looking at making switch myself. Also some of these offers are only available through the web. Installation and hardware charges will vary depending on what you need. For instance a Digital Video Recorder (DVR) is usually at least $5 extra month.

TV
For $350 you can get a number of quality high definition televisions, though not very many bigger than 22 inches. Personally I think it’s worth potentially spending the extra money to get a flat screen TV that’s 26 inches or larger if it’s going to primary television for the living room. I’ve been very happy with my Vizio, and Costco has a 22″ model for $349. The next size up for the Vizio is 32 inches and $600. I do feel that that 26 inches is really the minimum size that should be considered for high definition television for the main living space. A HD TV of the same inch measurements is actually smaller than a standard television of the same size because of the aspect ratio(16:9 vs 3:4). For example a 25 inch standard TV has 300 square inches of viewing space, while 26 inch HD TV only has 288 square inches despite the larger diagonal measurement.

Hello Dong, I’m a condo owner in Washington DC and could really use some advice.
Here is a very quick run down of my situation:

• there are 12 total units in our condo association (3 buildings side by side
  with 4 units in each)
• 3 units have been bought and are being lived in. 1 other unit is finished, and
  the 8 remaining units are approximately 75% - 85% finished.
• our developer has notified our acting property manager that they do not have any funds available to pay for upcoming insurance premiums (covering all three buildings) and repair costs for fixing our water heater a couple of times and possibly replacing our sump pump. The developer also said their lender would not give them any more money. Since I moved into the condo in March there has
  been no work done on the 8 unfinished units.

Since there are only 3 of us condo owners (25% occupancy) the developer is still in charge of the condo association, which, to me, seems to leaves us with few options. There has been talk with our property manager about doing a special assessment (for the 3 homeowners) to cover the insurance and repair costs. However, is it possible to have a special assessment that only applies to 3 homeowners? The developer still technically owns the other 9 units and I don’t believe they should be excluded. But if they are broke then what? We can’t try to foreclose on the unoccupied and unfinished units because we don’t control the condo association.

I guess some of our options could include suing the developer, making our building where the three of us live a separate condo association, or doing the
special assessment and then recouping costs later down the road when (or if) the developer finishes and sells the remaining 9 units.

Are there more options out there? I’d like to hear opinions from anyone willing to share them. We are in the process of getting a lawyer and I know that might be our only option, but I thought it would be interesting to see if you guys have any other suggestions or anything further to add. If anyone needs any more information please let me know.

Thanks,
Patrick

Patrick has quite a situation, and one which I’m not very qualified to answer. It’s clearly a legal issue more than anything else. This is not to say I don’t have any thoughts. I even took a little time to get some quick legal advice from actual lawyers. The first thing that Patrick needs to do is review all the documentation associated with the property. This includes the Condo Association bylaws, the Master Deed, and Purchase and Sales agreements. There might be something in those documents to hold the Developers accountable and or specify a predetermined remedy.

The bigger problem is not so much holding the Developers accountable, but what then. The problem with the developers is that they probably don’t have any money. I think Patrick and his fellow homeowners should exact what they can from the negligent developers, but it’s unclear how much of anything the developers have to contribute. Given that the developers is not paying dues and being a responsible member of the condo association, they may forfeit some of their voting rights as a member of the association. It’s unclear to me if this would be the case as the laws vary state to state. In the least the Condo association should begin the process of getting a lien against the properties so that they are in position to be paid.

As for having a special assessment that applies only to small subset of the unit owners, apparently in Massachusetts this is the de-facto course of action when more than 50 percent but less than 75% of the condo owners agree to the improvements. In Patrick’s case, actual owners only have a 25% interest. However, it might be different in Washington DC.

At the end of the day in this situation as in many other situations in life, it’s important to acknowledge common interests and not just take the opposing position. It’s in the best interest of both the current Condo Owners (Patrick and his compatriots) and the interests of the Developers to make the required fixes. The more work that’s done on the property, the better off the developers are. Ultimately all the developer wants to do is to sell the properties, and if the property is in disrepair his chances of doing so are diminished. With that in mind I think it’s important to both talk a lawyer and talk to the developers about coming to an agreement. I wonder if there’s opportunity for Patrick and the other owners to help developer sell the remaining units to owners who have the money to finish up the property and pay the assessment? Hopefully everything works out for a Patrick, and if anybody else has any thoughts please share in the comments. Both I and Patrick would appreciate it, especially if you’re a real estate lawyer