Financial Advice

Let Flagpole invest it for you.

Yeah, buy a flagpole. Those things appreciate like crazy!

Alan Greenspan wrote:

I am a college student with a decent amount of money (for a college student) sitting in the bank. I'm thinking about opening a CD just so I can make a couple bucks on it over the next year or so since I don't need access to all of it. Is this worth it? Should I wait and hope interest rates rise? I really don't know much about this stuff so I am just looking for some advice/ideas. Thanks.

1) Open a money market account with Vanguard.

2) Read every piece of literature that Vanguard ever sends you. The knowledge gain will be worth way more (even from a strictly financial perspective) than any interest you can make on your money at this point.

3) Read John Bogle's book on investing with mutual funds. Easily readable for the non financial types.

4) NEVER invest in anything you don't understand.

That'll be 5c please. Next.

alan Greenspan is a bathtub-soaking Tool!

Divide your money by 12. Invest 1/12 in the best CD you can find at a FDIC insured bank. Each month the rates will go up, or go down, or stay the same. Each month you will open a new CD with 1/12 of your money, usually the same few banks in each marketplace offer the best rates.

A year from now, the first CD will mature and you can make the same investment decision again.

This method is called "Dollar Cost Averaging" and can be applied to other CD terms (6 month, 13 month, 18 month, etc.), other fixed rate or variable bank products and also non-FDIC insured investments like Mutual Funds. The idea is that you are not "market timing" which is what most idiots do when they get a large sum of money because:

a. there broker tells them to (he wants his fee right now)

b. the investor thinks the market can only go one way

Dollar Cost Averaging allows you to get the average of all the return rates over the 12 months as opposed to trying to guess which way rates or mutual fund prices are going to go.

You can vary your method but the general idea is trying to do something a little less risky than taking a plunge in the market at a risky time or putting all your money in a CD while rates are extremely low.

Did Alan Greenspan ever get his Ph.D like he claims?

Ding ding ding! We have a winner. A Vanguard MMA will pay rates competitive to a CD, but without limiting your access to the funds.

But in reality, if you truly are a college student comfortable enough and responsible enough to sock money away then you will likely have no money problems as an adult and needn't ask advice here. The key to financial security is being prudent with the money you spend with respect to the money you earn, not necessarily the specific investment or investment vehicle that you choose.

Forget the CD's. First Arkansas Bank & Trust pays 4.41% interest on your first 50k in their checking account . Make 10 debit transacions a month (which is easy) and one bill pay or ACH transaction and you have qualified for the 4.41% rate. You WILL NOT find that rate in any CD.

Mr. Investment wrote:

1) Open a money market account with Vanguard.

2) Read every piece of literature that Vanguard ever sends you. The knowledge gain will be worth way more (even from a strictly financial perspective) than any interest you can make on your money at this point.

3) Read John Bogle's book on investing with mutual funds. Easily readable for the non financial types.

4) NEVER invest in anything you don't understand.

That'll be 5c please. Next.

Yeah, this is solid advice. If you have ENOUGH money to open an MMA with Vanguard, then that is better than a CD. The funds are more liquid, and you can easily transfer them to some mutual funds if you want. Investing though should be done only when you have NO debt other than a reasonable mortgage. SO, for this college kid, I would suggest he make sure he is debt free (pretty sure he doesn't yet have a mortgage) and has 3 months of living expenses saved up (this CAN actually go in the MMA too). He's got that in place then it's fine to invest a little (above and beyond what is in the MMA). Rates for MMAs and CDs less than a 5-year CD are pretty low right now, so you really won't make much money with them, but opening the MMA is a good habit-forming activity, and so you should do it. Take money from that MMA that you don't think you'll need in the near term, and put it in a mutual fund.

Good luck.

Whew!! I was holding my breath until THE GOD of all things financial graced us with his wisdom.

An online savings account (HSBC 1.45%, or ALLY 1.75%) is also a good option. Rates similar to CDs at brick and mortar banks.

I opened an online savings account with HSBC back in 2006, the interest rate was 5.05%, but has slowly decreased to 1.45% since then.

xlev2 wrote:

Whew!! I was holding my breath until THE GOD of all things financial graced us with his wisdom.

Note that I gave props to another poster for "solid advice". I'm not as arrogant as some of you try to paint me.

Flagpole wrote:

[Note that I gave props to another poster for "solid advice". I'm not as arrogant as some of you try to paint me.

Except now you had to going and brag about giving props to another...hee hee...(kiddingly)

How is that better than 4.41%???????

I think you're arrogant to think you can get away with putting your period outside the quotation marks. This is the United States, not the UK!

xyzrunner wrote:

How is that better than 4.41%???????

I don't know, why don't you crunch the numbers for me.

OK, folks. It's time for a little lesson. Allow me to state that which should be obvious but which an amazing number of people have trouble understanding:

Dollar Cost Averaging IS Market Timing.

Got that?

If you decide to invest in any liquid (I can get out of the investment at any time - although perhaps with a loss) investment, then put it all in at one time - as soon as you have made the decision to invest it in that particular vehicle. Anything else (splitting it in half and waiting six months to invest the other half or any other such scheme) is taking a bet on the performance of the market in the interim. i.e., it IS Market Timing which is nearly uniformly a bad idea.

Here's the basic math. Imagine you have $200. Let the year end value of $1 invested in the market at the beginning of a given year i be denoted by ri. So $1 invested at the beginning of year 1 yields $r1 by the end of the year. Kept in the market for year two it becomes worth $ r1xr2 and so forth.

Now imagine that you take your $200 and invest it all at the beginning of year 1 and keep it invested until the end of year 2. At this time you will have $200 x r1 x r2. Note that both r1 and r2 carry equal weight in the scenario. That is, year one and year two are being treated the same as one another.

Instead, invest only half at the beginning of year 1 and the other half at the beginning of year 2. At the end of year two you will have ($100 x r1 x r2) + ($100 x r2). Note that all of your $200 is subject to the returns of the market in year 2 but only $100 is subject to the returns of year 1. That is, you are treating year one as 'special' - somehow inherently more risky (or less rewaring) than year two. I.e., you are engaging in market timing.

Try it yourself - what would it look like if you invested all of the money at the beginning and then took half out at the beginning of year two (basically the opposite of dollar cost averaging and intuitively a rather absurd strategy). It turns out that your final sum would be ($100 x r1 x r2) + ($100 x r1). In this case we really like year one and are avoiding that risky year two but this absurd strategy makes exactly as much sense as the oh so clever idea of 'dollar cost averaging' - compare the final sums above for yourself.

Bottom line - dollar cost averaging in general makes no sense and has become part of the investing culture most likely due to a lack of basic algebraic competence.

For this I will not ask for the usual 2p. Just that fact that you understand the algebra is satisfying enough.

Mr. Investment,

The purpose of dollar cost averaging is to mitigate risk, and it DOES do that. It is NOT timing the market at all. Putting a lump sum in does well if you put it in at the bottom and it goes up for there, but dollar cost averaging helps if you put it in at a certain price and you continue on regular intervals (like twice a month, NOT ONCE A YEAR!) to put money in (buy shares) as it goes down. If you did that with a lump sum and it all went south, then you lost on the entire amount from the time you put it all in. If you buy as it goes down, not only did you not lose the larger amount but you were able to buy MORE SHARES as the market or the price of the stock went down.

I'm not entirely against putting lump sums in on occasion, but you need to have some things in place first. 1) already be doing 15% or more into retirement accounts that are made up of mutual funds with bonds and stocks in them; 2) be debt free but for a house (and even better, own the house too). Then, if you have some extra and want to buy when you think the market is low, then go ahead. To do this as your primary mode of investing though is very risky and it IS timing the market, which pretty much can't be done successfully at all.

Thanks for the input!