Money market accounts and certificates of deposit are safe, but they provide very little return on your investment. This fact, and the invigorated stock market, provoked one of my bankers, Dobrinka, at the local Santa Monica Wells Fargo branch, to ask for advice on how I would invest $25,000 if I was just starting out.This is a common question although the starting point in terms of cash varies. It certainly makes a difference how old the person is, their general knowledge about investing and finance, and the particulars of their financial statement.
Here is what I suggested sticking to regular themes I have written about before and broadly speaking would be a conservative approach emphasizing safety, diversity, liquidity, dividends and the potential for growth far exceeding cash in the mattress or in a money market account. I also think that it is important for beginners to educate themselves so my suggestions include an educational aspect.
It is critical to protect yourself against market volatility as best you can and this goes double for when your just starting out. For this reason Step No. 1 is to put about a third of the funds in bonds. This is very conservative, provides a high yield and dampens market volatility. It is a baby step in the right direction. This was discussed in Serious Money: ETF that's better than cash.
For this portion of the funds I recommended the Vanguard Total Bond Market ETF (NYSE: BND). You can buy 100 shares for about $7,800 as of yesterday's close. It pays about 4% and can be cashed out if need be almost immediately.
Historically, equity will appreciate faster than debt, and index funds have beaten stock picking 80% of the time while costing less to own. For the next third of the money, Step No. 2, I recommended the Vanguard Total Stock Market ETF (NYSE: VTI). This will pay about a 3% yield and owns thousands of stocks. It closed yesterday around $51. If you buy 150 shares it will cost about $7,700.
These two funds would actually be a good start for most people and if that was all they owned and they want to sleep easy it would be enough without any other moves. However, if that was the case I would invest one third in bonds and two thirds in stocks. These two investments give you a higher yield than cash and you will own a very large segment of the bond and stock market. Together it will consume $15,500 of your $25,000 leaving $9,500.
The next step is not essential, but I recommended it because I think it is important to ones education to feel ownership in something specific: read the annual reports and become familiar with the workings of the market and business in general. Step No. 3 adds four stocks in different industries, that have long histories of superior management, branding power, dividends, admirable balance sheets and they are in businesses that have been around and will be around a long time. I have written about all of them and the most recent post is linked.
Johnson & Johnson (NYSE: JNJ) closed at $60.59 so say 50 shares costs about $3,100. Serious Money: Five high-yield, safe, diversified stocks
Olin Company (NYSE: OLN) closed at $14.18 so say 150 shares costs about $2,100. Chasing Value: 5% yield from Olin, a 'boring' old company
United Parcel (NYSE: UPS) closed at $54.53 so say 50 shares costs about $2,800. Serious Money: UPS -- No sure things, but ...
Wells Fargo (NYSE: WFC) closed at 27.17 so 100 shares costs about $2,700. Chasing Value: Wells Fargo - squeezing out the shorts!
These four buys total $9,700, but I am confident my inquisitive banker friend can come up with the extra $200. Some people might recommend getting equal dollar values of each stock and let the number of shares be odd numbers. This might be alright for large numbers of shares but not for so few. It is better not to have odd lots. These figures are close enough to balanced.
There are many more solid companies that one might include, but I think the point has been made about the approach to take. When it comes time to invest the next $25,000 I would alter the mix some. I would split the money equally between the stock index fund and the individual stocks and exclude the bond fund reducing it as a percentage of the total, favoring equity over debt.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of everything discussed BND, VTI, JNJ, OLN, UPS, and WFC.
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Reader Comments (Page 1 of 1)
8-13-2009 @ 3:38PM
Tech said...
No I would have them go to stockcharts,com and loo at the free public charts and take some baby steps after following the markets for awhile. Technical charts are the only way to play using trendlines and stops. All markets work in triangles and the US market is declining while Chindia is growing. Currencies, gold, commodites, agriculture, and stocks in them play off the declining dollar and offer real returns. Walmart is OK for the dividend and is the only game in town but it's already grown in the USA and a mature stock. Food and agriculture will grow, oil, and until the dollar settles to it's global equilibrium dollar based investments will underperform gold etc.
8-13-2009 @ 3:49PM
Stock Lurker said...
Nonsense.
All the funds and financial companies who are using technicals are bleeding money.
Only those who have massive systems that are border line artificial intelligence can use technical like Goldman Sachs and they win out because they can beat people on shear speed and computation power.
Don't BS yourself. The average user will never have connection to the markets fast enough to beat GS at technicals.
Either you going to have to play with it speculation or earnings and research. Technicals is the alchemy of the 21st century.
As the author advises playing ETFs is not a bad way to go because you are playing long term and not trying to beat the technicals.
8-13-2009 @ 6:53PM
martinqueensr said...
sorry i disagree , gold and silver is where you should put your money if 25000 is all you have to invest , just my 2cents worth
8-13-2009 @ 5:44PM
Sheldon L said...
TECH --
None of the great investors have ever used technical analysis -- that's zero -- they were primarily value based using basic cash flow analysis, ROIC, book value, and market size.
As a graphic tool to better visualize historic numbers it has merit as well as to compare different companies and investments. As far as predictive value it is on par with palm reading...and I might be slighting palm readers.
GOLD GUY -- your suggestion is highly speculative, might be a consideration for a portion of a large portfolio, not for starting out.
8-13-2009 @ 11:18PM
Beltway Greg said...
a. Gold and silver. Why? If you're simply going to base your investment decisions on an "end of the world scenario" pick a product, wheat, corn, or oil that has some type of utility. Besides they advertise gold endlessly on conservative talk radio. Better yet buy a truck, a tent, a dog, a fishing pole and head for the hills and maybe you can find your own gold while you're there.
b. Technical analysis? I agree with Sheldon on this one though I think some of the items he suggests are technical in a very loose sense. But, when the chart goes parabolic, POT, SKF, I usually head the other way. Overall though, technical analysis is witchcraft. Take a copy of Investors Business Daily and tuck it away for a year, take it out and look at it and see how many of the stocks with the dreaded cup with handle managed to break-out to new highs on greater volume.
c. As our pal Warren said, "find companies which can be run by idiots because sooner of later an idiot will be running it."
d. What do I want? Simple. For short term plays, a stock which has a great story/product/or positioning that is aggressively taking market share. For long-term plays stocks like APH, JNJ, GE, ITT, Emerson, Danaher,Heinz, Waste Management, Con ED. Just like an ETF buy them when they get hit.
8-22-2009 @ 11:51AM
Davey Rockefeller said...
If you don't use charts you can lose bigtime by paying too much while the Wall ST boys fleece you. Gold is much better or real commodities when the dollar is being inflated and the overall condition of the USA is losing money! Like a company do want to own their paper if they are losing money? No, you buy another country's paper or real value like metals, agriculture, oil etc. You could own dollars if they were making money but until then? No way! Holding on to stock in a money losing company or country is sheer stupidity-it's a global economy. You want to only hold paper of growing companies and economies and right now that's Chindia, Brazil, etc. and real commodities. Global companies that pay steady and growing dividends like Walmart, Waste management, JP Morgan, MLP's, Excel, in the USA maybe, but you can still lose if the dollar declines. Think globally and base your investments using the dollar chart underneath as your trying to make a profit in dollars. Trade short term and cash in your profits sticking them into solid long term "investments" and play currencies.
JP Morgan's ghost roasting in Hell next to John D.
9-28-2009 @ 8:47PM
dcbright33 said...
Well, I think gold and silver is the way to go. But, you have to do careful research when investing. Just my opinion.