02-20-2014, 10:37 AM
(02-20-2014, 08:16 AM)Star Wrote: Hey guys, I am new here (for those who don't see the post count first), I am looking for a little bit of advice.
Hi Star! Welcome to the forum.
(02-20-2014, 08:16 AM)Star Wrote: I work full time earning a good amount for a grad.
I have saved a nice (in my eyes) lump of cash.
Congratulations. I think that puts you ahead of just about everyone else your age.
(02-20-2014, 08:16 AM)Star Wrote: How should I start off? I am not too keen on ETFs. I was thinking a few staples such as KO, MCD, JNJ. Then REITs such as O, also liking ARCP (since it's merger with cole - possible lising soon in the S&P 500).
Is it better to buy a few solid stocks and keep adding to those positions when they are relatively undervalued, or should I deploy all capital at once?
I am also looking to purchase my first home, I want to save for that too. Right now I am debating stocks vs larger down payment.
The answer to all of this, of course, is "it depends." If you really plan to buy a house soon, then you need to put aside enough for the 20% down, transaction costs, and some cash for the inevitable (and always bigger than you expect) new home expenses. If the lump of cash you have saved is larger than that total amount, then there is the dilemma of whether to use the excess to increase the down payment or buy stocks.
Math gives a pretty clear answer to that question. If the returns you can get in stocks exceed the interest rate on the mortgage, then stocks are the way to go. If not, then increase the down payment. Of course it is not quite as simple as that. The yield on things like KO, MCD, and JNJ are not going to be higher than the interest rate on your mortgage in year one. But if dividends grow as hoped, there should be a crossover point where they do that is earlier than the end of your mortgage (I am assuming a standard 30 year fixed). I personally would not allocate too much to the REITs, but whatever extent you add them only improves the math.
(Though given your age, if your income is high and stable, and if you can live far below you means, I could see making the case for taking a serious calculated risk and putting a lot cash into REITs like O and ARCP (but NOT things like NLY), and letting the income stream more than cover your mortgage. Not for the faint of heart, and maybe terrible advice, but I could see the case for it and would be tempted to run the numbers.)
And as always it is important to remember that this is not all math. If having a mortgage weighs on you, it might make more sense to put the extra cash towards the house regardless of what the math says.
If you do decide to go with some allocation to stocks, the question of whether to go all in at once or to ramp into it is tricky. Which approach turns out better depends on the unknown. If prices keep going up, you'll be glad you went all in. If there is a correction soon, you'll be glad you held some back. Given that you're new to this, I'd probably recommend that you don't go all in at once. Buy in bits and pieces as opportunities present themselves. You'll gain experience and comfort, and will get to know yourself better as an investor. As you get more experience, you may decide to put the rest in aggressively, or you may decide that there is a higher use for your cash.
In any case, it is a truly great dilemma to have, especially at your age. I wish I had it so together when I was 21. I'd probably be able to retire right now.
