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Hello all,

I am new here and would like to ask for some advice from the most seasoned members. I am in my mid 20’s and have no experience in investing. Also, I don’t know any experienced or successful investors personally. I have been doing a lot of reading and I think I have been successful in following general advices on how to get ready to start investing; however, I have not been able to come up with an investment plan or strategy. Anyways, this is my current situation:

•No debt, no payments that charge any interest.
•34,000$ in savings.
•3,000$ in a simple IRA account (retirement funds from my previous job).
•My income and expenses allow me to save about 2,000$ a month.
•My employer offers 401k with 25% matching up to 5% of my salary, but I have declined to participate in this program as I didn’t see much of a benefit from it.
•Brokerage account funded with 5,000$, but I haven’t made any moves.

My question is: how should I start? Should I build a diversified portfolio by buying a few shares of a lot of companies and periodically add money to it? Or is it better to start with a lot of shares of 2 or 3 companies? What percentage of my saved money should I use? Would it be convenient to move my IRA money to 401k and join my employer’s retirement plan? I guess what I am looking for is some advice on how to best take advantage of my own money, or how to build an investment strategy that is suitable for my situation.
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By placing the dollar sign after your numbers, you make me think you could be an immigrant. Can we presume you are a US citizen with no plans to return to another country?

First question is what is your investment objective? Saving for retirement? To purchase a home? Educate children? etc etc.

Assuming your goal is saving for retirement, most would suggest that you fund a Roth IRA each year to the maximum allowed. If you fall below income limits, Roth lets you accumulate funds after tax, but they grow tax free and are not taxed when distributions are taken according to the rules in retirement usually after age 59-1/2. The Roth may be at any custodian you choose. Most would choose a mutual fund company (if you plan to invest in their mutual funds) or a discount broker (for stocks or a mix of stocks and mutual funds).

Roth 401k's are available some employers. They can be excellent. Most would invest in your 401k at least to get the match. That is free extra income. Investing to the pretax limit is a good idea for most. Your funds grow tax free, but are taxable at ordinary income tax rates in retirement. They can also be rolled over to an IRA after you leave the employer or converted to a Roth IRA. Much depends on the fees charged and the investments offered. Low cost 401k's are often offered by large employers, but smaller employer plans can be expensive.

A major advantage of the 401k is convenience. It is funded painlessly by payroll deductions. And it is easy to designate that your funds be invested in one or more funds, usually mutual funds. This lets you accumulate shares steadily. The result is dollar cost averaging, which gives a low average cost, especially when you buy through a market dip.

To answer your questions, first you should do a Roth conversion on your IRA (if you qualify), then fund your 401k. These investments work best for retirement saving. If you are saving for other purposes, then a cash account can work well. You probably want an emergency fund to cover the unexpected. How large is needed is often debated on this board. I have used a combination of credit cards and bond funds with check writing privileges. But this depends on the nature of your situation and the size and frequency of likely emergencies.

As to where to invest, most would begin with mutual funds at least while you learn about stock market investing. An S&P 500 Index fund or total market fund is usually the way to begin. Once you get over $10K, adding a few stocks can be a good way to learn. However, a CAPs portfolio is also good practice. If you can successfully win at picking stocks, converting your strategy to cash investments is easy. If you don't win at picking stocks, you know you are better off to rely on the pros usually by owning mutual funds.

The $2K per month contribution works best for mutual funds. You can even arrange to have a given amount automatically deducted from your bank account each month and sent to the mutual fund. Or you can simply close your books each month and send surplus funds to your investment account.

The $2K per month is probably large enough to make monthly purchases of stocks at a discount broker, but that could be more trades than you prefer. So accumulating funds in a money market fund at a brokerage house and then occasional investments when opportunities arise could work for you.

As to how to accumulate a portfolio, make a beginning and learn as you go. You will soon learn what works for you and become aware of other opportunities.

This is getting a bit long. Feel free to ask if any of this requires more explaining.

Best of luck to you. Good investing!!
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Hello and thanks for your reply and advice.

You are correct: I am an immigrant, but I am also a US citizen and my plan is to stay here.

Regarding your first question, I have two objectives: I want to save for retirement and build an investment portfolio that generates money for me in the short and long run.

Regarding retirement savings, your recommendation is to convert my IRA to a Roth IRA and also use my employer’s 401k. I thought that if I chose my employer’s 401k it would be more beneficial to move the $3K I have in the simple IRA to that new 401k account. This is because my plan was to save for retirement only through my employer’s plan, if at all… However, your suggestion to use both my employers 401k to take advantage of the “free money” and also fund a Roth IRA to the maximum allowed sound like a much better option, especially since income from a Roth IRA is not taxable. Thanks for the eye-opener!

Regarding the investment portfolio, if I invest on an index fund, would now be a good to time to buy in? By looking at the 10 year and 5 year charts, it seems the indexes are peaking right now... Furthermore, if I start buying shares, would it be better to start by buying a few shares of different companies (diversified), or a lot of shares of one or two companies?

Regarding emergency funds, if I spend about $2k a month, what percentage of my $35k in savings should I move to my brokerage account? Or should I just leave that in savings and from now on start adding a certain fraction of my $2k monthly excess to my brokerage account?

Also, when you say that I should use a discount broker, you mean a broker like Scottrade or eTrade? If not, can you recommend a couple?

Thanks again for your reply and your recommendations.
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If the funds in the IRA are all rollover funds from a 401K plan, the funds can be transferred to your present employer's 401k plan. The rules of your plan dictate how this is done. It might be ok if you have a low cost 401k plan with good investment choices. But the investment income is still taxable at ordinary income tax rates in retirement. (Note that rollovers and transfers do not count as contributions. You can still make the full maximum contribution to your 401K and Roth in the same year regardless of any transfers.)

Roth conversion is attractive assuming your income tax rate is still fairly low. Plus you can pick your own custodian and your own investments. And it is possible to put the Roth at a discount broker and invest in stocks. Most people do not move rollovers to 401k's because IRA or Roth IRA gives you control of your funds, whereas your employer can change rules or investments in your 401k at any time.

As to when to invest in index funds, timing an investment is always difficult. That is an advantage of making regular investments in the same fund. Dollar cost averaging gets some shares at the lowest available price and you buy more shares at the lowest price.

No one does market timing well. We hope that Congress resolves the fiscal cliff problems. Then economic recovery should continue. That makes it a good time to invest. But clearly these are times of uncertainty. In a 401K plan where you make the same contribution every month, this does not matter so much. But it is a concern if you plan to make a large single purchase.

On emergency funds, think about the largest event that might come up. Suppose your car required a major repair costing say $1000. How would you fund that? With assets of $35K, you can probably come up with the funds in time. Personally I would put it on a credit card and then work out where best to get the funds when the bill comes in. A bond fund usually works well for that, but if you have a portfolio of stocks, in a month you can decide which one to sell. You do take the risk that you might be forced to sell at a loss or at unfavorable times. But the alternative is often lower rates of return. So that is one choice you have to make. You also must decide for yourself how large your emergency fund needs to be. Some do keep funds in money markets for that purpose. An interest bearing checking account can also be used.

As to discount brokers, there are many of them. They are discussed on the Discount Broker discussion board--

They are most up to date on the various brokers. Personally I use Fidelity. They claim to be the largest. They do a good job. They have an office in most major cities for face to face discussion when necessary. They also offer training courses on various investment subjects. And they provide free independent research.

All of the discount brokers I know of seem to do a good job. So pick the one that meets your needs at the best prices.
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Thank you for your help and for providing me with all this valuable information.

Clearly, I still have some studying to do and a lot to learn (specially about some investment vehicles you mentioned that I didn't even knew about), but now I have a much better idea on what mindset I should have to plan my investments.
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