How to invest a small amount of money

Posted on May 12, 2014May 12, 2014 by Danielle

It must be admitted that small means different things to different people, and might be $100 for some and $100,000 for others. But for purposes of this post, I’m going to set out the following rules (my blog, my rules, right?)

It should be money you don’t need immediately. This is not your emergency fund, next month’s mortgage payment, etc. You should be able to hold it for a few years.
Similarly, it’s for investing, which means you hope to make money from its growth, but not gambling, where you’re in it for the thrill of it.
You will only choose an investment after assessing how much risk you can tolerate.
Do you have enough to meet the investment’s minimums?

While you can open a savings account with very small amounts of money, you don’t have much upside potential in them either—they’re parking lots. On the other hand, many mutual funds require $3,000 or $10,000 minimums. You can get in the game by choosing ones with lower minimums (usually Target Date or others designed for retirement or college savings) or purchasing ETFs, but if you’re very new to investing, ETFs may seem to complicated. Purchasing a few shares of individual stocks is usually hardly worth the double whammy of sales commissions and risk concentration.

On the other hand, if chump change is $100,000 for you, you’re probably an accredited investor and someone is pitching you a special-only-for-the-elite investment, which generally means you are about to be taken on a risky, money losing ride. This also includes anything with a can’t-lose return, super-special private deal annuities, non-traded REITS, hedge funds, and master limited partnerships. Be sure to check your back to see if a sign saying Easy Mark is pinned somewhere.

But what should you look for in a decent small investment?

Return. You ought to get some. In this low-rate market, that’s probably somewhere between 1% and 8%, with, as always, more return means more risk.
Safety within the range you can tolerate. A Federally insured account is the safest, but with no danger of losing principal, but of course that also means the smallest return. A big mutual fund company (like Vanguard, Fidelity, TIAA-CREF, or T. Rowe Price) offers you no guarantees on investing, and theoretically could lose all your money in its mutual funds. Most brokerages offer SIPC insurance but this only protects against the company going belly up and taking your money with it. It offers no protection whatsoever that whatever you’ve invested in couldn’t go kaput and take your money with it. On the other hand, it is highly unlikely that you would lose your principal in a money market fund, because they are invested in short term, highly predictable instruments like ultra-short term bonds. And, guess what, you won’t get much return (like, nothing) on them at the moment. By now, I’m hoping you’re seeing the pattern common to all investing: to make money you have to take some risk. How to minimize that risk while earning a little more than a bitcoin or two.
Diversification. This is really the key principle, and the hardest to achieve with small amounts of money. To get return you have to take risks, but to minimize risk you have to spread out an investment so that your bet isn’t riding on one number on the roulette wheel. Buying a single stock is putting all your money on one number, and in most cases I don’t recommend it. But what most people don’t realize is that buying a mutual fund focusing on a specific asset class (say, health care or mining or the S&P 500) is a pretty limited bet also. While it’s more diversified than a single stock, these guys tend to hang together. Even worse, some people think they’re diversified because they hold stock funds in several different mutual fund companies. If you’re holding “growth” stocks at Fidelity, Vanguard, and T. Rowe Price, you probably own about the same portfolio at each—i.e. little diversity.

But, what a surprise, the mutual fund companies have cooked up something designed to pander to your needs, er, address your specific investing challenge. These relatively new types of mutual funds are known as Target Date, Life Strategy, Lifepath, etc. They were developed to offer something within employer 401k plans, college savings 529 plans, etc. for large pools of investors who might be inclined to put away only very small amounts of money at a time. Indeed, a Target Date fund may be the best default choice in your retirement plan, especially if the other choices consist of a lot of high-fee or proprietary funds.

Investors with a small amount to put away might consider these funds for purposes other than retirement (as well as retirement), by remembering that the closer to goal, the more conservative the Target Date fund. Let’s take the example of investing some money that you can leave alone for 5 years. If you need to be relatively certain that you’ll have that money, you might want it conservatively invested in something such as a Target Date 2020 fund, which is going to be primarily in bonds and cash. But let’s say you hope to make a little more than that, and don’t HAVE TO with draw the money in 5 years—say, if it is up you’ll withdraw, but if it’s down somewhat you could wait another 3 years. Then, you might want to consider a Target Date 2030, or 2040, or 2060—all of which will be invested in a higher proportion of stocks, internationals, and perhaps alternatives.

Target Date funds will give you far more diversification across many types of investments and many companies than you could achieve on your own with individual investments. But they will change their investment path over time—moving to more conservative investments as they march to their Target Date. Is there any other type of fund you might consider?

Before Target Date funds came along, 60/40 mutual funds were pretty much the go-to for investors who wanted a set-it-and-forget-it investment. These funds are designed to maintain a balance of 60% stocks and 40% bonds, a mix that is generally considered prudent but with some potential of return. Also, the funds impose an automatic discipline of re-balancing whenever one side or the other gets out of whack, thereby (at least theoretically) buying low and selling high—what we’re all supposed to do, but usually do the opposite.

You may see these funds called balanced funds or moderate allocation or equity/income but drill down a little bit to take a look at management fees (should be low), make sure they’re no-load, see exactly what balance they promise, and determine whether they are made up of index funds or the choices of some manager (prefer index funds). Also, take a look at the longevity of these funds—some of them have been around since the Depression (1929, not our current ongoing situation).

The third choice you might consider is a fund of funds—a mutual fund company collects a basket of their index and actively managed funds and distributes your tiny coins among them. Not a bad choice for diversity, but I’m not a huge fan of actively managed funds. Keep an eye on fees and commissions (nope, nope, nope).

Finally, a disclaimer—none of these may fit your personal situation, and you should not take this as specific investment advice. And then, there’s always your mattress.

Time, Money, and Agency

Posted on April 24, 2014April 24, 2014 by Danielle

Are you old enough to remember the Whole Earth Catalog? It was an amazingly romantic document. You could entertain yourself for days fantasizing about all the things you could learn to do (many of which you had never heard of) and how utterly self-sufficient you could become.

Another book that came out about that time was Living Poor with Style, by Ernest Callenbach. Would anyone buy that book nowadays? Yet, it was a masterpiece of rethinking consumerism, with the proposition that less stuff and more self-sufficiency was the way to happiness. It’s hard to believe that these books were part of the same baby boom generation that survives now. We went a totally opposite way—tons more stuff and almost no self-sufficiency. Building a brick oven has morphed into turning on a microwave. Not only do we not cook, but even cooking shows have become competitions, not instructions. Do any of us believe we could actually make, ourselves, what we see on Cake Boss or Iron Chef?

We baby boomers have somehow come to the conclusion that we’d rather work long hours with no vacations so we can pay someone else to, well, handle our lives. Right now I’m reading Michael Pollan’s book Cooked, where he argues that our lack of being able to make things narrows our lives—we spend our time in increasingly narrow and isolating specialties (for which we may be paid quite well), but without the agency—the ability, control, and perspective that comes from being able to accomplish something fundamental, particularly in a creative way. We also lose the cooperation and connection that shared meals, purchasing raw materials from growers, and perhaps even cooperating with neighbors to share skills and tools, used to bring. And our children? Well, if we’re lucky they’re quite proficient at scoring high on the SAT.

For many things, if you want to learn how to do a craft, you won’t even be able to find a local teacher. The Craftsy platform has made a serious go of it by promising video instruction, the ability to contact a live teacher, and a chat room to share creations and discuss with “classmates”. Not at all the same thing as sitting with my aunt and sewing my finger with the machine, but about as good as it gets nowadays when mom, dad, and grandmother may have never learned the basics.

And why is this? Because none of us have any TIME anymore. Callenbach argued that, given enough time, you could save money by re-soling your own shoes. That’s too far for even a do-it-yourselfer like me, but I have discovered over the years that I can do practically anything a handyman can do if I watch enough Youtube videos (the modern alternative to hands-on instruction). And the issue of time makes me laugh—we all seem to have enough time to cruise Facebook, forward cute kitten videos, keep up with Game of Thrones, and keep the computer gaming industry going strong. And then there’s shopping…

If you spend your time, you will save your money, usually. I have my doubts about sewing clothing, since so much cheap stuff is available, and some hobbies (knitting being another) encourage some of us to hoard wonderful stuff rather than actually use it. Still, what you actually take care in making is often far, far better than what you can buy already finished. But what I am arguing is not so much saving money (although I like that), but the satisfaction and control over your life—the POWER—that being able to make things and understand methods delivers. Making things can slow down consumption—besides the time invested, one fine thing can be much more satisfying than a lot of purchased crap.

Give yourself the gift of pride, power, and uniqueness. Do it yourself. Really, it beats scrolling through Facebook from your cubicle (or corner office).

The College Visit—stuff I didn’t think to ask

Posted on March 27, 2014March 27, 2014 by Danielle

I’ll be honest—we didn’t do a ton of visits, when dear daughter was applying. As usual I had a divergent view and couldn’t really grok spending thousands of dollars to see colleges where she might not go. Plus, the few we did visit she hated. Maybe it helps with admission and maybe it doesn’t much matter, but who knows. Personally, I don’t think student guides walking backwards have all that much influence.

But now that she’s happily ensconced in a school, there are a bunch of things I wish we’d known enough to ask. I include them herewith, as they may save you some money or allow you to do better calculations.

Is there a college sponsored way for kids to get to the airport?

Some schools do offer a shuttle, but this is generally only on the day when school lets out for breaks (if at all). And getting back to school after breaks? Good luck on that one. If the school is located in one of those charming remote areas, check out how much the cab or airport express costs. Don’t faint. And while you’re doing that, check out the airfares. Add $2,000 or so to what you thought was your budget—because the airlines know when the schools let out, and price accordingly. College students have a lot of breaks.

What does it cost to stay in the dorm over breaks? Can you?

Luckily, I guess, my kid always wants to come home. But there are often special programs, internships, or even paid jobs that run over breaks. Before signing up, check out if the housing & food cost makes them worth it.

What can you do with the kid’s junk, er, room décor, over summer break?

Find out what storage costs average—many campuses have arrangements with storage locker facilities, but surprise, they aren’t cheap. Plan to rent a uHaul? Add up that cost, too.

What’s the policy if the student takes a year off, or quits or gets ill at some point in the college experience?

Right now you’re probably thinking please God not my kid. In the past 2 years I have heard 6 stories of personal acquaintances whose children did not or could not finish. Will the school automatically admit them back if in good standing? What about tuition refunds? And be aware that any loans will then kick into payment mode.

How does the health service bill? Is the local hospital in-network for your insurance?

Can you get bills to submit to your own insurance company? Can they get your kid to the emergency room or will your child have to find friends or EMTs if they need more than the health service can provide?

What can the school do if your child is in bed with the flu?

Surprisingly, at dd’s school nobody seems to have considered how a sick student will get fed. If your child is too sick to get over to the dining hall, she better have friends willing to get infected. Find out if there are beds at the health service—maybe you don’t want to be in the same room as a roommate who’s got the flu. And lock your kid in a room until the HIPAA form is signed so the health service can talk about the kid’s condition with you.

Is there an appeals process for grades that is remotely fair to the student?

This is a hard one to discover. But think for a moment about what each class is costing. Let’s say, total cost of attendance is $56,000 and child is taking 4 classes/semester. $23,000/4=$5,750. I am NOT saying that buys you a good grade, or that ANY child is entitled to a grade they did not earn. But the student ought to be entitled to a FAIR grade. Speaking from said daughter’s experience, there is going to be at least one teacher who

Can’t produce a coherent syllabus
Changes the grading system three or four times during the class
Can’t get assignments back so that the student has some idea how they’re doing and can prepare for a test
Loses assignments, doesn’t appear to read assignments carefully, yadda yadda
Doesn’t show up during posted office hours, and is late to appointments
Grades based on some airy-fairy feeling rather than the actual numbers the kid has scored

Sure, you had some terrible profs and so did I. But we probably weren’t paying the kind of bills we’re now getting, either. Thankfully, this experience was acquired via study at that other school down the road, okay, it was Swarthmore and not dd’s beloved Bryn Mawr. And I shudder to suggest that not all profs are equally (remotely) capable and that supervision of exactly what they’re up to is not as closely monitored as, say, the average schmo in an actual job, because that would probably make me sound a little resentful. Even worse if it’s a required course, a prerequisite, or something the student is profoundly interested in. In such a class with such a prof you would be better off lighting five Grover Clevelands (he’s on the $1,000 bill in case you’re never seen one)—at least it wouldn’t hurt the kid’s grade point average.

I’d ask about appeals and how many have been decided in the student’s favor. Snarky rant over.

Check out the public safety reports often posted on bulletin boards.

The ones over at Swarthmore made daughter and this parent shake in their boots. You really want to know about sexual assaults, armed robbery, etc. before you read about them in the paper. Unfortunately, some of this appears to be the new normal on some campuses (thankfully not aforesaid Bryn Mawr).

Will campus safety escort a student back to the dorm at night, do they actually show up, and how many people use it on an average weekend night?

Yeah, your kid will hate you for asking this. Until some dark and stormy night.

Is there an emergency management plan?

Not that there is ever a big snowstorm or anything, but maybe as a parent you’d be more comfortable if the inmates weren’t running the asylum. The kids are stuck there, but what about food service? Campus safety officers? Fire department, heat , electricity? If I had it to do over, I’d probably find out if a copy of a plan was available. Bryn Mawr did do a terrific job with snow and kid management. Glad it wasn’t me trying to handle both at once.

I’ve developed significantly more grey hair over the past two years my offspring has been in college and it’s not even due to her behavior! Find out all you can before you sign that acceptance letter, and you’ll sleep better for the next four years.