Quick overview of investing $8,000 in a brokerage account
I got asked to write on the topic of investing a little more, specifically, how I go about investing a sum of money that comes into my possession. This post will be quite basic for some and hopefully a simple overview for others.
Investing $8,000 is no different from investing $100 or $250,000. There are ways to setup an account for automatic investing and you can also invest your money manually, which is what I will be doing here.
Opening a brokerage account
The process is simple these days, thanks to user-friendly interfaces. You go to your chosen brokerage website and click on “Open Account” and you fill out the relevant information.
Fidelity, Charles Schwab, and Vanguard are among the more recognizable examples of a brokerage account. These companies allow you to transfer money from your checking account into your brokerage account and then decide which particular investment (a stock, bond, mutual fund, etc.) you will direct your money into.
You will be taken through questions such as the purposes of the account (savings, retirement, etc.) which is irrelevant. A retirement account is often reserved for pre-tax money such as when you invest in a 401k or IRA. A savings account is a what is sometimes called a private brokerage account in which you invest in various stocks or mutual funds, this is the example we’ll be using.
You then enter your SSN and DOB and few other personal details. Then you enter your checking account number and routing number in order to transfer money from your bank over to your new brokerage account.
Transferring money to your brokerage house
In my case, I have $8,000 which I want to invest. I open my Vanguard app on my phone, select the stock or mutual fund I want to buy and indicate how much of it I want to buy and finally where that money will come from.
I will then select my checking account from the drop-down menu and the money will be transferred within about 2-3 days to cover the investment purchase. It’s that easy.
Alternatively, you can elect to have a portion of your paycheck sent directly to your brokerage account every 2 weeks. This can be done on your employer’s website and can be an ongoing process.
The money which is transferred to your brokerage account can either sit in a basic savings account or you can choose to have it invested into a particular fund as soon as the money arrives.
Choosing your investment
In a private brokerage account such as the one I have at Vanguard, I decide what specific funds I want to invest in and usually by February or March of the following year, Vanguard will tell me how much I owe in taxes.
The reason I mentioned the tax thing here is that some investments are better held in retirement accounts such as IRA’s or 401k’s which aren’t taxed until you are retired, while some investments don’t have heavy tax consequences and can be held in a private brokerage account.
Choosing what you want to invest in depends on your risk tolerance, investment horizon and how much gains you’re hoping for. This is something best determined by talking to financially savvy friends or a financial adviser.
I don’t enjoy taking a lot of risks and don’t mind lower returns in exchange for a better night’s sleep, knowing that the chance of losing my investments is low.
Stocks or Bonds
My buddy invests only in individual stocks. He has around $2,000,000 invested and has enough different individual stocks that he is somewhat well diversified. He is heavily invested in technology and healthcare and holds his positions for the long-run as opposed to those who trade every few days.
The current sentiment regarding lower-risk investing is that it’s better to forgo the individual stocks and bonds and hold passively managed mutual funds (aka index funds) instead. However, you should decide for yourself as to which is a better investment strategy for you.
I am only invested in index funds. This allows for some diversification and gives me exposure to not just a handful of stocks or bonds but a much larger group of investments.
A mutual fund will often have a ticker symbol just like a stock will have a ticker symbol. You can enter the ticker symbol or the full name of the mutual fund, decide how many units or how many dollars worth of it you would like to purchase and then you are done.
Mutual funds can hold bonds or stocks or other investments such as real estate. These are called REITs.
Think about your asset allocation
If you are investing in only one mutual fund then you won’t have to worry about dividing up your money between the different assets you hold. However, most investors like to have some exposure to stocks but also some exposure to bonds. The ratio between these 2 would be called your asset allocation.
My asset allocation for my private brokerage account is somewhere in the 70% range for stocks (also called equities) and 30% for bonds or cash.
I chose this asset allocation because I wanted less volatility in the ups and downs of this account. You see, if I decide to stop working then this would be the account that I would likely draw down from at my current age of 39.
If I invested in an all-stock mutual fund then it might be up 10% one year, down 20% another year, then up 15%, down 5%… you get the idea. Adding bonds into the mix eases the volatility because when stocks are up, usually bonds will be down and vice versa.
My brokerage account
I have around $126,000 invested in my brokerage account. $77,000 is in international mutual funds (also called index funds), $23,000 in US mutual funds and $26,000 in bonds.
My asset allocation, which is that 70/30 ratio that I am aiming for, is 80% equities (stocks) and 20% bonds (off by only 10% in each category).
My asset allocation breaks down even more into how much international index funds I want to hold and how much US index funds. I want to shoot for around 50/50.
Currently, my international index funds make up 77% of my equities and my US index funds make up 23%. So instead of the 50/50 ration, I have a 77/23 ratio. This isn’t a big deal, it’s just that I did a lot of research to come up with the asset allocation that best fits my needs – it’s important that I maintain it.
rebalancing for asset allocation
Every time I come into some money I invest in whichever fund that is lowest. In the 77/23 example above, I need to invest more into my US index funds (23%) in order to bring it up closer to the international index funds (at 77%).
I took my $8,000 and bought more of the US index fund which should take my ratio up to 71/29 – better.
The next few months, if I come into more money, I’ll keep buying more of the US index funds in order to achieve my desired 50/50 ratio. Alternatively, I could sell some of my international funds and buy more of the US equities, but then I would have a possible tax event because my assets are up. The IRS will want their cut if I profit off of a sale.
Get started investing
The easiest thing is to open a brokerage account and start investing. The purpose of investing is to grow your money and learn more about finances.
There are those who turn $100k into millions and there are those (like myself) who are just trying to slightly beat inflation at conservative rates. You need to decide how aggressive you want to be which means, how much risk are you willing to take?