Need Advice! How do I invest?

I am in my mid 20s and recently got some money that I would like to invest. My idea is to invest somewhere, let it grow for 5 years, and then use it to buy a house.

The only problem is that I don't know anything about investing.

I have never had any money, and now that I do I feel like I have this huge pressure to do the best possible thing with it. I've been trying to research all of my options but am utterly overwhelmed. Where do I start?

Of course I'd like to let the money grow until I retire but I would like the option of using some of it before then. It all seems very complicated.

Any advice?

I...recently got some money
Umm, Is it bigger than breadbox? Smaller than a refrigerator?

If your time frame is 5 yrs, that's relatively short. So you probably don't want to take too much risk of losing any of the principal. Look at short term savings/investment vehicles that match your time frame. Unfortunately, interest rates are pretty low now, and seem to be headed lower in the very near term. The safety you may require will mean a relatively low return.

I woldn't contact peppy about "sub-pennies" if you still need it in 5 years...

You can buy municipal bonds - they are exempt from taxes and yield a healthy return. However, you will not have any outsized gains.

Investing in only equities for a term like 5 years is too risky to do with the money you are saving for a house. So you can do one of several things:

1. Put 80% of your money into municipal bonds, preferably from NY or CA - they have high taxes and are most likely to make money on their projects. Put 20% of your money into an S&P 500 exchange-traded fund, since they are very tax-efficient.

2. Put 50% of your money into an S&P 500 exchange-traded fund and 50% of your money into a commodities price index. such as Dow Jones AIG. Stock indices and commodities usually move in opposite directions while providing similar returns over time, so the value of your portfolio should not fluctuate that much.

Good luck.

not so fast doc. municipal bonds - they are exempt from taxes...preferably from NY or CA
this is not necessarily true, and moreso, it is more likely to be untrue.

while it is absolutely true that you will not be taxed at the federal level for municipal bond income earned, you most certainly may be taxed at the state level. here is an example:

if you are a new york resident and you purchase a new york municipal bond, you will (as will all folks) be exempt from federal income taxation. this is a result of ruling based on interpretation of the 16th amendment to our constitution. you will also be exempt from new york state income taxation.

if you are a resident of another state, you will avoid federal income taxation on your NY bond, but you will pay state income tax on the earnings gleaned from your NY bond. (unless you are in a small handful of states that dont have income tax in their state ... yipee TEXAS!).

also, there are 18 states that tax their own state's bonds to their own citizens. (EGAAD!!!)

now, you also run the risk ... especially in our present national financial system ... that you CAN pay capital gains on your municipal bonds. if you bought a bond at $800 two years ago and now you sell it for $1200 prior to maturity, that $400 is, more likely than not, taxable as a capital gain AT THE FEDERAL LEVEL!

i will let someone else chime in with your recommendation #2 being a good portfolio for avoiding risk.

-----------------

welcome to the forum. while it is not my place to define this forum, my opinion is that it is a teaching forum. drive by's and one liners generally wont be beneficial to people and in fact are counterproductive to those seeking to learn. it is amazingly difficult to be precise here, but an attempt to do so would make you a valuable resource. no financial topic is black and white and it deserves a little coloring inside the lines if you are to opine. to do otherwise is a disservice to the other forum members.

Opai - good call on the state taxes. I forgot to mention that:)

And I meant keeping the bonds to maturity:)

These details are the reason why every investor should research things completely before going in.

Mix some at- or below-par investment-grade corporate bonds in strong companies that mature in 4-5 years along with those munis.

Mix some at- or below-par investment-grade corporate bonds in strong companies that mature in 4-5 years along with those munis.

Good suggestion - but how well will this work after taxes?

You pay income taxes annually on the interest and long term capital gains tax (since it is longer than 1 year) on any capital gains.

My idea is to invest somewhere, let it grow for 5 years, and then use it to buy a house.

[...]

Of course I'd like to let the money grow until I retire but I would like the option of using some of it before then. It all seems very complicated.

Any advice?
Of course, the OP complicates matters by mentioning needing the funds after 5 years, then recanting that statement by stating wanting to save the money for retirement.

5 years vs. 40+ years would use two very different strategies in 97.82% of cases.

You pay income taxes annually on the interest and long term capital gains tax (since it is longer than 1 year) on any capital gains.

What I mean is - is it worth to take on potentially more corporate bond risk if after taxes, the yield can be similar to munis?

Or do corporate bonds outperform munis by so much that even taxes do not remove the advantage?

Frisco,

In the other thread that you posted on, another member mentioned a Roth IRA:

http://forums.kiplinger.com/showthread.php?p=39050#post39050

This could work for you in both situations. If you really, really needed to, you could borrow against the original principal of your Roth to use towards your new house at no penalty. Also, all your interest and capital would grow tax-free and you could reinvest any new funds produced by the bonds as you saw fit.

What I mean is - is it worth to take on potentially more corporate bond risk if after taxes, the yield can be similar to munis?

Or do corporate bonds outperform munis by so much that even taxes do not remove the advantage?
It depends on which corporate bond and which municipal bond you are choosing, as well as Frisco's tax bracket. Generally speaking, you will get better interest rates with the corporate bonds, even after taxes, but you are taking on more risk. You will also be a little more diversified, since munis and corporate bonds don't always trend the same way.

It depends on which corporate bond and which municipal bond you are choosing, as well as Frisco's tax bracket. Generally speaking, you will get better interest rates with the corporate bonds, even after taxes, but you are taking on more risk. You will also be a little more diversified, since munis and corporate bonds don't always trend the same way.

Thank you.

Before you invest in anything, you should do as much research as possible; do not completely rely on the advice of others. Here are two links to educational resources that may be helpful to you. http://finance.yahoo.com/education and http://www.etfmarketpro.com/investors/.

Good luck!