7 Essential Tips for Young Investors
August 10, 2008
Money, cars, a nice house or condo, these are all possessions and assets associated with the wealth we all dream of having. Reading quite an extensive pool of articles on the internet and in various magazines, I have compiled a list of the 7 most influential guidelines for a young investor to cultivate in order to champion his/her dreams.
1. To Retire Rich, Start saving Now.
I’m sure many of you have heard this before and seems like simple advice. However, the importance of this point deserves emphasis and repetition. Consider a goal of accumulating $1 million by age 65 and that you are able to earn 8% return per year. According to T. Rowe Price Associates (A mutual fund company), if you put off investing until you’re 45 years old, you will have to sock away some $21,900 a year. However, if you begin investing at age 25, you’ll need to make an annual investment of just $3,900. That’s a big price to pay for procrastinating.
2. Get the Debt Saddle off your Back.
How would you like to earn 18% return immediately? Pay off those credit card bills and other high interest loans you may have. By paying them off, you eliminate the high interest charges that you incur (As high as 18% on many major credit cards). Some of you may argue that you’ve been earning more than 18% from your stock and mutual fund holdings.
Let me inform you that the historical average annual return from stocks is about 10.7% (Stocks being represented by the S&P 500 Stock Index). In other words, don’t expect the 20%+ returns that we’ve been experiencing these last couple of years to be the norm. Furthermore, think for a moment how you would feel if you owed $3000 in credit card debt at 18% interest and your $2000 mutual fund investment is down 30%. In general, I don’t believe people should undertake an investing commitment while carrying debt.
3. Don’t Confuse Saving with Investing.
Many of you are also intent on saving for a house, a car, higher education or something else. By all means, continue saving, but don’t invest your savings in stocks and stock mutual funds if you plan to make a large purchase within the next four to five years. Remember, investing will work wonders for you, if and only if, you put time on your side. Time periods of less than five years may not give you enough time to recover from a substantial market drop.
Though some of you have never experienced a sustained down market ( otherwise known as a “Bear Market”), let me assure you that they are not a thing of the past. And luck usually has it that when people invest for short time periods, a “correction” or “bear market” rears it’s ugly head right about the time you need your money. Get the picture.
The sensible thing to do when saving money for a short-term objective is to invest in a certificate of deposit, short-term bond fund or money market fund.
4. Take Full Advantage of your employer’s retirement plan.
These days many employers have the 401(k) type retirement plan, whereby, you the employee are responsible for contributions and how you want the money to be invested. These plans offer a great opportunity to accumulate enormous sums of money. The money that you contribute from your paycheck is tax-deductible and will grow without being taxed. Some companies will match your contributions, but even if your company doesn’t, a retirement plan is still a great wealth building tool.
5. You don’t need large sums of money to begin investing.
Out of the 2,266 equity mutual funds investing in the U.S. stock market, 180 have a minimum investment of $250 or less, according to Morningstar. If you choose to be a dedicated investor, there are even more options. Many funds will waive their regular minimum if you commit to an automatic investment plan where money is taken out of your bank account and put directly into the mutual fund.
An automatic investment plan is a terrific idea for a young investor and here’s why:
- You pay yourself first every month before you pay the bills and before you start spending
- It turns you into a disciplined investor
- It’s affordable as I mentioned before
- It helps you avoid the pitfalls of market timing
- You will be a smart investor because you’ll be buying more shares when prices are low and fewer shares when prices are high.(known as “Dollar Cost Averaging”)
6. Steer Clear of Journalism’s short-term time Horizon
Journalism tends to have a negative bias and a very short term horizon( day-to-day for newspapers and minute-to-minute for CNBC) which is exactly the opposite of where your focus should be — on the long term. The constant stream of information concerning every up or down tick of the market is causing many people to “micro-manage” their investments. I caution you from trying to make sense of the markets’ short-term trends. Stay focused on your investment goals and not every newspaper headline.
7. Choose Stock Mutual Funds for the core of your portfolio.
Mutual funds are terrific for the young investor because they allow investors to own many company stocks without having to shell out large sums of money. Assuming the fund is properly managed, it should provide exposure to companies in several different industries. For starters, I would look for a conservative fund that invests in large company stocks in many different industries.
Before I wrap this up and let you get on your way, I want to remind you we cannot count on the government,unions or big corporations for income and health care in retirement. Therefore, you must view stocks as a defensive investment necessary for combating the biggest risk facing us all: Outliving your money.
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August 11th, 2008 at 7:15 am
Live within your means and aggressively trade!
August 11th, 2008 at 9:50 am
August 12th, 2008 at 10:56 pm
If you start young enough, compound interest alone will do wonders for launching a portfolio. You are oh, so right about the possibility of outliving your money. Therefore many other growth factor opportunities must be taken into consieeration.
August 13th, 2008 at 1:02 pm
Well said Jack. This man has some pretty amazing accomplishments, I suggest for all of you to read his work!
August 13th, 2008 at 9:21 pm
Great post - Consider writing about ETF’s as well. They are like Mutual Funds minus the management fees
August 21st, 2008 at 9:45 am
Extremely nice article.
No. 5 is the major point because I found lots of people thinking that, lots of money required to start investing. Appreciated your work to crack that foolish myth.
No.7 Stock mutual fund mean the diversified, midcap mutual funds along with largecap funds to protect from volatility. Balanced fund required to have moderate equity exposure but that is depends on one’s age.
Nice article pal… go ahead..
Sherin - http://investinternals.blogspot.com