Tuesday, June 03, 2008

Goat Path to ... Comfortableness

After last week's Financial Forum, ("The Road to RIches") I wanted to add my additional 4 cents to the mix. (Note: I'm not a licensed financial advisor. I strip the $.04 down to basics. And I make the assumption that the concept of investing scares and/or bores the underpants off you.)

The Biggest Single Problem of Investing? Not doing it, and not doing it while young. People put if off because they're buying things ... paying off things they've already bought ... going out to lunch a lot. And believing they have "no extra money" to do it.

I would disagree a bit with Ms. Gibson that being in debt prevents investing. Failing to put money into investments prevents investing. Even if you're paying off credit cards, you can still find a way to make automatic deposits into some kind of investment vehicle (401(k), Mutual fund, etc.). If you think about doing it, you're dead, because thinking is as far as it will go. DO IT.

Just set up the investment mechanism and then ignore it. Payroll deduction, automatic wire transfer from your checking account, anything will do so long as it's steady. You'll figure out a way to spend less somewhere else in your life.

The Next Biggest Problem of Investing?. Figuring out what to invest in.

If you're in your twenties or thirties, avoid putting a big percentage of your stash in bonds (20-30%, tops). And avoid funds with big administrative fees or sales commissions. Go to your local Barnes and Noble with a notebook and pen, pull a copy of Morningstar Funds 500 off the shelf, and copy down three to five likely candidates. (The cheapest are index funds, but some managed funds have low costs too. The watch words here are broad diversification and minimal costs.)

Here are a few stock fund suggestions from various Mutual Fund Families:

T. Rowe Price Spectrum Growth

Vanguard Total Stock Market Index Fund

Fidelity Spartan International Index Fund

(The differences between the funds above? The first is a fund of funds that combines domestic and international stocks, the second is a U.S. stock fund, the third is a non-U.S. stock fund. All three are relatively inexpensive. All give plenty of diversification.)

If you're in your forties or fifties, the above applies ... except that you want a bigger slug of bonds (30-40%). Don't do any long-term stuff, since interest rates are already low and you don't want to put moolah at risk. Stick to short-term bond funds or intermediate-term bond funds. A few good options in the bond category:

PIMCO Total Return*

Harbor Bond *

T. Rowe Price Spectrum Income

Vanguard Total Bond Index Fund

Vanguard Inflation Protected Securities

(*Kindly note that Harbor Bond and PIMCO Total Return are both run by bond wizard William Gross. But Harbor only takes $1000 to get into, while PIMCO requires a $5000 stake.)

And the next problem of you know what ...? Freaking out when the market goes down. The weird thing is ... the counter-intuitive thing is, down markets can be good for people who still have ten or more work-years ahead of them. Because they can pick up more shares of a mutual fund for less money.

But it doesn't feel good, especially when you look at your holdings going down month after month. And if the declines go on long enough, you'll probably have an overwhelming desire to bail out into something "safe and secure" like a Money Market fund. But unless you're on the cusp of retirement, it's most likely a stupid move.

Investing doesn't have to be complicated, and it doesn't have to be expensive. You're best strategies over time are 1) Keep it simple. 2) Keep it low-cost. 3) Keep your stash broadly diversified.

We now return to 'Toonland.


notanymike said...

No one's taught me anything on Investments...my parent's are too disabled to know...I never asked my teachers because they never mentioned that they are important...and I wouldn't know WHO to ask in college or online for the best place to learn how to invest...although I also need to learn how to budget and other money managing basics...I don't even know how to get a credit card or credit history! I've been relying on Social Security for mental disorders all my life so I wasn't worrying about money or jobs since I'm still in a (commercial) art college and I haven't "entered" the industry...Can you please help me out?

Steve Hulett said...

You gotta learn to budget. No impulse buying at Vons or K-Mart, minimal use of credit cards.

And you must pay yourself first. By that I mean, you put something into savings every week you get money, and make do with what's left over.

Where to put that payment? There's a ton of excellent advice about investing on the internet, but you need to dig it out.

One suggestion: For somebody with not much money, I'd say go to a multi-purpose fund that gives you everything: stocks (foreign and domestic) and bonds (short and longer term).

The STAR fund at Vanguard is good for this. It's low cost (.34% admin fees), broadly diversified, and you can start with only a thousand bucks. That buys you some of the best actively managed funds at Vanguard.

The point is, the sooner you start, the better off -- long term -- you will be.

Site Meter