You're Ready to Invest -- or are You?

Townhall.com ^ | September 7, 2011 | Carrie Schwab Pomerantz

[Kaslin]

Dear Carrie: I'm 27 and finally in a situation where I can save some money. Last year, I was even able to put $5,000 in a Roth IRA. But now what? Everyone tells me to start investing, but I have to confess I'm kind of scared. I think what's been happening in the last few years has really shaken me up. How can I invest and not lose money? --A Reader

Dear Reader: First, major kudos for getting an early start on retirement saving. By starting in your twenties, you give yourself a huge advantage; in fact, if you continue to save just ten percent of your salary each year, you should be in pretty good shape come retirement time. But the people urging you to invest are absolutely right. Saving is only half the story. (set ital) Growing (end ital) your money is the real key to setting yourself up for the future.

Looking at your age alone, the standard advice would be to put the majority of your savings in stocks. However, given the market ups and downs you've seen, I completely understand your reluctance to jump in. Let's try to put some things in perspective.

YOU HAVE TO ACCEPT SOME RISK

There's no way around it: when you invest, the risk of loss goes hand in hand with the potential for gain. And while stocks have a greater potential for gain than bonds or cash over the long term, they also are the most volatile. So before you make any decisions, I recommend that you take some time to think carefully about how much risk you're willing to take. Are you willing to accept a loss in one year knowing that you also have the potential for gain in the future? Also realize that at your age, you do have the time to ride out the market's downs more than say a 40- or 50-year-old would.

YOU NEED A PLAN YOU CAN STICK WITH

That said, if you're really not comfortable taking on much investment risk, go with it. When you invest against your feelings, you'll be tempted to bail the first time the market goes through a rough spot. So it's important to come up with an investment approach you can stick with over time.

What might this mean for you? A conservative portfolio might have 20 or 25 percent in stocks and the rest divided into fixed income investments, such as bonds or certificate of deposits and cash. In my opinion, that would be extremely conservative for someone of your age, but it may be appropriate for you -- at least as a starting point. A more moderate approach might be along the lines of 60 percent in stocks divided among large, small and international companies.

Funds can be a good choice for getting started because they can give you a lot of diversification for a small investment -- and diversification helps balance risk, though it cannot eliminate the risk of market losses. But you need to do some research. For starters, look for funds with low expenses. There are a number of easy-to-use online screeners that will help you compare your choices. You might find it fascinating once you get started. And the more you know, the more comfortable you'll feel investing.

Another tool that can be helpful, is what's called a target date fund. You choose a fund according to the date you plan to retire, which in your case might be 2040. The fund invests more aggressively to begin with but automatically adjusts to a more conservative approach as you get closer to retirement. Please keep in mind, though, that neither the principal nor the return of a target date fund is guaranteed on the target date (or any other date, for that matter).

YOU CAN EASE YOUR WAY IN

Another thing to realize is that if you're feeling tentative, you don't have to jump into investing all at once. To ease your way in, you can use a gradual but systematic approach known as dollar-cost averaging: Once you have identified appropriate stocks or funds, you then invest a set amount each month (or at any set interval) -- whatever the market is doing. If prices are low, you'll be able to buy more shares. If prices are high, you'll buy fewer. Over time your cost basis will even out -- and in the meantime, you'll be poised for growth. Of course dollar cost averaging cannot ensure a profit or protect you against losses, so think carefully about your ability to continue investing during declining markets.

THINK LONG TERM

Once you've made your initial investments, keep adding to them as you get more comfortable. Keep an eye on your investments, but try not to worry too much about short-term fluctuations. Remember, it's growth over time that's important. And the sooner you get started, the more time you'll have to make the most of it.

[Roccus]

Chinese holiday season and Indian wedding season are coming up soon. }:^)

[silverleaf]

Only if she’s interested!

To me it would be torture to invest in something that didn’t personally interest me!

I bought a starter collection and now am getting hooked on Morgans. Also the junk silver like pre-64 quarters and old Mercury dimes

Man if silver would drop into the 30’s I would have fun

But gold is still da bomb. I am starting to like the old french francs, too. Pretty cheap way to buy old gold, easy to resell, pieces of history and less liable to be confiscated or taxed as unearned wealth when the leftist govt comes after our safe deposit boxes and bullion, at least if they use the plan of their god “FDR”

[agere_contra]

Very true!

Also: the Pan Asian Exchange will soon be offering physical Gold contracts, which will destroy the competing paper product from the LBMA banks.

The actual timing of the Pan Asian Exchange offering Gold contracts appears to be “the 4th Quarter”, but the forward stress of such an event will start to drive PM prices higher now as LBMA banks cover their bets.

[Choose Ye This Day]

The current Gold vs DOW cycle won't reverse until it's 1 or even 0.5 oz of Gold to buy the DOW.

How do you KNOW? You sound awfully sure of yourself. You have some sort of clairvoyant predictive abilities? That's amazing that you can see into the future, and then tell people you've never met over a message board that they should "invest" all their money into ONE volatile asset class.

It's like clockwork

Countless fortunes have been lost by people who uttered the same words, or, similarly, "It's different this time." Who knows, though...you may be lucky.

I don't begrudge you your great returns. Good for you. I hope you get to keep them, and I hope you're able to sell when gold starts dropping. I prefer to buy low, sell high, and diversify. I'm just not as smart (or adventurous) as you.

[Choose Ye This Day]

[LonePalm]

I am still looking for the DOW to be under 9,000 before the end of the year.

So long as the government has mandated the excessive high cost of hiring a worker, don't look for companies to hire any more people than they absolutely have to have to survive.

You want to see hiring soar rather than sore? Repeal 0bama Care.

Garde la Foi, mes amis! Nous nous sommes les sauveurs de la République! Maintenant et Toujours!
(Keep the Faith, my friends! We are the saviors of the Republic! Now and Forever!)
LonePalm, le Républicain du verre cassé (The Broken Glass Republican)

[tbw2]

Better choices for a 20-something:
* Pay off any student loans and all other debt. The ability to put something back for retirement doesn’t mean debt free. And the interest rate on her debt is her rate of return for paying it off.
* Build up a large cash cushion for down payment on an eventual home. That counts as investing in real estate when she’s ready.

[crosshairs]

Invest in MRE.

[taxcontrol]

I disagree with much of the current market understanding of investing. I am of the belief that in a shrinking or stagnate economy, the best use of money is to reduce debt, create savings to avoid future debt (save for car / house, etc) and limit investments to those provide positive cash flow. This can be a home business, dividend stocks, etc.