Three Rules for Young Investors
By John Persinos
My daughter is typical of her generation. She has a budding family (twin 8-year-old boys) but her knowledge of finance is sketchy. Becoming a grandfather has given me incalculable joy. I want my grandsons to enjoy a secure financial future.
In that spirit, here are three investment tips for my daughter, her husband, and other younger investors, to help start and grow a retirement portfolio.
1) Harness The Power of Compound Interest
One of the most common pieces of retirement investing advice you'll hear is to start early, or at least as early as possible. All the studies show that the earlier you get going, the more money you'll have in retirement. That's because the earlier you start, the earlier compound interest goes to work for you.
Younger investors often overlook the power of compound interest, but if you can set aside a small amount of money every month and stick to your program, the results can be dramatic. Even better if you can set aside, say, between $100 and $500 a month.
To illustrate both ends of that spectrum, let's look at two hypothetical 25-year-old investors, Henry and Marie, both of whom are keen to get started on their retirement investing. Henry can afford to set aside $100 a month (or $1,200 a year), while Marie is fortunate enough to be able to tuck away $500 a month ($6,000 a year) for her golden years.
Let's also assume a hypothetical 10% average annual rate of return, compounded monthly. By age 50, Henry's savings would have ballooned to $133,789. That's not bad, but Marie would be sitting on a plus-sized nest egg of $668,945.
The moral? As far off as retirement seems, getting going early is well worth the trouble. And setting aside as big a chunk of money as possible every month is a real game-changer. Your older self will thank you for it.
2) Emphasize Stocks
Younger investors should take advantage of their long time horizons and focus on stock mutual funds in their 401k plans. The fact is, 401k plans are long-term money. And over the long term, stocks have outperformed every other investment vehicle.
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