Anita asks a good question. Most of us don't have large amounts of money to
invest which limits our attractiveness to financial planners. And with
investments becoming more complicated it's harder for the average guy to
know what to do.
Let's break this into three parts. First, we'll look at the eight basic
rules of investing. Second, we'll look at the three things that a
do-it-yourselfer must learn. And, finally we'll see if we can't show Anita
how to select funds that are right for her.
These basic rules are the foundation of any successful investing program.
Fortunately, they're easy to understand.
There is no risk-free investment. Even if you put your money in the bank.
They'll guarantee that you'll get it all back. But, no one will guarantee
how much you'll be able to buy with it.
Time reduces risk. History has shown that in any given 10 year period you
would have made money if you owned all of the stocks on the NY Stock
Exchange. Even including the years of the crash of '29 and the depression.
You must consider inflation. Your investment must grow faster than
inflation or you're really losing money. Being too cautious in your
investment selection can actually increase your risk.
You must consider taxes. Even at a 15% tax rate your growth will be
significantly affected. Suppose you invest $1,000 and it grew 8% per year
for 50 years. If your growth were taxed each year at 15%, you'd end up with
$28,650 at the end. But, if you didn't have to pay taxes along the way that
same $1,000 would have grown to $50,653.
Invest early. Money invested in your twenties has more time to grow than
dollars invested in your forties.
Invest often. Don't wait until you have a big bunch of money to invest. Get
in the habit of adding to your account on a monthly or quarterly basis.
You'll be amazed at how those smaller amounts add up over the years.
Compounding is a wonderful thing. Having your money make more money sure
beats working for it. All you have to do is to let your earnings stay in
the account and wait for time to pass. Any newby investor can do that.
Doing average is ok. You don't need to be a stock picking genius. Very few
people are. All you need to do is to get average returns over a number of
years and you'll do quite well.
OK, now let's see if we can help Anita grow more comfortable with a
do-it-yourself investment project. Like any DIY project she's going to have
to be willing to learn and to try new things.
The internet has made it easier to research mutual funds. You can get
independent advice from Morningstar.com
and The Motley Fool <fool.com>.
The mutual fund companies are also willing teachers. Both Fidelity.com and
Vanguard.com offer advice for the new investor. They have many pages
dedicated to educating people like Anita.
She'll want to learn about three main topics. How commissions and fees will
be charged. How to determine what a fund invests in. And how to evaluate
past fund performance statistics. These are simple concepts that anyone can
By now Anita should know the basic truths of investing and some idea of how
mutual funds work. Next, let's learn something about a concept that greatly
simplifies investing. That's the 'index fund'.
Earlier we mentioned owning all of the stocks on the NY Stock Exchange. An
index fund does just that. An index fund is not really managed. There's no
one trying to outguess the market. The fund is managed to be a reflection
of the index that it represents.
Studies have shown that index funds will generally outperform all but a few
managed mutual funds. That makes Anita's job easier. Instead of picking a
fund, all she has to do is to pick an index that represents her level of
aggressiveness. If she's cautious, she'll want a fund that indexes the
NYSE, American Stock Exchange or S&P 500. If she's braver she might want to
index the NASDAQ. Or if she's aggressive she might want to check out one of
the technology index funds. Then she'll choose a quality mutual fund
company that offers a fund for the index she's selected.
Should Anita be careful as she begins investing? Sure! But, if she starts
small, adds money regularly and continues to learn, she'll be able to build
a valuable asset for her future.
Gary Foreman is a former financial planner who currently edits The Dollar
Stretcher.com website <www.stretcher.com>. You'll find hundreds of articles
to help you stretch your day and your dollar. Visit today!