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Start
Young!
(Or as soon as possible if the boat has
sailed on "young.") The math
does all the talking on this one and, if
you haven't looked at
The Math of Money, you should.
Just look at these examples:
Let's invest a
total of $54,000...
a little at a time over many years.
Let's also assume that you want to
retire at age 65 and we're investing at
10%...
Way 1: Start
investing at age
20...
$100 a month... So, that's
45 years
for that baby to compound... At
age 65, you'll have
$1,048,250.17!
Way 2: Start
investing at age
45...
$225 a month... So, that's
20 years to
compound... At age 65, you'll have
just $170,857.99.
THAT is a HUGE
difference! If you start young, it
just takes a little each month to get
rich. Be sure to check out the
annuity calculator
and play around
with some amounts.
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Buy and Hold...
or Buy and Homework!
(I have
to give full and proper credit to stock
guru, Jim Cramer, for the "buy and
homework" line. That guy is
great!)
First
of all, buy and hold is definitely what
you'll want to do with your mutual
funds. In fact, you often HAVE to
keep them for at least 6 months.
Do your investigating, buy one or more
really good mutual funds and just hold
on to them. Sometimes, they'll go
up and sometimes they'll go down.
Some years will even stink. But,
if you've really got a good fund, in the
long run and over time, things will go
up. |
There
are different philosophies out there for
HOW you should buy and sell stocks.
One camp is buy and hold -- just like
mutual funds... And the other camp is
buy and homework -- which means that you
continue to investigate the stock...
Maybe sell it at a profit a month
later... Maybe sell it if some bad
news about the company hits...
Maybe hold onto it for a long time.
I bought one stock that jumped up 35% in
the two weeks after I bought it!
When this happens (and, yes, it
sometimes will), should you wait around
to see what else is going to happen?
Or should you take the money and run?
Which
camp you'll fall into is up to you...
how much time you have and what your
comfort levels are.
Diversify!
This is the financial way of saying,
"Don't put your eggs in one basket."
Ok, what the heck does THAT mean?
If you have $10,000 to invest, don't go
out and spend it all on stock for Booger
Art, Inc. What if there's a sudden
shortage of boogers? Or if some new
medicine comes out that prevents boogers
all together? You'll lose
everything!
So, invest a
little in this and a little in that.
You want to be spread out over all the
sectors (financials, real estate,
technology, medical, etc.). So, if
one sector gets into trouble, but
another sectors goes up, you balance
out.
The simplest way
to diversify is to buy
index and life cycle funds. In
general, mutual funds are the way to
stay diversified.
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Only Take on the Risk You Can Live With!
Some investments (like AAA rated bonds)
are safe and some investments (like
stock in a new company) are risky.
The trick is that the safe investments
tend to pay out much lower returns and
the high risks tend to pay off big (if
they pay off). So, how much risk
can you handle? Everyone is
different and the answer is simple:
Only assume the risk that won't make you
lose sleep at night. It's only
money, people. |
You need enough to
buy the basics of food, shelter and
clothing. Anything after that is a
bonus. So, don't make investments
that threaten your basics.
A general rule of
thumb is to use your current age as the
percent of safe investments (like bonds)
versus stocks in your portfolio...
If you are 20,
have 20% of your portfolio in bonds and
80% in stocks and mutual funds.
If you are 55, have 55% of your
portfolio in bonds and 45% in stocks and
mutual funds.
This is a bit
conservative for my blood, but, like I
said, everyone is different. You
may be very different than me and you'll
need to find what you are comfortable
with.
Before you do any investing, I highly
recommend that you read the following
books -- and in this order:
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The Millionaire Next Door by
Thomas Stanley
(a classic primer for how to
view money) |
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The Automatic Millionaire by
David Bach
(a conservative approach for
saving and investing) |
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Rich Dad, Poor Dad by Robert
Kiyosaki
(how to think like a rich
person -- very motivational) |
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Real Money by Jim Cramer
(how to buy and sell stocks
for maximum profit) |
The
first two books take the conservative
approach and the second two are for the
more aggressive investor. You may
want to fall somewhere in between, so do
real all four if you are serious about
this!
I
also recommend two TV shows:
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The Suze Orman Show
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Mad
Money with Jim Cramer |
Again, opposite approaches, but very
good people to learn from! Both
are on CNBC.
Personally, I like things from both
approaches. I like to have the
biggest chunk in a set of really good
mutual funds -- about 10 of them that
are selected so the group is
diversified. Then, I make sure
that I have at least 9 months of salary
in a money market account for
emergencies. But, stocks sure are
fun... so, I have a chunk of "mad
money" (per Cramer) that I use for
stocks. I only keep 5-10 stocks at
anytime, because you REALLY have to keep
an eye on them -- and I mean, daily!
As I get older (ahem), I'll start
getting into bonds too via a bond fund.
Get educated and learn how to do what
you are comfortable with! |
