Lately, we’ve had some Budget Buds who have given a lot of the same advice: Invest in your 401ks and IRAs while you’re young! (Are you sick of hearing that yet? No? Good, because it’s important!)
Upon hearing this advice you might wonder, “OK, great, well, what next?”
To answer some of these questions, I thought it best to interview a family member who is an investment advisor. It certainly beats my guide on budgeting tips. As someone who’s been in the financial business for over 30 years, this Seasoned Investor offers some sage advice on what to do next.
Tell me about yourself and your background.
I’ve been in the investment business thirty odd years. I started in public finance, and morphed into an investment adviser. In between that time I sold bonds, so I have a varied experience. The last fifteen odd years I’ve been exclusively an investment adviser, which you guys call a wealth management adviser, which used to be called a stockbroker.
What does an investment adviser do?
I deal with individuals, helping them with their financial planning and wealth management.
What is your motivation?
Well from day one, when I started working in bonds sales and then morphed into working with individuals, I enjoyed the business, not only because can you help people, but also, as part of your job, you have to keep up with the geopolitical news of the day, as well as the financial news, and to me that’s fun and exciting. The part of working with people- that’s a bonus when it’s good…when you really get someone onto something that works, it’s very satisfactory.
What is your biggest advice to young people?
Start investing early. Also, I would say to any young person who has the opportunity to be in a 401k, do that before opening an account with any broker or investment adviser, because a 401k is before retirement and grows tax deferred. Compounding without paying tax over a long period of time is a great way to make money. The other part of that is if the employer matches, and whether it’s 5% to 100%, the match is free money. To not take advantage of that is a mistake.
Also, it’s very important to contribute what you can and work your way up to pay yourself first. It’s not my original phrase, but is very important and the 401k is a very good way to do that.
If your employer doesn’t offer 401k where do you go?
If you don’t have a retirement plan at work, the alternative is an IRA, and it’s the same thing (as 401ks). There are limitations (to how much you can contribute), but with the IRA you won’t have any matching. However, not every corporation matches, especially these days. If you don’t have a 401k you need to open an IRA, and if you’re self employed, you can do a SEP IRA.
Where would you go to set up an IRA?
You can go online and go to Schwab, Fidelity, or Vanguard. If you’re not inclined to do the research yourself and go on the internet, then you need to go to your local bank, as most of them will have a wealth management personal staff.
If you’re also interested in investing money, where do you start?
Like anything else, the more knowledge you have the better off you will be. You can go online to Yahoo Finance Schwab or Vanguard and they will have pages on their website on IRAs, and will give you details on what you can invest, how much, and how to go about it. Now if you don’t want to spend that much time, that’s where you go to your local bank and they’ll send you to their people.
But what if they want something more liquid than a 401k?
The reason I keep stressing IRAs is because if we’re talking about people starting off, that’s where they need to max out. But maybe they need to save for a house, or something else- those same sites… Schwab, Vanguard, they will all help you buy mutual funds that are professionally managed, and diversified.
What do you tell people who are nervous about investing?
You’ve heard that before, and it’s all very true. For most of the people your age, in their working lifetime, the market has had some very volatile periods, and though volatility is not usual, it’s been very volatile the last ten-twelve years particularly because of the credit crisis.
But you still believe in investing?
Absolutely I do! If you look over the last 20-100 years, you would have in general fared better with a diversified portfolio of stocks and bonds, rather than other investments such as CDs or some of the more conservative investments.
What is the biggest mistake you see people make when investing?
Not having a specific plan and being swayed by emotions, rather than sticking to plan.
Do you ever have people who decide they want to pull out all of their money after a bad day?
That’s what I mean by investing with emotions. You have to understand there will be volatility, and the important thing to do is not be swayed by the volatility, and to stick with diversification and time. Diversification and time are the two greatest things working for an investor.
What do you mean by having a plan?
What I mean by having a plan is not having a specific number of years and dollar goals, but understanding there will be volatility, and that you have to be stick with your plan of keeping the money in long term and letting their money grow over time, knowing that they have to ride out some volatile markets.
What is a good percentage of your income to invest?
I would say that’s a hard question to answer, as there’s no magic number. It really has to be what’s comfortable for each individual. Each person is so different. Most people in business will say do the max you can do. Yet, the point is it’s what you can comfortably afford to invest…If you could set 10% income aside (for your 401k or IRA) you’d be doing very well.
Explaining the Rule of 72
Here’s something- it’s called the Rule of 72. If you divide 72 by the amount of the annual rate of interest , it will tell you how long it will take to double your money investment. (For instance), if your investment grows 10% a year, it will take 7.2 years to double your money. The rule of 72 is what a lot of people use to gauge how long it may take them to grow their investment to a certain level.
What is a conservative growth estimate for you money to make when you have invested it?
That’s a great debate. Historically people have expected to get 7-10% in a good, diversified portfolio of equities, but it’s hard because there’s no black and white answer. You can pull out statistics of years gone by, and you can make the figures say anything you want. You would hope to earn anywhere from 7-10% average annual return.
You can have a period we’ve just gone through where you’ve lost money, and have to get back to where you started. This is why it’s important to start young. If someone put in $100,000 in 2003 in the S&P 500 and had done nothing else, in 2008 it would have lost money, and (now) come back (to where it was in 2008). But, if you had put in $10,000 in 2003, and put in $10,000 each year following, you would have been way ahead of breakeven.
If you can add money (to your investments) on regular basis, whether each month, each quarter, each year, it can be advantageous.