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Five Things Every Young Investor Needs to Know

When investors develop the right habits and attitudes about investing early in their working career, they greatly improve the quality of their retirement years.

Below are five common sense suggestions that will help today’s young investors become more successful:

  1. Be different: Save money regularly.

    This is so obvious that I shouldn’t have to write it and you shouldn’t have to read it. But if you look around and seriously observe your peers, you’ll see plenty of people who either don’t know this or don’t care: To be aninvestor, you have to save money.

    Unless you come into a windfall inheritance, if you want to be an investor you will have to save money from your income. You will need to do this every payday, every month, every year. Get in this habit and you’re on your way. Ignore this, and the rest of what you read in this book won’t matter very much.

  2. Be even more different: Live below your means.

    I hate to saddle you with two pieces of bad news right off the bat, but you can’t follow my first piece of advice unless you spend less than you earn.
    The good news is that you can make this a habit, and eventually it will become second nature.

    Your friends may spend all the money they have and rack up big debts in order to spend even more, all in order to live a lifestyle they can’t afford.
    They will likely wind up with finances so fragile that when a need comes along, they will have to either borrow more money or sell the investments that are supposed to be growing for the long term.

  3. Make your money work for you.

    There’s a terrible trend afoot in the land lately: Many young people, rightly observing the damage to their parents’ and grandparents’ fortunes from what’s being called the Great Recession, have vowed to avoid that fate by shunning stocks and seeking guaranteed returns.

    This happened after the stock market’s crash of 1929 and also after 1932, 1974 and 1987. After each of these crashes, many investors were unwilling to trust the market again for decades. During those decades, those spooked investors missed out on some of the most productive years in the market.

    So my advice to you is simple: Once you have saved money, don’t just put it in the bank. Invest it is something that can grow over time. That means owning something – most likely stocks of public companies. When you put money in the bank or buy bonds or anything that’s “guaranteed,” you are letting your money work for somebody else.

  4. Save 10 percent of your income if you can.

    In the real world, you’ll almost certainly be able to reach your long-term goals if you get in the habit of saving 10 percent of your income each year – and if you invest that money wisely. That means 10 percent out of your own pocket, without counting tax breaks or matching contributions from your employer. The first part, saving, is up to you. The second part, investing wisely, is where low-fee advisors like Sensible Portfolios and others can help.

  5. When you are young, invest in stocks.

    When there are decades left before you will need the money you invest, you want that money to grow. No one can guarantee the return you will achieve from investing in stocks (using mutual funds, of course).However, there is little evidence that you will achieve any significant growth if your money is in bonds or certificates of deposit.

    It’s true that you can reduce your short-term risks by adding cash and bonds to your portfolio. But if you do that, you’ll reduce your long-term return in order to gain some short-term comfort. If you’re young, that’s a poor bargain.

    Over the 86 years from 1926 through 2011, long-term government bonds provided a return of 5.7 percent. Meanwhile, the Standard & Poor’s 500 index returned 9.8 percent. That difference is much greater than it seems. Invested in bonds, $1 grew to $118 over that very long period. Invested in stocks, $1 grew to $3,100.

    This article was written by Mr. Paul Merriman, a retired financial advisor who shares my views on the need for young people become educated investors.

A Case for Sensible Investing

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