Expert: Steve Hach - 7/20/2009

Question
Hello Steve,

I've always had an interest in investing because I think its important to plan
for the future. This dawned on me a few years ago when I got a new job and
during the orientation, I was shown a video about the future of social security
and the prospects does not look good. Basically, it stated that by the time my
generation, Generation Xs reach the retirement years, social society would
either disappear or there would not be much money by that time since the
Baby Boomer generation will use it all up. That frankly frightens me and I now
realize that I cannot simply rely on social security alone, I need a backup.

Anyway, I'm very new to investing so I don't know anything about it, except
that there's no such thing as a perfectly safe place to put savings and that all
investment involves the risk that you will never see your money again. I am
interested in both short-term and long-term investing.

1. How can I get started on investing?

2. Do you recommend that I take courses at my local college to get a better
understanding of how investing works?


Best regards,

Julian

Answer
Hi Julian,

Thanks for the question.

Sorry for the delay in my reply, sometimes you answer and the system does not send it through unless you remember to hit the "send" button after you "preview" the response.

Successful investing takes discipline, education, and patience. A plan should be established and strictly followed for decades. My suggestion is to spend the next six months researching. Start with "Investing for Dummies", available at amazon.com and most major bookstores. This will give you the basics on most major forms of investment, and you can do further research on what appeals to you. In general, the higher the possible return of an investment, the more risky it is. As an example, a money market account will earn you about 2%/year; this is a very low gain. But it is perfectly safe and you would get that 2% every year without fail.  CD's (Certificate of Deposits) can earn perhaps a few percent more in annual returns and are also perfectly safe, most banks offer CD's.

No risk here, but your investments are locked up for one to two years depending on the CD. A portfolio of stocks can earn you much more each year. But some years will be good, and others bad. Many investors lost half or more of their worth during the bad markets recently. However, over a long period of time, the risk evens out and the returns are much more substantial. An average of 20% return each year would double your investment every four years.  

You cannot count on this, but the key is that if you start now you will have MANY years for the compound interest to work and over time this really adds up.

Another good resource here are any of the books written by William O’Neil, founder of Investment Business Daily. Keep in mind this is one approach, but he goes into depth on how he successfully selects stocks and builds a stock portfolio. Always read with a critical mind, no one has the holy grail when it comes to investing. If they claim that they do, it is a scam. There will always be failures, but the idea is find more successes than failures. This is very possible over time.

Then I suggest mutual funds. Do your research. The book I mentioned above will help, and www.morningstar.com is perhaps the best-known source of mutual fund information available. Lipper is another. When you have more than $5,000 invested, branch out to several mutual funds that specialize in different areas such as real estate, technology, health care, utilities, or others. That way if a specific industry does poorly, you will not feel it too badly.

Only after a few years or whenever you feel confident should you venture into stocks. But start practicing right away. Begin researching possible stocks you would want to invest in (again the book I mentioned will help you learn what to look for).  Track your ideas on a free service such as yahoo.finance.com and see what your stock picks do.

The best/easiest thing to do would be to put your money into a stock market index fund.  Most major investment firms offer some sort of index fund.  On average, these funds will pay 5-10%/year and over time this will really add up.  Of course, the fund will go down sometimes, but will usually increase over a lifetime.

If you get more sophisticated over time you could begin to manage your own portfolio instead of using the index fund.  Yahoo finance has lots of information for individual investors.

Please keep in mind that right now the markets are in real turmoil.  It may be best to just keep saving money in a safe vehicle for now and to not invest in stocks until it is a sure thing that the market has turned.


I would just stress the following points:

1. Avoid debt like the plague!  Do NOT run up credit card debts.  

2. Save money.  If you can save 25-50 dollars a week and invest it you will end up with a huge amount of money by the time you are 65.

3. Read a good newspaper everyday--like the New York Times or Wall Street Journal.  Read the news AND the business section.  I also like some of the financial blogs like this one:
http://bigpicture.typepad.com/

4.  Take a college course in finance and/or US economic history.

5.  Invest your money in a stock market index fund.  Try to find one with low fees.  Leave that money there and do not try to chase the markets.  You want to gain over time, you don't need to day trade or worry if things go up a bit or down some.  Think long term.

6.  Remember that a lot of what you hear about social security is political propaganda.  The system is solvent for years to come and with a few tweaks--raising retirement age, adjusting the limits on where the salary limits cut off additional taxes--it can be made solvent for the next 50 years quite easily.  However, SSI was meant to keep the elderly out of poverty, it was not meant to make it easy for you to live a country club lifestyle after age 65.  Before the program a huge proportion of the elderly became destitute once they quit working.  That issue has been largely eliminated and in that sense social security is one of the most successful government programs ever!  Think about what would happen to people with no SSI and all their money in the stock market who needed to retire now, their life savings would be GONE and they would have nothing.  With their SSI, they will receive enough money to live and eat.

Hope this helps.  Sorry again about the tardiness of my reply.


Good Luck,

Steve