ComproTax Talks!

Here’s a piece from MSNBC that lists what it calls five tips for young investors but it’s really a good list for all investors. Here’s what they include:

1. Buy stocks. Over long periods, returns in the stock market have averaged about 10 percent a year, while bonds earn a little over 5 percent. Cash, such as bank accounts or money market funds, averages about 3 percent.

2. Look at mutual funds. Though the stock market offers good returns over time, many individual stocks lose money and never recover. Fortunately, we have mutual funds, which are investment pools run by professionals.

3. Focus on fees. The average stock-owning mutual fund charges investors annual fees equal to about 1.3 percent of assets — $1.30 for every $100 in your account. That little bit adds up. If your fund held stocks that returned 10 percent, the fee would cut your fund’s return to 8.7 percent. Instead of making $10 for every $100 invested, you’d make $8.70. You’d take a 13 percent pay cut.

4. Minimize taxes. Since taxes chew away at returns the same way fees do, savvy investors use a variety of tax strategies. The best options are the 401(k) or similar retirement plans offered by millions of employers.

5. Stick with it. Investing in stocks is a long-term strategy, not something you do with next month’s rent money. If you can weather the downturns you should be pleased with the results.

My thoughts on these:

1. I’m a big believer in stocks as well. And since I have a long time horizon (20 years or more), they make up a dominating part of my portfolio.

2. Most of my stocks are in mutual funds, not in holding individual shares. I’ve been decreasing the number of individual stocks I own for a couple years now and I’m down to only six as I write this post.

3. Yes, costs matter if you want to maximize your investment returns. The article goes on to sing the praises of index funds.

4. Same as #3 above. Taxes are costs.

5. You need to be able to weather the storms and ride the stock market roller-coaster through its many ups and downs in order to be successful. You may even need to swim against the current. It’s tough to do, but financially rewarding if you can learn the discipline.

The article doesn’t include the most obvious tip to young investors in it’s list of five, but it does start by saying how important time and compounding are in a young investor’s success. A summary:

Time is the investor’s best friend, and you have plenty of it — perhaps two decades to save for a child’s college costs, and probably four decades to build a nest egg for retirement.

If you invest a little each month starting now, you won’t have to invest as much as you would if you were to wait another 10 or 20 years to get going.

Start early with whatever you can afford. It will make life much easier later.