Giving You The Business: Smart Investing
you might feel a pinch, but it only hurts for a minute
2007-07-25
Donna Johnson and Boyd Klingler
Carlos Slim, Bill Gates and Warren Buffett probably don’t feel stretched too often. We mere mortals, however, have to pay the mortgage, cover the car leases, and keep junior in Akademik low-riders. In the process, the direct deposit can start to look exceedingly small. Investing the “what’s leftover” might sound silly, but it is a good idea and can be done. As one of Boyd’s professional colleagues says, you don’t want to spend your golden years eating food meant for a Golden Retriever.
After maxing out your 401(k) (2007 contribution limit of $15,500, with a $5,000 catch up provision starting in the year you turn 50 – hey, that’s this year for Boyd; I remains ageless), if your saving rate is low (standard operating procedure for most Americans), you still ought to be investing that money. Putting all your eggs in one basket is a time-tested way of wrecking your long term performance, so you probably shouldn’t begin by buying individual stocks. Instead, using mutual funds or exchange traded funds (ETFs) is the best way to get diversified quickly. Many mutual funds have relatively low minimum investments, ranging from $50 to $2,000. ETFs are funds traded on securities exchanges, usually based on, and intended to mirror the return of, an index. There is no minimum investment, so with a discount or on-line broker you can get started with less than you’d need for mutual funds.
This is where a protracted discussion of fees and commissions usually comes in. Personal finance journalists seem obsessed on this score, and, it’s true, mutual funds and ETFs have combinations of internal fees, sales charges and buy and sell commissions. But the importance of fees and expenses to your investment result pales by comparison to how you allocate your assets. You can pay the lowest possible fees and still have a less than successful investment result if you are allocated badly. A well diversified portfolio will have equities (large, mid- and small cap; growth and value), real estate, fixed income (bonds, CDs, preferred stocks), perhaps some commodities, and more.
Your first step, in fact, ought to be determining what your asset allocation should be. You need to assess your risk tolerance (that’s your threshold of pain), as well as decide what your investing goals are. Changes in levels of taxation and regulation have outsized influence on capital market returns, so understanding the macroeconomic environment is important in making the final allocation decision. Remember also to integrate your retirement plan allocations into the overall plan as well – most 401(k)s offer several fund allocation choices. In the early years you will be funding that plan faster than any after-tax investments.
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Now start to implement that brilliant plan. Realistically, it will simply not be possible to put your total plan into place at once. But you need be in no great hurry to build your nest egg. Remember that most of America’s millionaires created their wealth over many years. You can start with two or three of the asset classes you have chosen, and slowly add the others as you continue to save.
Once the plan is funded, the heavy lifting begins. You can’t just sit back, because things change: You get older, the kids finally leave. Retirement looms on the horizon. Your asset allocations need to reflect your current circumstances. Not to mention the ever-in-flux economic situation. So even when you retire you have to monitor and maintain your portfolio.
The financial markets have responded over the last thirty years to demand from budget constrained consumers to provide investment vehicles at relatively low minimum starting points. It is up to you to allocate your assets wisely now that you can.
We’re Donna Johnson and Boyd Klingler and we’re Giving You the BusinessSM.
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