7 Things I Wish I’d Known About Investing When I Was Younger

CATEGORIES: Investment Planning

Smart Money

Guest post by Matthew Amster-Burton

What would it be like if you could go back in time to talk to your younger self about investing? Pretend for the sake of argument that Younger You doesn’t run screaming from Older You to avoid creating a rip in the space-time continuum.

Pretend I’m a guy from the future. (I’ve always wanted to say that!) Here are seven tips to get your investing life moving in the right direction. If you’re a young person, or are just realizing it’s time to get serious about investing, or just need a refresher course? Listen up.

1. Have a plan. A bunch of random mutual funds isn’t a plan. Saving whatever you have left at the end of the month isn’t a plan. A plan means running a retirement calculator, identifying a savings goal, making reasonable assumptions about rate of return and taxes, and then deciding how much you need to save and what mix of investments is likely to get you there. And put it in writing. Well, typing.

2.  How much you save is more important than what you invest in. This is especially true at the beginning of your investing career, because the size of your contribution dwarfs the investment returns you’ll get in an average month. Yes, diversifying your investments among different asset classes (such as stocks, bonds, and cash) is important, but right now, it’s not nearly as important as putting aside a healthy chunk of money from every paycheck. If you get so bogged down deciding what to invest in that you throw up your hands and shred your 401(k) signup sheet, you lose, no matter what the market does. Speaking of which …

3. Your 401(k) and IRA are free money—even if you don’t get a match. Obviously, if you’re entitled to an employer match, take it. You don’t need a guy from the future to tell you that. But even without a match, retirement accounts offer massive tax savings. Would you tear up a tax refund check? Then don’t waste the tax-advantaged space that Uncle Sam offers you every year. If you can afford to max out your 401(k) and IRA, do it. Period. Then look into other tax-advantaged opportunities, like 529 college savings plans, savings bonds, and health savings accounts.

4. TV and headline news won’t make you a better investor. On TV, investing looks like a blast. You get to sit in front of a big screen like in WarGames and periodically jump up and wave papers when a bell rings, or something. Frankly, I have no idea what’s going on when I watch these shows, but I do know that investors who trade a lot make much less money than those who buy diversified mutual funds and rarely look at how they’re doing. If you want more fun in your life, consider equestrianism, collecting vintage airplanes, or another hobby less expensive than stock speculating and market timing.

5. Pay less, get more. Every mutual fund and ETF, whether inside a 401(k) or not, has an expense ratio, which tells you the percentage of your money taken out every year for operating costs: recordkeeping, big computer screens, polish for the fund manager’s boat, and so on. The expense ratio is a teeny tiny number, usually somewhere between 0.1% and 2.0%. Ignore it at your peril. A slightly higher expense ratio means vastly less money left for you over the course of a few decades. Studies have consistently found that low expenses are among the best predictors of which funds will perform best in the future. Your 401(k) is required by law to tell you about expenses; if it’s not clear on the paperwork, ask. It’s worth your time, in a big way.

6. Bear markets are your friend. Warren Buffett likes to illustrate this point with an anecdote involving hamburgers: if you like to eat hamburgers and plan to buy some next month, do you want the price of burgers to go up or down? The answer is obvious. Now replace burgers with stocks. If you’re going to buy some next month, you should be pleased when the price goes down. This is not an esoteric principle: Investors who were able to continue putting money in right through the punishing market of 2008-09 made more money than if the crash had never happened. I know, because I was one of them. Pretty punk rock, huh? Okay, maybe not.

7. If it sounds too good to be true… Plenty of people are eager to help themselves to your money by promising secret investment strategies you won’t find anywhere else, market returns without market risk, or something involving an asset that has recently skyrocketed (hello there, shiny metals!). Be skeptical. The term “financial advisor” is unregulated. In fact, be more than skeptical: run away like a 20-year-old running from responsibility.

Now, if I can just find enough D-cells to power up this time machine, I can deliver this advice to a guy who desperately needs it. He looks kind of like me, but he still has hair.

What do you wish you could tell your younger self about investing? What did we leave out? Post a comment and let us know.

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About the Author

The team at Jemstep is dedicated not only to helping you make better investments, but also to enlightening and educating you about financial markets and responsible investment decision-making that will help you achieve your financial goals faster.

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27 thoughts on “7 Things I Wish I’d Known About Investing When I Was Younger

  1. If I put money in my 401k today how will make my cell phone payment or my internet payment or buy the new Nike shoes for my kids. A growing retirement fund that I can’t spend for 40 years does nothing for me today.

    And this is the problem.

    • The stuff expands to fill the space available. In other words, your expenditure will increase to the limits of your income. You must STOP this happening. Ring fence 10% of your income for your retirement fund. TIghten your belt. It will become second nature and you will not miss the money. You hope to get old. Don’t be a poor pensioner who has limited quality of life. You may spend up to 1/3 of your lifespan retired. You know it makes sense!

    • If you don’t save for the future – you will have none. Saving what is left over is NOT a plan for your future, but a failure to plan.

  2. The advice you give is basic and sound  but like other things in life  only the smart and wise people will take advantage of it

  3. One of the most basic rules of investing was left out; STOCK PRICES HAVE NO RELATION TO THE VALUE OF THE COMPANY LISTED, stock prices only reflect the value perceived by the last seller of the stock.  If the last seller discounted the stock by 10% then the stock dropped by that amount when someone bought it.

    There are two methods of gaining moneys by “investing;” 1) by buying low and selling high (speculating) and 2) ownership in the company itself and receiving dividends (actual investing).  Speculation is where most investors “earn” their rewards, even if they let their fund managers do the actual speculating. 

    Actual Investing requires research into the various companies out there and asking some basic questions about their stockholder-based performance.  What is their record of paying dividends; DO THEY pay dividends is the primary focus of this question and what is their dividend to profit ratio is the second.  Do they split their stock and how often does that occur?  A stock that pays no dividends but splits at 2:1 every year is still worth buying.  You are still speculating but in the long-term of not cashing out until you retire.

    If you have a talent for running a business, consider buying a controlling interest in some small company that interests you.  As the business performs, so does your income potential.  There have been some spectacularly quiet successes with this method; a major paper company executive whose employer was “acquired” and the broken up a la Bain Capital in the 1980′s bought a small paper company and ran it successfully for over a decade before selling it for a major profit.  And there are glaring examples of the opposite.

    The main principle is the be clear what your goals are, what your strengths are and apply your resources accordingly.

  4. One of the most basic rules of investing was left out; STOCK PRICES HAVE NO RELATION TO THE VALUE OF THE COMPANY LISTED, stock prices only reflect the value perceived by the last seller of the stock.  If the last seller discounted the stock by 10% then the stock dropped by that amount when someone bought it.

    There are two methods of gaining moneys by “investing;” 1) by buying low and selling high (speculating) and 2) ownership in the company itself and receiving dividends (actual investing).  Speculation is where most investors “earn” their rewards, even if they let their fund managers do the actual speculating. 

    Actual Investing requires research into the various companies out there and asking some basic questions about their stockholder-based performance.  What is their record of paying dividends; DO THEY pay dividends is the primary focus of this question and what is their dividend to profit ratio is the second.  Do they split their stock and how often does that occur?  A stock that pays no dividends but splits at 2:1 every year is still worth buying.  You are still speculating but in the long-term of not cashing out until you retire.

    If you have a talent for running a business, consider buying a controlling interest in some small company that interests you.  As the business performs, so does your income potential.  There have been some spectacularly quiet successes with this method; a major paper company executive whose employer was “acquired” and the broken up a la Bain Capital in the 1980′s bought a small paper company and ran it successfully for over a decade before selling it for a major profit.  And there are glaring examples of the opposite.

    The main principle is to be clear what your goals are, what your strengths are and apply your resources accordingly.

    • You’ve made a valid point – that stock prices aren’t indicative of the company’s values, which is a great reason not to invest based on speculation, as the market can act very irrationally.
      Like you said, the most successful financial plans start with a clear goal and use the investor’s strengths and resources accordingly.

  5. You’ve made a valid point – that stock prices aren’t indicative of the company’s values, which is a great reason not to invest based on speculation, as the market can act very irrationally.
    Like you said, the most successful financial plans start with a clear goal and use the investor’s strengths and resources accordingly.

  6. Great article and good advice.  Most of us learn the hard way.  Luckily for me I don’t think it is too late and we did save a lot in our younger years.  Many Americans haven’t saved anything and spend everything that comes in despite a high income.

  7. The problem i see is the prediction or “speculation” that markets will always get better….
    the reason we didn’t see a fall like in the depression is because of the money in 401k’s from everyday people that watched in dispare as their life long investments were piddled away by the speculative rich.
    If everyone was able to take out their investments w/o a hefty penalty than more would have when the market fell and we would have seen a much larger drop in the market like a ZERO that should have been on everyones tv set.
    But don’t worry for the rich they will continue to invest your money the way they want and get a bailout while the workers of the world are caught under the press of trying to survive in a society of ever increasing missssssssmanagement of your funds while you are told to save for the future.
    In my future we are seeing the market as the complex ponzie scheme that it really is
    like the promised future of the social security i have paid into since i was a teen and is becoming clearer by the day it will not exist
    I find it funny that usually the people telling you how to invest are the ones flooding us to disaster
    save 10% in an economy where wages are going down if you can find a job cost of living is going up, heating costs are at an all time high margin compaired to income yearly adjustments to name a quick comparison
    the bottom falling out of most peoples investments that were not managed well by the same people telling you to tighten up your belt yet again while they were in line for a bailout to collect their “bonus” for how well they used your money
    wake up america the definition of insanity is repeating the same action but expecting diff results

    • While there is an element of truth in most of your complaints, ignoring the other side of the argument just ensures you remain in the poor house.  Most people have seen their 401K’s recover since 2008, as long as they didn’t panic and go to cash.  Long term returns of a diversified portfolio are 8%.  Maybe it will be 7% for a while, but it’s money put away and growing and making your retirement far better, and giving you a tax break now.  Hey, I don’t take full advantage of the tax benefits, just my match for now, but I have in the past and it was worth it, and I will again as soon as I can restructure my expenses.   Also, Soc Security is not ‘broke’ and at worst it’s estimated that 30% of your promised benefit will not be there for you… so instead of $30K per year, you get $21K.  That isn’t cool, but it’s way, way better than $0K.  However, I will say that a lot of people are stuck in lousy 401K’s that steal your returns… you need to get into Vanguard or Fidelity as soon as you can with a balanced portfolio of low cost index funds.  This approach has a very high likelihood of providing a sustainable retirement.

    • Jon Neal
      Despite your ‘occupy’ screed, the 401k has been very successful at creating wealth for responsible individuals…
      by keeping a little earnings from our greedy parasitic Fed Govt..

      My 401k will save me from the Social Security ponzi SCAM/FRAUD proffered by our corrupt Federal Govt..

  8. Buy 10% of your portfolio into a couple of stocks you simply like.  ”Owning” a company and sharing its success teaches business. Return on investment should be measured equally in life lessons and tax-deferred mutual fund compounded appreciation.  I want to teach the young me capitalism.  I want the young me to work for goals, not retirement. 

  9. Diversification seems to be every professional stock managers recommendation, yet have you taken a look at their numbers in terms of return on investment by using this highly touted model? Check out the majority of mutual and hedge fund %’s of gain over the last 10 years and you will quickly see what I mean. Pat Manley has made an excellent point about making money by going “all in” with great companies. I have had superior results by primarily investing in Apple over the last 10 years, and have made substantial gains with Intuitive Surgical, Google, Panera Bread, and Chiapolte Mexican Grill. My secret to success has been to invest in proven companies like these, one or two of them at a time until they top out, and then move into another one or two proven winners that are on an upward trend. Limiting the number of stocks I own permits me to study them daily, really get to know what catalysts will move them up or down, and has made me a highly successful investor. For example I have learned to buy Apple before its quarterly reports, before the release of new or improved products, shortly after an announcement is made about an upcoming invitation only special media event, etc. I have also learned that Apple not only leads the market upward, but it can also crash hard when the overall market takes a dive. Fund managers tend to pull the trigger on their most profitable companies first when they spot a downturn. Then, once they sense the market has bottomed, they buy it back and it runs back up. Nothing beats really getting to know how your chosen stocks are likely to move, and owning a handful of proven companies that you keep up with can make you serious money. 

    • Great comment.  I do exactly the same… heavily into aapl…. in with a long term core position and trade in and out with technical analysis.  Other great high flyers as well but mostly aapl.

  10. I started saving late in life, due to…    …life.   I told my kids;
    If you spend more than you make, you’ll die with your boots on.
    If you spend less that you make , you’ll pick your retirement date.

  11. Wow!  Wish i could say that I agree with everything here but sorry to say that you suggest mutual funds and diversification.  It is a factual statistic that 90% of mutual funds don’t even outperform the S&P 500.  So the odds of finding the 10% that do outperform are statistically difficult. And, also, I am not impressed with the return of the SPY….  Not real good advice here…. yes, start young….. pick the right stocks….. buy in a bear market….. all good advice.

  12. Generally, good article. As someone with enough experience / time to be looking back wistfully this way, my comment is this:    It’s not enough to say that continuing to invest during 2008 (or
    2001-2) would have done better than getting out. The best plan was to defend the growing pile: use very simple moving average watching to figure out a point to get out before most of the damage was done, and get back in after
    intermediate moving averages had been crossed to the upside again.
       After you’ve saved for a number of years, the impact of a
    bear market (or a pronounced bull) becomes much bigger than your yearly
    savings rate; and asset allocation across non-equity classes becomes
    more important.  At that point, it makes sense to “play defense” with
    some very simple, sensible market timing, trend watching using just
    simple moving averages – becoming defensive as the market turns down,
    re-entering equities once they show better upward behavior.
      So point 2 and points 6-7 are somewhat contradictory and limiting. Certainly when someone is starting out, all of these points make sense – save money, invest regularly following a well thought out plan, take advantage of any 401K and especially the match, get going.
      But once you have enough to worry about – defend it.

    • Agreed… I was caught with no plan in 2000 and vowed it wouldn’t happen again.  I was transitioning all of 2008, and lost about 12% (would have been single digits but I was working 7 days a week that August and missed adjusting my investments that month – and it was a critical month).  Losing 12% is no good, but it’s way better than losing 35%. – That’s like making a 25% or so return immediately vs the alternative buy and hold.  I recovered that loss in about a year and a half, not counting further contributions.

  13. Put all your 401K contributions into a MMF. When the market hits a 4 yrs low (which it will) move it to a broad market index fund and keep contributing to a MMF.

  14. Don’t rebalance your portfolios, OVERBALANCE them. When the market hits 1, 2 and 4 yr lows, increase your equity portion to 30%, 50% and 70% respectively. When the market hits 2 yr, 4 yr and all time highs, decrease your equity exposure to 70%, 50% and 30% respectively. This couch potato system will beat almost all of the financial gurus at a lot less risk.

  15. Give some more specific examples of long term successful dividend paying companies.  How much would you have if you had invested $1000 in Coke, WalMart, McDonalds, Intel, etc., etc., 20 years ago and let the dividends reinvest?  I know most start out with Mutual Funds in their IRAs and 401Ks, (maybe that is all that is available in a company plan), but individual companies are more fun to study and track.  Young folks should get a brokerage account in their IRA and get some help from a seasoned investor, (friend, dad, grandpa) in building a portfolio.

  16. “I do know that investors who trade a lot make much less money than those who buy diversified mutual funds and rarely look at how they’re doing.”
    This is an unintentional red herring.  Knowledgeable investors take action when needed and don’t sit back and ignore what they’re doing.  This isn’t really what the author is saying, but some will take it that way.  A knowledgeable/talented but conservative high frequency trader will make far more than some dunce who blindly puts money in something he/she doesn’t understand and actively research.

  17. These are good tips.  In my investment meetup group, young people show up in small numbers.  The ones who are motivated to develop a plan will become the 1% of us 99%.  In addition to 401K plans, careful placement of little $1,000 chunks in their 20s can remove any need to have a job after a pretty young age.  You’re 26 and want to put a little money on Facebook?  Go for it.  Then get good investment research skills from somebody like IBD or non-commercial like AAII.  

  18. Ignore the mutual fund guy that says he’ll take care of everything. Be savvy enough about your investment to keep tabs on the investors!  I didn’t look deep enough into the investment company and missed the fact that my “diversified portfolio” was actually investing in one giant conglomerate. When they went under, everything I’d put away for 15 years went with them.  Do your due diligence, younger self!

  19. Avoid UnWise debt! Dont use credit card/s casually! pay in-Full monthly – Dont fall behind. Avoid Debt!
    Make a retirement Goal and supporting Plan – Stick to your Plan – be Disciplined, Revise your methods and investments occasionally. Dollar-Cost-Averaging (regulaly monthly investments) will beat market-timing, and be way easier to live with. Do your Homework, network prudently!
    Good luck good investing!

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