What is the one investment tip I would give to people in their 20s? Avoid the shoot-the-lights-out mentality of investing. Younger people, particularly men, want to find the next great investment so they can turn $500 into $1 million overnight. Everyone dreams about picking the next great stock whether, that is Google (GOOG) or Facebook or, back in the good old days, Microsoft (MSFT). For younger investors, avoid the get-rich-quick mentality and instead adopt a slow and steady approach.
I know this is not the sexy approach to investing. We all hear the cocktail chatter about how someone made a killing on this stock or that stock. In reality, the storyteller is likely using their selective memory only to mention their winners. They never mention their losers -- the Internet startup that went bust.
|There's no need for this to become your life.|
The shoot-the-lights approach to investing is oftentimes an all-or-nothing bet. The thinking is that "it is only X dollars, so it is OK if my investment goes bust." But investing $1,000 a year wisely can turn into real money.For example, assume a 25-year-old invested $1,000 each year into a brokerage account. Also assume that investor earned a net return of 6%. After 40 years they would have about $155,000. The "it is only $1,000" mentality can cost investors real money over time. The reality is, the hot idea you put the $1,000 into generally won't pan out so well. So how does one adopt a go-slow approach to investing? Very simply, by saving a regular amount and investing it in low-cost investment vehicles. My suggestion is to use a broad-based index mutual fund or exchange traded fund. Mutual funds may not work for young investors, as there is usually a several-thousand-dollar minimum initial investment per mutual fund. While ETFs do not have a minimum investment amount, they typically have a trading commission for each purchase and sale -- relatively low at $8 per trade, but an $8 commission on a $1,000 ETF trade equates to 0.8%. Fortunately, many of the large financial firms, such as Fidelity and TD Ameritrade, now offer certain ETF commissions for free. A young investor could create a well-diversified portfolio by buying just two commission-free ETFs -- the iShares MSCI ACWI Index Fund (ACWI) and iShares Barclays Aggregate Bond Fund (AGG). The first invests in equities here and abroad, giving the young investor broad global equity diversification. The second gives a young investor a broadly diversified U.S. fixed-income investment. Best of all, the blended annual operating expense ratio for an 75% ACWI/25% AGG portfolio would be just 0.32% per year. Even cheaper options may exist, so shop around for the firm offering the best slate of commission-free ETFs. Forget about stock picking, young investors, and be broadly diversified. Instead of having to continue monitoring specific stocks you can spend your free time doing something much more enjoyable, like spending time with family and friends.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV