Every day I read personal finance articles with bad advice that is recycled endlessly. Ordinarily I keep my mouth shut about them, but recently Jonathan Clements over at
The Wall Street Journal
devoted one of his columns to advice for people in their 20s, and that's my turf. You can read it
here if you have a subscription and a pillow handy for the cat-nap it will likely induce.
I started foaming at the mouth when Clements suggested that investors in their 20s should put 60% of their money in stocks and 40% in bonds. I got a tic in my right eye when he pooh-poohed the idea of investing heavily in growth stocks while you're young, and I had to spend 15 minutes punching a pillow while I calmed down. This is exactly the kind of one-size-fits-all advice that might make sense for a 50-year-old, but doesn't do squat for anyone under 30.
Those of you who read my earlier columns might be surprised that I'm taking any kind of position on investing. I believe that saving money is at best nonessential for the under-30 cohort, and that people my age will generally get more from spending their money than from buying stocks or bonds. That said, there's a right way to invest in your 20s, and there's a wrong way to invest in your 20s. Clements is firmly in the wrong-way camp.
What's right, and where do I get off even having an opinion here let alone expressing it?
I've never made any money in the market. I haven't even been allowed to own stocks for the last two years because I've been writing for "Mad Money" with Jim Cramer on
, and now I'm doubly locked out of the market because
forbids its editorial staff from owning stocks, excluding shares of the Mother Ship. (You would think that as Jim's nephew I could've gotten in on the IPO way back when, but my dad works at a hedge fund so we were all excluded as friends and family.)
Before I started working at "Mad Money" two years ago, I didn't know jack. I'm no expert now, but you don't spend two years working for a guy like Cramer without learning a ridiculous amount about investing and developing some strong opinions.
Being an investor in your 20s is totally optional, but if it's something you want to do, as opposed to something you believe you ought to do, then take my advice. Unless you actually have a pretty large amount of money that you're interested in preserving, you should take on as much risk as possible. Buy small-cap stocks that trade under $10, have little analyst coverage and a reason to go higher. In a word: Speculate.
You should be prepared to lose everything more than once so don't use any money to buy stocks that you need for the necessities. If you're trying to earn a respectable 10% return without taking too much risk, you might as well stop wasting your time. That's a fine approach to take when you're older and already have some money.
If you're just starting out, then you want to turn a little money into a lot of money. You'll never do that by keeping 40% of your portfolio in bonds. You're young. You've got your entire life to earn back everything you lose. You can afford to take risks.
If you're looking for ideas, you're smart enough to know that I'm not your man. I'm surrounded by people who are much better at picking stocks than I am, and if any of you are like me, it pays to know that about yourself.
Take a look over at the
Stocks Under $10 newsletter run by Frank Curzio and Larsen Kusick or at Jim Cramer's three speculative stocks of the year for "Mad Money":
Level Three Communications
. Anyone who wants to start speculating should also pay some attention to stockpickr.com, which is a great way to glean great ideas from other people.
To be clear, if you're buying stocks in your 20s, you shouldn't be investing to gradually build up your "nest egg," a phrase that for some reason grates on me like the sound of fingernails scraping across a chalk board. This is the typical route followed by most personal finance gurus, and as far as I'm concerned, it's a dead-end.
With maybe $2,000 to invest a year, you won't make serious money in the market unless you take enormous risks. It's much more likely that you'll get wiped out, but since you won't have a lot of money on the line, it's a worthwhile risk.
In fact, if you're in your 20s and don't have much money to invest, I don't see any point to anything other than speculation.
Let's say you have $2,000, and you're taking a more conservative approach. You set up a diversified portfolio of five stocks from different sectors, and you follow Jim Cramer's advice, spending one hour a week on the necessary homework for each stock, or five hours of homework total each week. (I've spent too long working for Jim on "Mad Money" to believe that you can skimp on the homework and not get torn to pieces by the market.)
Doing that five hours of homework each week, you're going to have to invest 260 hours a year to do the minimum amount of work. In a good year, you might be up 20%, which is just $400 if you start with $2,000. It's not worth the effort. Even if you start with $5,000 you'd only be up $1,000 for the year, meaning you earned $3.85 for every hour of homework you put into your responsible, diversified portfolio. Start with $10,000, and you just barely do better than the minimum wage.
This is why we have to throw the rules away and take our chances speculating, and my example gives you a much better return than you would be likely to get following the strategy that Clements advocates.
If you keep 40% of your portfolio in bonds and you still manage to produce a 20% return consistently, you ought to be a professional. That advice is good for someone who's middle-aged and has some money in the bank. But this strategy is totally counterproductive for anyone under 30 and hoping to turn a little into a lot.
Clements says your first priority should be diversification. I say don't worry about diversification. Jim Cramer, my boss at "Mad Money," will probably make me cry for saying that. If you're thinking of writing me an email to tell me what an idiot I am, know that Jim's already got that covered.
Diversification is essential when you've got enough money to put together a real portfolio. But until you have at least $10,000 in the market, I believe that it's a waste of time. You diversify your holdings because you don't want every stock in your portfolio to get wiped out at the same time. It's the key to capital preservation, but you probably don't have enough dough in your 20s to be worried about capital preservation.
I'm not alone in recommending that young people speculate. Cramer advocates speculation because it's fun. It keeps you interested, and as long as you're interested, you'll do the necessary homework that Cramer suggests for every stock.
But Cramer still has to be the voice of age and responsibility. If he comes out and tells everybody under the age of 25 to put all the money they have invested into speculative stocks, he'll get crucified.
I've got nothing to lose, so I'll tell you what Jim is too responsible to say: In your twenties you should speculate with way more than 20% of the money you're putting into the market. Think more along the lines of 100%.
If you have the time, the money and the inclination, then stop pretending you're 50 years old and investing responsibly to prepare for your retirement. You're not. You're in your 20s. You probably aren't earning that much money. Whatever you can afford to put into stocks is going to be pretty paltry. If you're going to invest you have a responsibility to yourself to take a few chances.
This approach is made out to be a lot more dangerous than it actually is. Clements, for example, says that even though growth stocks, which are far more reliable than the speculative ones I'm advocating, can produce great short-term returns, they don't work as well as value stocks over a longer time frame.
This is a guy who believes in buying stocks and holding them through hell or high water. Yeah, if you buy a bunch of high-risk speculative stocks and then sit on them for a decade, you're being the worst kind of idiot. So don't do that.
Buy and hold is suicide for speculators, so you'll have to manage your money a bit more actively. I don't believe that's a problem, since most people want to invest precisely because they believe buying and selling stocks is fun. As long as you only have a little money to play with, it's not worth doing if it's not fun.
As a hobby, speculation is much less expensive, irresponsible and downright dangerous than the other forms of thrill-seeking available legally and extralegally these days, and some of the time you even end up making money.
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