Feeling bullish about your future? Stock up on our excellent advice. And if you're wondering when to start, now would be a good time.
Two years before they tied the knot, Lynn, 24, and Ken Buddie, 26, did something few couples do at that stage of the game: They visited a financial advisor and began creating a plan for their future. "All his life, Ken has been a big saver. He'd always tell me to 'save, save, save,' and I'd say, 'spend, spend spend,'" admits Lynn. "But Ken convinced me that it was a smart idea to mesh our finances and invest even before we got married."
While the Buddies, who live in Sterling Heights, Michigan, may have pooled their financial resources sooner than most couples, their decisions exemplifies a golden rule: It's never too early to start saving. And regardless of the dips and downturns in the stock market, there isn't a bad time to invest your money as long as you do it wisely.
So whether you've been playing the stock market since high school and have a nice nest egg, or never invested in anything more than a lottery ticket and have a meagre savings account, you can make smart financial decisions by researching potential investments and taking advice form the experts.
SETTING GOALS
Before you invest your first dollar, make sure you have a cash reserve on hand - experts recommend three to six months' living expenses (it earns a higher rate of return than a savings account). Anything beyond your rainy day stash is fair game for investing.
But before buying a stock on a "hot tip" from a friend, figure out your investment goals and time frame. Are you thinking of buying a house in the next year or two? Or are you thinking of your investments as a fund for long-term goals, such as your future children's college fund or your own retirement years?
A good choice for novice investors is mutual funds. "These allow you to invest in a diversified collection of stocks or bonds and have a professional manager on your side. You're not really buying the stocks or bonds, you're buying the management, or at least their expertise," says Joe Saul-Sehy, a personal financial advisor with American Express Financial Advisors in Troy, Michigan.
From stock mutual funds to bond mutual funds, there are more funds available today than ever before, so do your homework to figure our what best suits you. "If you have a 20-year goal, a growth-oriented mutual fund may be best for you," says Saul-Sehy. "Even if your mutual fund takes a big dip at one point, you can still do very well over time."
While the fund manager is in charge of choosing the individual companies in which a fund invests, you can check the fund's performance in the newspaper, or by consulting the mutual fund company's website. In addition, you can access stock and mutual fund information on Morningstar.com, a website that rates and tracks the performance of stocks and mutual funds, and allows you to monitor your performance online.
If you don't want to leave your entire financial future in the hands of a mutual fund manager, and still are not fully comfortable with the idea of picking stocks by yourself, consider index funds, whose growth is based on the performance of all stocks in the index. (Indices include Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average, among others.)
"I call it the no-brainer, automatic investing plan. Index funds are perfect for people who don't want to or don't have the time to think too much about their investments," says Stewart Welch III, an Alabama-based certified financial planner and author of the 10-Minute Guide to Personal Finance for Newlyweds (Macmillan). "When you invest in index funds, you are basically going to get what the market itself delivers."
Once you've been investing for some time, experts say buying individual stocks can be a great option. But again, do your research. Go to the company's website to read press releases of their business activity, and track the stock's performance in the paper before making a purchase. And check your local library or bookstore for a good investment guide, such as Learn to Earn: A Beginner's Guide to the Basics of Investing and Business (Fireside), by Peter Lynch.
DIVERSITY AND DISCIPLINE
Experts say the key to successful investing is to diversify your portfolio and contribute to it regularly. "The biggest lesson we've learned from recent stock market situations is not to put all your eggs in one basket," says Todd Andrlik, 23, of Palatine, Illinois, who invests in mutual funds for himself and his fiance, Hillary Holloway, also 23.
The best way to discipline yourself into making regular contributions is to do what is called dollar-cost averaging. This is when you invest the same amount of money each month (it often comes directly out of your paycheck or bank account) into a fund. "You don't even miss the money when it's deposited indirectly into a mutual fund account, and you'll be amazed at how much money accumulates in as little as six years," says Juliette Fairley, author of Money Rules: Personal Finance in Your 20s and 30s (Prentice Hall Press).
THE FABULOUS 401(k)
Many companies offer their employees some type of retirement plan, the most common being a 401(k), which is a tax-deferred savings vehicle that automatically takes an agreed-upon percentage of your pretax income (usually up to 10% or 15%) you want to invest. In addition, many companies offer to match a portion of your investment. All in all, a 401(k) is just about the wisest investment you can make. If you work for a nonprofit agency, you may be eligible for a similar plan, called a 403(b).
If you don't have a 401(k) plan at work, open a Deductible IRA, which is retirement money that can be deducted on your tax return. Roth IRAs, which use after-tax money for retirement savings, can be opened in place of, out in addition to, a 401(k) plan, says Peter Calfee, a founding partner in the Cleveland, Ohio-based financial services form of Cotter, Calfee & Associates. Both the Roth and Deductible IRAs have earned-income limits (capping the amount you can invest depending upon how much you earn).
Retirement may seem a long way off, but remember that many couples at retirement age are facing many years during which they'll still need to support themselves and, hopefully, enjoy their work-free time to the fullest. "we want to live a certain lifestyle when we retire, so to do that we realized we needed to save money," reasons Julie Dye, 30, of Austin, Texas. She and her husband, William, 32, both have retirement plans through their jobs, as well as Roth IRAs.
Meanwhile, don't fret if your retirement fund suffers a decline. Remember, you're in this for the long haul. If the stock market takes a dip, resist the urge to withdraw your money or to cease making regular contributions. "Saying you don't want to invest when the market is down is like saying you won't buy your bridal gown until the sales are over," says Saul-Sehy. His point: While the stocks are down, you're buying at a "bargain" price, and making the assumption that, at a later point, they'll go back up. Just keep thinking long-term.
Investing in an Advisor
Whether you have $100 or $1,000 a month to invest, a certified financial planner can help you make smart choices. But don't choose a professional at random.
"There is a tremendous benefit that comes from finding an advisor whom you can trust, and someone whom you feel identifies with both of you," says Kathleen Gurney, CEO of Financial Psychology Corporation in Sonoma, California. Ask for references, and make sure he or she understands your short- and long-term goals. If you think a financial advisor isn't in your budget, meet with someone just for a consultation to map out some of your strategies.
"Most people say things like, 'I don't have enough money for a financial advisor,' but many advisors will meet with you on an hourly basis so you can plan your life together," says Gurney, who gives investing tips on FinancialPsychology.com
From your don't-touch-now retirement account to the latest hot stock, start talking and thinking about your financial future - and what a solid, sane investing strategy can do to make that future fabulous.
*Reprinted from Spring/Summer 2003
