1) How can people who have no idea how to invest get involved in creating a portfolio?
Investing
is easy if you know what you want because investments pretty clearly
"match up" with different goals. In this month's Kiplinger magazine, we
liken it to a dating game, where you match the goal to the investment
that compliments it. Emergency fund = bank savings account; retirement
account (when you're young) = stocks, both foreign and domestic. Buying a
car/financing college/buying a house in the next five years = fixed income investments, like medium-term bonds.
But you'll feel a lot more
comfortable doing this if you know a little about how all these
investments work. We've tried to explain that in our Simple Investing
story; those who want more can check out our "Investing Basics" series at Kiplinger.com, or my book, which aims to explain investing basics in a detailed, but clear, concise way.
2) Why should people who aren't in the stock market get into it?
If you have a long time horizon, you need stocks because
they're the only investment that consistently beats the rate of
inflation over time. People are soured on stocks now because they've
performed badly over the past decade or so, but you have to realize
that's normal. Stocks go through long stretches when the market just
keeps rising relentlessly; and they go through long stretches when
they're down. But over long periods of time, domestic stocks have earned
about 10% on average annually over the 80+ year period tracked by
Ibbotson Associates, which beats the rate of inflation by 7 percentage
points a year.
That boosts your
buying power and makes it far more likely that you'll be able to afford
your goals in the future. (Incidentally, we use more conservative return
projections with the magazine, figuring that you'll only earn, say, 8%
on average with stocks. We figure it's better to estimate on the low
side than give people unrealistic expectations. But that's still the
best long-term average return you're going to find.)
By contrast, bonds (which have done exceptionally well
lately) have earned an average of about 5% over long stretches of time,
beating the long-term inflation rate by just 2 percentage points. Does
that mean you'll have twice as much if you invest in stocks over bonds?
No. Actually, the difference compounds over time. For
example, if you figure that you invest $500 a month earning 5 %, you'll
have about $418,000 saved at the end of 30 years (you can check this
online at BankRate.com's Simple Savings calculator); if you earn 10% instead, the same amount of savings will grow to $1.14 million over the same period of time.
3) What are some different types of portfolios, and who are they designed for?
The best portfolios
are the simplest -- a savings account and a mutual fund or two. If
you're young and don't want to bother "allocating assets," you can
simply have a savings account (for your emergency money and short-term
goals) and put all of your retirement assets in a Target Retirement
fund, which buys stocks and bonds and other investments in percentages
that are appropriate for your age.
If you're older and have more goals -- maybe kids who need college funds -- you'll want to add in a 529 plan, two.
If
you're older, richer and more sophisticated, you might want to mix in a
good actively managed fund or a portfolio of individual stocks...or
both. We've recommended several in the magazine that are part of the Kiplinger 25;
my Practical Investing column talks about how to pick individual stocks
and tracks the performance of my 19-stock (and one index fund)
portfolio.
There's no one right answer. The right answer is the one that makes you comfortable and addresses your goals, now and later.
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