Investment Advice for Novice Investors

Investment Advice for Novice Investors

The most important point here is the age factor at which you start investing. Saving and investing in your 20s will grow to a size of 4 to 15 times more (depending on the rate of return) than if you start in your 40s or 50s. Even better - Investing a small amount one time in a newborn child or grandchild can have that investment grow by over 500 times by the time that child reaches retirement age. Start investing young and make time your friend. Otherwise, time becomes your enemy.

When it comes to IRAs, always invest in Roth IRAs. Ignore the ignorant financial advisors who recommend comparing tax rates now versus retirement. It is much better to pay a little tax now for a Roth IRA, than to pay even a low tax rate at withdrawals of Traditional IRAs that have doubled in value several times since the original deposits. Finally, most people are ignorant of smart investing and are afraid of the stock market, especially in their 20s and 30s. The stock market offers their best chance for the largest investment returns over the long run.

Take advantage of 401K plans that have company matches (usually adds 50 to 100% to your initial investment). Most are “Traditional” 401Ks instead of “Roth” 401Ks, but the company match still make it very attractive. 

Here are some tips to help the novice investor. Never buy individual stocks - they can go to zero or just stagnate far longer than any stock market, plus you are not smart enough to know when to get in or out. Buy pooled assets such as mutual funds, ETFs, and index funds and hold onto them for decades without selling. Only have a small amount to invest - The SandP 500 ETF index (SPY) is all you need (should use the ampersand symbol instead of "and" between S and P, but this system overrides it adds "amp;" to the ampersand symbol - &). It reflects the stock market trend which over the past long run has averaged 10 to 11% average annual growth or a doubling "average" every 7 years. SPY is composed of 500 of the largest stocks ( virtually no risk of all 500 going to zero), is cheap to buy (about $5 to $7 at most brokerage houses) and has the added value of being able to buy or sell it instantly during open market hours (as do all ETFs; mutual funds buy and sell prices are calculated after the market closes and if you buy them after the market closes, then your price is determine after the next day's stock market close which is why it is better to buy these within the last hour the market is open but not too close to the end). Want a technical stock market play also - buy the ETF - QQQ, which reflects the top Nasdaq 100 stocks.

If you also want to buy mutual funds, learn about and then buy a variety of mutual funds (these are "managed" assets where the manager is buying and selling trying to time the market - very hard to successfully do), including "growth" and "value" MFs, small caps, medium caps, large caps, and "general" (combination of all 3 company cap sizes). Other considerations - domestic versus international MFs, emerging market MFs, and industry MFs (for example, tech, medical, retailing, transportation, etc.). ETFs mimic many of these funds and are cheaper to buy. Very important - there are "load" mutual funds that take 5% off the top of your initial investment (never buy these - you need 5% growth just to break even) and no load mutual funds. Learn to utilize "research" tools that brokerage houses give you online to determine which mutual funds have been consistently good performers in both the short and long term. 

Roth versus Traditional IRAs and Tax Bracket Insignificance

The tax bracket both now and at retirement is totally meaningless as a decision point of whether to invest in Roth or a Traditional IRA. What matters is the amount of principal taxed. Again, a $1,000 IRA investment as whatever tax bracket is chump change (only $100 to $390 depending on tax bracket) compared to what it grows to at the time of withdrawal. For example, with a young person at age 23, given the historical long term growth rates of the stock market (an average doubling every 7 years), he/she gets to withdraw $64,000 a year for each of 42 years starting at age 65. A minimal tax bracket of 10% still dings him for a $6,400 tax payment each year for a Traditional IRA compared to less than $400 in each of the years invested. Remember, Roth IRA withdrawals are not taxed. So let's add it up on a total lifetime basis. 42 years of paying taxes upon investment of $1,000 for each of those 42 years is a maximum of $390 times 42 or $16,380. For most people, because they are not in the 39% bracket, it will be far less (at 10%, it would be $4,200 in tax). Now for the retirement years - 42 years of you and likely your heirs of withdrawing $64,000 a year in order to deplete the entire account (which is the intent of generating IRA income, plus the government basically forces you to withdraw each year, even at a measly 10% tax bracket is 42 times $6,400 each year for a minimum lifetime tax of $268,800, and possibly double or triple that for higher tax brackets. So which do you think is better - a Traditional IRA with minimum lifetime taxes of $268,800 or a Roth IRA with maximum lifetime taxes of $16,380 and probably much less than that for most middle class people? The answer should be very obvious. Don't let the Federal government become your "investment partner" which it does become with Traditional IRA investments.