You may not be Mitt Romney rich—using $100 bills to polish your solid-gold doorstops—but let's say you're finally at a point in your life where you've saved a little nest egg. What kind of wizardry does it take to make it grow? Forget the 0.6 percent earnings on the savings account you set up when you were 12. We spoke to some financial experts to learn how to invest your money like a grown-up.
Stocks, bonds, mutual funds…sweet Jesus, where do I start?
Individual stocks, though offering a high rate of return, are a risky investment, and most financial advisers don't recommend them for newbies. But investing in a variety of stocks through a mutual fund can still offer a high rate of return with less risk.
"Consider an 'asset allocation' mutual fund that matches your time horizon for needing the money and your tolerance for risk," advises Gayle Matson, a local certified financial planner. "Such funds usually hold both domestic and international stocks and bonds.â
Piman Limpaphayom, a CFP and professor at Portland State University's business school, recommends dividing investments between high-return stocks and safer bonds. "When you're just starting to invest, you would put a lot of money in stock mutual funds, like 60 percent, and about 30 to 40 percent in something relatively safe like bonds. Put 5 to 10 percent in something we call 'alternative investment,' like gold or real estate. But that is only a small portion. You can invest in a more aggressive fashion when you're 25 or 35—you can put more in stocks."
If this is your first investment rodeo, consider seeking advice from a professional. Most banks can provide free information or an initial consultation if you're a client, and many work with investment firms that can be referenced. Just keep an eye on rates and fees you will be paying, especially from financial advisers who work on commission. "You want to know how much firms charge on a year-to-year basis," says Limpaphayom. "Because they will charge you for things they have to pay like advertising and marketing expenses. So you want a firm that minimizes those.â
How much money are we talking about?
"The common recommendation that we give is for someone to have at least three to six months of their salary in the bank before they even think about investing," says Limpaphayom. "Investing is a long-term commitment, so you want to make sure you have enough. Have an emergency, liquid fund in the bank."
Once you've got a savings together, you don't have to dump every penny into your investment portfolio. "It's not a matter of how much we should save, it's about how consistent—it's the key to investing for long term," says Limpaphayom. "For example, if you put in $1,000 in January, then the whole market drops in July but comes back to the same level in December, you'd still have $1,000. But if you split that $1,000 into 12 equal payments and invested it consistently each month, even though the market dropped in the middle of the year, you'd actually end up with more value. It's called 'dollar cost averaging.' So instead of putting the lump some in at one time, we actually recommend investing consistently each month regardless of how the market is doing. You have to be very disciplined."
Shouldn't I buy a house? Grown-ups do that, right?
There are plenty of good reasons to buy a home, but being purely an investment is not one of them. "I think in 2005 everyone thought real estate was the best investment, and the average five-year return was 25 percent," says Limpaphayom. "But when the bubble burst in 2008, it was no longer a good investment. It is a saving mechanism. If you look at the returns of real estate, over 60 or 70 years the rate of return is only 2 to 3 percent, so it is not a good investment. But the good thing about putting money in a home is that it forces you to be disciplined. It gets you to be consistent. Down the road, you can keep the equity and make use of it any way you want, but do not expect high returns."
Michelle Puggarana, director of homeownership programs at the Portland Housing Center, recommends potential buyers examine what type of investment they are looking to make.
"Many people got into trouble during [the housing bubble] by treating their home like a credit card or a quick investment strategy," Puggarana says. "Buyers who are purchasing a home now would want to consider their goals, how long they plan to stay in the home, and how much cash investment they are making at the time of purchase in determining if it is a 'good' investment."
Plan for retirement? I only just landed a job where I don't have to wear a name tag.
That's right, kids. One day you will be old, and wouldn't it be nice not to have to eat like you're back in college? Start saving now.
"The most powerful retirement savings vehicle for most young people is their employer's retirement plan, if there is one available to them," says Matson. "Most employers offer some kind of matching contribution, so you want to contribute at least as much as will allow you to take full advantage of the match. Always take the free money!" After getting your employer's matching contribution, Matson recommends putting any additional savings into a Roth IRA, which allows you to withdraw your money without tax or penalty should you need it. "The earlier you start saving, the less you will have to save over the long term," she says. "Never underestimate the power of compound interest!"
How about I just scrap all this mumbo jumbo and buy gold?
Um, no. Even if you don't mind the destructive environmental and social effects of gold mining, buying up Krugerrands won't turn you into a Scrooge McDuck. "Gold, if you look at the last three years, the return is like 25 to 30 percent," says Limpaphayom. "But if you go back to 1970, the average return was only 5 percent. So don't make an investment based on short-term memory. These commodities will look good at some point, but it won't look good in the long run. But, having said that, it is a great hedge for inflation—the value tends to keep up with inflation. Gold is a good savings vehicle, not an investment. Some years it will give you a lot of excitement, but other years a big headache.â