Friday, September 26, 2014

Message for Young Savers and Investors ... Keep It Simple ... Try Putting the Horse Before the Cart

Getting things right in the end begins with starting right and on time in the beginning.

For young workers starting their careers, that means keeping things simple and getting a grip on why developing the habit of saving and investing at an early age is an essential ingredient to later success.

There's absolutely no reason for those entering the work force to make things difficult for themselves or have 'paid experts' when embarking on an adulthood which includes saving and investing for the benefit of themselves and their families over the long haul.

Seven Investing Lessons for Teens contains solid and simple advice for the beginning saver and investor as well as his or her well intentioned parents:

"Frequently . . . parents try to teach their teenage children about investing by encouraging them to pick an individual stock. . . .

A much better plan is to teach your children the following:
  • Why it’s important to invest (to stave off inflation and increase your purchasing power)
  • How to find the money to invest (by living within your means and saving regularly)
  • When to invest your savings (when it’s longer term money)
  • How to decide between an active or a passive / evidenced-based investing approach (hint: would you rather search for a four-leaf clover or own the whole field)
  • How to pick the optimal asset allocation (110 minus your age for the portion to put in equities is a good starter rule-of-thumb)
  • How to diversify within each asset class (U.S. vs. international; small cap, mid cap, large cap; value, growth)
  • Whether or not you want to obtain your exposure by buying mutual/index funds or individual stocks and bonds (note, this is the last–not the first–step).
While it may be easier and more fun to start investing lessons by encouraging your child to pick an individual stock, without the broader context what you are really doing is teaching your child to trade–as opposed to creating a well-diversified investment portfolio for the long run."

Summing Up

Parents should teach their kids the whys of saving and investing in context, and help the young acquire solid individual saving and investing disciplines to be followed throughout adulthood.

The fundamental "why" of individual saving and investing is all about staying ahead of inflation and letting the compound interest rule of 72 work its magic over the length of the individual's working career.

It's also about developing the habit of living within one's means and investing in a low cost and well diversified portfolio of blue chip stocks.

There are no heroics required, but rather just the adoption of and adherence to the boring basics.

But first things first --- and that means either being taught or teaching ourselves "why" we need to be fair to our future selves by choosing early to live within our means and routinely save and invest a portion of our earnings.

That's my take.

Thanks. Bob.

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