Going into adulthood witnessing a stock market collapse and hearing constant warnings about trillion dollar budget deficits, low yields on savings and excessive debt is, quite honestly, depressing. Given all that's going on in the world today, what's your best advice for what young adults should do about money? -- Jeff M., Denver
Even though the economy and the stock market are in better shape than they were just a few years ago, many investors remain anxious about the outlook for the future.
But If there's one thing my experience has taught me, you can't let your emotions dictate your financial decisions.
With that in mind, here are three pieces of advice that young investors just starting out -- as well as veterans who still feel rattled by the upheaval of recent years -- should keep in mind while managing their finances.
1. Things are never as good -- or as bad -- as they seem. We all have a tendency to extrapolate the present into the future. But it makes no more sense to assume the tough times we've been experiencing will continue into the future any more than it did to presume during the dot-com boom that we had entered a new era of uninterrupted prosperity.
Since MONEY published its first issue in 1972, the U.S. economy has weathered six recessions, six bear markets and dozens of other crises. (Remember, the "Asian contagion" and the Long-Term Capital Management hedge fund implosion of the late '90s?)
But recovery followed each setback. Why? Because the economy and the financial markets work in cycles, with fat times followed by lean ones.
Since the upswings typically last far longer than the downturns, however, it's only natural that living standards and stock values tend to rise over time. So don't get too caught up in the mood of the moment, be it gloomy or euphoric.
2. Take doomsayers' stock market predictions with a large block of salt. There's nothing investment pundits and the financial press like more than writing off stocks. One famous example: the BusinessWeek "Death of Equities" cover story in August 1979, which contended that inflation and other woes spelled the end of competitive stock returns.
But investors who avoided the stock market after reading that story likely regretted their decision. Since the story ran, stocks have gained roughly 11% a year, which means someone who invested $10,000 in large-company stocks back then and reinvested dividends would be sitting on an account worth about $315,000 today.
Yes, there were plenty of big setbacks along the way, as there will be in the years ahead. But, anyone willing to ride out stocks' periodic nosedives stands a good chance of reaping solid rewards over the long term.
3. Focus on what you can control. You have no power over the returns the markets deliver. But you can exert some influence to improve your chances of building wealth over the long term.
One way to do that is to build a broadly diversified portfolio and, aside from occasional rebalancing, stick to it. Diversifying won't yield the highest returns. But it will allow you to limit the downside during market cataclysms, making it less likely you'll sell in a panic and subvert your investing strategy.
You can also boost your portfolio's long-term prospects by holding the line on investment costs. If you stick to the low-fee index funds and ETFs on our MONEY 70 list of recommended funds, for example, you can easily save a percentage point or more in annual costs.
That's like earning an extra percentage point of gain each year. Lest you think such a margin won't make much of a difference, consider this: Getting 7% a year instead of 6% on a $25,000 investment leaves you with an extra $28,000 after 25 years.
The area where you can really exert some control, though, is in deciding how much to save. Granted, living expenses (and taxes) can soak up a lot of your income. But by making a deliberate decision to live below your means, you should be able to regularly stash some dough in a 401(k) or other savings vehicle. And the more you save, the better off you'll be should the financial markets deliver less robust returns than you expect.
So start saving regularly and investing sensibly. That won't solve the world's problems, but it should improve your finances.
Do you know a Money Hero? MONEY magazine is celebrating people, both famous and unsung, who have done extraordinary work to improve others' financial well-being. Send an email to nominate your Money Hero.
No comments:
Post a Comment