Young investors: Do not fear stock market

Tuesday, June 22, 2004
By John Gin
Contributing writer
The Times-Picayune

Question: I am a young investor in my first real job. I feel that my future will be bleak if I don't take control of my finances. What advice can you give me to get started?

Answer: Young investors are increasingly aware that they have to be self-reliant for their financial security. Many young investors not only lack faith in the future of Social Security, but they are also witnessing the disappearing model of being employed by the same company for 20 years or more and the benefits of long-term traditional pension plans.

According to CNN MONEY, young people are more concerned about their money than were their predecessors, and they are more entrepreneurial in their investing habits. However, awareness is not enough. Instituting a financial plan as early as possible is crucial to long-term financial security.

The Employee Benefit Research Institute's 2003 Retirement Confidence Survey shows that 61 percent of workers do not know how much money it will take to live comfortably in retirement because they have never made an effort to calculate the numbers. The 39 percent who did make retirement calculations changed their planning and started saving more or adjusted the allocation of their money.

With time on your side, you can plan today to overcome external concerns, such as job security and Social Security, as well as meet your personal goals, such as buying a home, starting a family, furthering your education, caring for aging parents, insurance and enjoying retirement. Here are some simple steps to help you reach your long- and short-term goals:

-- Don't be afraid of a down market. Past performance is not a guarantee of future results. When you are in your 20s, 30s and 40s and have time to let your investments mature, the stock market can offer significant long-term benefits. When the market is volatile, it's easy to look at your immediate gains and losses, and panic, but it's important to remember that time is on your side.

With good planning and patience to wait out rough times, the market probably will cycle back in your favor. For example, in the five months after the attack on Pearl Harbor, which ushered in the United States'

involvement in World War II, the S&P 500 declined almost 17 percent. When the war ended in 1945, the index had advanced 62 percent from its level on Dec. 7, 1941.

-- Set goals. Before you can decide what types of investments are appropriate from a risk perspective, you need to evaluate your savings goals. Is your goal to preserve principal, generate income for current expenses or build the value of your principal over and above inflation? Your answer will enable you to find an appropriate balance between the return you hope to achieve and the risk you are willing to assume.

-- Examine your time horizon. Focus on time in the market with a buy-and-hold strategy, not market timing, which is the practice of moving in and out of the market in an attempt to boost returns. Consider how comfortable you may be riding out short-term losses in the value of your investments. Remember, the longer your time horizon, the more volatility you can tolerate in your portfolio.

-- Diversify investments and manage your risks. The process

of diversification, spreading your money among several different investments and investment classes, is used specifically to help reduce market risk in a portfolio. Mutual funds can be a good way to diversify because they invest in many different securities. Selecting more than one mutual fund for your portfolio can further reduce risk. Also consider the potential benefits of selecting investments from more than one asset class: Stocks are particularly hard hit because of changing conditions, but bonds may not be affected as dramatically.

-- Take full advantage of 401(k)s and benefits. A 401(k) plan offers a wide variety of benefits. For example, any earnings on your contributions grow tax-deferred and are not subject to taxation until they are withdrawn from the plan. (Note that taxes are due upon withdrawal, and withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty.)

If you get corporate-matched dollars, take full advantage of this "free" money. In addition to long-term savings, young investors should incorporate strategies for short-term goals into your financial plan. You need a separate savings vehicle for short-term goals, such as saving

for a down payment on a house, a new car or a vacation. In addition, you should have a separate fund for six months of emergency reserves in case of a layoff or costly unplanned expense, such as a new roof. To reach your short-term and emergency reserve goals, consider investing in CDs or interest-earning money market accounts that are liquid and immediately accessible.

There are many options and strategies available, especially for young investors.

 

 

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