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Kiplinger magazine is running an article this month titled Simple Investing. The author, Kathy Kristof, contributing editor for Kiplinger Personal Finance Magazine, is also the author of Investing 101. I had a chance to ask her some questions about people who aren't investing now, and some tips she had for them.
1) How can people who have no idea how to invest get involved in creating a portfolio?
Investing is easy if you know what you want because investments pretty clearly "match up" with different goals. In this month's Kiplinger magazine, we liken it to a dating game, where you match the goal to the investment that compliments it. Emergency fund = bank savings account; retirement account (when you're young) = stocks, both foreign and domestic. Buying a car/financing college/buying a house in the next five years = fixed income investments, like medium-term bonds.
But you'll feel a lot more comfortable doing this if you know a little about how all these investments work. We've tried to explain that in our Simple Investing story; those who want more can check out our "Investing Basics" series at Kiplinger.com, or my book, which aims to explain investing basics in a detailed, but clear, concise way.
2) Why should people who aren't in the stock market get into it?
If you have a long time horizon, you need stocks because they're the only investment that consistently beats the rate of inflation over time. People are soured on stocks now because they've performed badly over the past decade or so, but you have to realize that's normal. Stocks go through long stretches when the market just keeps rising relentlessly; and they go through long stretches when they're down. But over long periods of time, domestic stocks have earned about 10% on average annually over the 80+ year period tracked by Ibbotson Associates, which beats the rate of inflation by 7 percentage points a year.
That boosts your buying power and makes it far more likely that you'll be able to afford your goals in the future. (Incidentally, we use more conservative return projections with the magazine, figuring that you'll only earn, say, 8% on average with stocks. We figure it's better to estimate on the low side than give people unrealistic expectations. But that's still the best long-term average return you're going to find.)
By contrast, bonds (which have done exceptionally well lately) have earned an average of about 5% over long stretches of time, beating the long-term inflation rate by just 2 percentage points. Does that mean you'll have twice as much if you invest in stocks over bonds?
No. Actually, the difference compounds over time. For example, if you figure that you invest $500 a month earning 5 %, you'll have about $418,000 saved at the end of 30 years (you can check this online at BankRate.com's Simple Savings calculator); if you earn 10% instead, the same amount of savings will grow to $1.14 million over the same period of time.
3) What are some different types of portfolios, and who are they designed for?
The best portfolios are the simplest -- a savings account and a mutual fund or two. If you're young and don't want to bother "allocating assets," you can simply have a savings account (for your emergency money and short-term goals) and put all of your retirement assets in a Target Retirement fund, which buys stocks and bonds and other investments in percentages that are appropriate for your age.
If you're older and have more goals -- maybe kids who need college funds -- you'll want to add in a 529 plan, two.
If you're older, richer and more sophisticated, you might want to mix in a good actively managed fund or a portfolio of individual stocks...or both. We've recommended several in the magazine that are part of the Kiplinger 25; my Practical Investing column talks about how to pick individual stocks and tracks the performance of my 19-stock (and one index fund) portfolio.
There's no one right answer. The right answer is the one that makes you comfortable and addresses your goals, now and later.
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