Are you Rip Van Crinkle? Have you just woken up from a financial slumber, only to find yourself with wads of bills crinkled up in your pocket and no idea what to do with them all? You're not alone.
On our Investing Beginners discussion board the other day, Fool community member likeroi posted a message titled "NEED HELP" and shared these thoughts and questions:
"I'm a 34-year-old single woman (own a condo and am in the 28% tax bracket) with $50,000 in the bank earning a whopping 1%. I've been reading this website, watching investment shows, etc., and am still not sure how to divide up my money and my approach. I think I should put $10,000 aside for emergency funds and [am] looking to put into VA municipal bonds (which the Fool seems to not agree with, but it only costs a few dollars, and I can take it out any time I want). [I] opened up my Ameritrade
She continued: "How would you recommend dividing up the $50,000? Bonds, stocks? And how to diversify stocks? Those Hidden Gems? Staples like General Electric
Advice galore
Our community member got a bunch of good advice from some fellow board denizens, and I'll share some of that advice with you. But first, my own thoughts.
Regarding bonds, well, of course anyone who has read up on them and wants to invest in them should go right ahead. Just make sure you do so knowing that over long periods, stocks tend to outperform bonds.
According to Wharton business school professor Jeremy Siegel, for example, stocks outperformed bonds in 60% of all of the one-year periods between 1871 and 2001. Over the same period, stocks won out 74% of the time in all five-year periods (1871-1876, 1872-1877, etc.), 82% of the time in 10-year periods, 95% of the time in 20-year periods, and 100% of the time in all 30-year periods. Got that? If you're looking to increase your investment's value as much as possible over a long period (and you're only 34, giving you 30 years until you reach the still-young age of 64), you might want to favor stocks much more than bonds. (Of course, if you're older and want to take on less risk, do give bonds more consideration.)
Next up, a word of congratulations for having opened a brokerage account. Many people, not knowing just how to do it or what to expect, never get around to it. These days, you can find brokerages that charge you just $5 or so per trade, and many fine brokerages charge less than $12 per trade while offering many services. Learn more from our Broker Center and its handy comparison chart. As you pointed out, you don't need many thousands of dollars to open an account. I explained a year ago how you can trade online.
You're smart to plan on creating an emergency fund. If you're looking for some guidance on how to invest short-term money, check out our Savings Center.
Finally, regarding your idea to invest in a homebuilder's stock for just a year, please know that when we speculate, we can end up with losses. Trust me -- I've been there and done that.
Fools chime in
There's much more advice that one can offer a newcomer to the financial world. Here are some responses from fellow Fools:
- 5MinMajor offered this: "(1) Move your savings to one of the online banks (there is a board here for that). I use ING
(NYSE:ING) , [which is] paying 3.15%. There are others that are paying a little higher. That should triple your return on that money. (2) Pick your goals/style for investing. Do you want capital appreciation? Current income? Growth stocks? Want a certain amount at a fixed point in the future? Will you be adding to the $50,000? How averse to risk are you? [Permit me to point out that we offer investing newsletters for many different investing styles/goals -- check them out and try one or two for free.] ... Many mutual fund companies offer 'target' funds. These funds have an asset allocation already prepared. Bank stocks and utilities right now are doing pretty well with kicking out dividends. Philip Morris [now AltriaGroup(NYSE:MO) ] has always been a favorite of mine. Before buying, though, you may want to do some homework and figure out really what it is you are buying. Due diligence." - Community member jrr7 brought up some important questions: "When do you expect to retire? How long do you expect to live after you retire? Do you really expect $50,000, plus growth, to last through your entire retirement? I don't. I'm close to your age, and I expect to need upwards of $2 million in total assets to have a comfortable retirement." [Learn much more about how to position yourself well for a comfy retirement via our Rule Your Retirement newsletter.]
- MotionShield made some good points: "Make sure you are taking full advantage of any retirement plan provided by your employer, and consider opening a Roth IRA as well. My advice for people just getting started is to ignore individual stocks for the time being (I'm of the opinion that even experienced investors should steer clear, but that's a topic for another board). Instead, you should find a low-cost mutual fund that is broadly diversified. Ideally, something like an S&P 500 index fund would be a good core holding to start with. Once you gain some experience, you can then make a decision as to whether or not investing in individual stocks makes sense for your situation."
- FoolishMicheal offered some excellent counsel: "I recommend you park the money in a better savings account (ING Direct, for example) while you learn about investing, portfolio management, and asset allocation and make an educated decision instead of a snap decision that might cost you. There should not be any rush to invest your money before you know about the market. I did this for over a year before I was confident enough to dip my toes in the market. Although not every selection was a winner, had I not deferred my actions to learn, every selection would have been a loser."
Learn more
TropicalBear offered some great resources for learning even more.
"Here are some things I read and recommend:
- Peter Lynch: One Up on Wall Street
- Peter Lynch: Beating the Street
- Benjamin Graham: The Intelligent Investor
- David Gardner, Tom Gardner: Motley Fool Investment Guide (I'm recommending this because it's where I learned to read a balance sheet and income statement, but there are other sources.)
- Robert Kiyosaki: Rich Dad's Prophecy
- Jim Rogers: Hot Commodities (Just because I'm recommending reading the book doesn't mean I'm recommending trading commodities. I especially recommend the chapter on China.)
"I'd also pick a couple of the Motley Fool newsletters. The ones I currently take are Income Investor and Hidden Gems. These [are] worth every penny.
"One thing to realize is that although, on average, stocks return about 10% per year, the stock market can go an entire decade, moving up and down, and end up back where it started. It's also not that unheard of to have a down year out of every three or four."
TropicalBear added some other suggestions on how to invest. You can read them in his entire post -- which was actually only his second post ever on our Fool boards. Way to go, TropicalBear!
Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of no company mentioned in this article. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.
