Live Long & Prosper
I recently finished my latest book, How to Be a Great Investor – Investment Techniques for Christians, available on Amazon in paperback or on Kindle – also, at GreatInvestor.org. In the final section, I start off by saying:
“Yes, I am a Star Trek fan. I was intrigued by the memorable scene from ‘Star Trek: Into the Darkness,’ when Leonard Nimoy’s Spock advises the younger Spock (played by Zachary Quinto) on how to defeat the treacherous villain, Kahn. It’s a time warp, science fiction moment that gets you thinking. What could I say to a younger me if I could go back in time?
What exactly would I say to a 25-year-old Richard Everett to help him become a great investor? What wisdom would someone with 35 years of experience impart to a young, uninitiated, new investor? I’ve thought long and hard before answering that question. After a lengthy deliberation, I came up with this:
The first thing I would tell my young apprentice is, in order to be a great investor, he must learn to think for himself. To think independently of what others believe or say. Don’t listen to the crap on the financial networks. Thinking, for a change, will help him make logical investment decisions.
In addition to taking time to think clearly and not over complicate the investment process, I would tell the young, debonair Richard to take advantage of his employer’s retirement plan. Whether it’s a 401(k) or 403B, he should make sure he signs up to contribute as soon as he is eligible.
There are several good reasons to make this a priority:
His contributions to the plan are tax-deductible. That decreases his taxable income—therefore, he pays less income taxes. In this case, less is better.
Many employers will match a percentage of what he puts into his account. Some companies match 25% on a dollar, some 50%, and really generous corporations match dollar for dollar, or 100%, up to a certain limit. Never, never, never turn down free money. Let me repeat—never, never, never turn down free money!
His retirement plan money grows tax deferred. Richard pays zero taxes on the appreciation until he takes money out of his account or until age 70½ when the IRS requires him to withdraw a percentage of his funds.
It will make him a millionaire. A 25-year-old contributing $3000 per year into a retirement plan for 40 years at an assumed 10% rate of return will have $1,596,333.20 to retire on! That’s all it takes, just $8.22 a day for his working lifetime.
That’s definitely worth an ‘If I were you’ lecture from Richard the Elder!
If I had a DeLorean Time Machine, I would try to talk some sense into a younger, clueless me. Having money automatically deducted from his paycheck forces him to systematically buy shares of a stock mutual fund or index fund inside of his retirement plan. By doing so, he can enhance his overall investment return over time. The concept is called ‘dollar cost averaging.’ It’s a pretty neat strategy. By investing the same dollar amount each month over a long period of time, he will take advantage of buying more shares when the stock market is down. For example, if he were adding $100 per month into his 401(k) in 2008-2009 when the market was down over 50%, his $100 would have bought twice as many shares in his mutual fund than he was buying prior to the meltdown. Think about it, when the market recovered and went back to where it was a couple of years earlier, the cheap discounted shares he bought would have doubled in value. Get the concept? Even though the market did not increase in value, Richard makes money by buying on dips.
An example is in order:
Notice that in just 24 months, with the mutual fund share price starting and ending at $25 (breaking even), this faithful investor made $385.75 or a 16% return. Not bad, all things considered.
Dollar cost averaging is a great way to take advantage of volatility in his account and a great way for him to buy additional shares when they go on sale. I would also tell the brawny, rugged youngster how to allocate the assets in his retirement plan. I would instruct him to start out by putting 100% of his contributions into an S&P 500 index fund until his account grew to a $100,000. Almost all retirement plans offer an index fund of some kind. However, because employers set up their own plans and choose the mutual funds for the plan, no two plans are the same.
So, the bottom line is, I can’t recommend a specific fund because the odds are, it won’t be available in Richard’s 401(k). Since an index fund has outperformed 90% of all actively managed equity funds, he might as well stack the deck in his favor and invest in an S&P 500 index fund. After the smart, good looking Richard gets to the 100K mark, I would suggest investing 25% of his portfolio and 25% of his future contributions into an international fund with 75% still going into his index fund. Once his account got up to a quarter million dollars, I would suggest allocating another 25% of his account and 25% of his future contributions into a bond fund.
By now, Richard is older, wiser, and richer. His 250K is broadly diversified by having 50% of his money in an index fund made up of 500 of the biggest and best companies in America, some small-cap, mid-cap, and large-cap stocks, some growth stocks, and some value stocks. No duplication or overlap, just pure, unadulterated diversification. His other half is split equally between a bond fund and an international stock fund.
Once this mature investor gets closer to retirement, say three to five years out, he should seek advice from a well-seasoned investment professional. Richard will need guidance from someone who is qualified to get him ready for retirement and help navigate him through his retirement years. It’s cheaper for him to hire a professional than become one, especially when it comes to allocating his life savings. There are no second chances in the investment arena. If he makes a major mistake with his nest-egg, his retirement funds could become toast.
I would strongly encourage the older, balding, overweight Richie not to go it alone with his million or two at this stage of his life. He’s worked too hard and too long to blow it now. Imagine him retiring a month or two before a 40-50% market decline and watching in horror as his 401(k) shrinks by one half. I know Richard pretty well; to say he would not be very happy would be a gross understatement. I also know he is not a do-it-yourselfer. One of his favorite sayings is, “If at first you don’t succeed—don’t try parachuting.” I don’t think any sane person would risk his or her lifetime savings by not getting professional investment advice at this critical point in life.
By the way, if Richard’s employer didn’t offer a retirement plan, I would encourage him to open and fund a Roth[*] IRA in an equity mutual fund or index fund. He should set up an automatic monthly deduction from his checking or savings account. By doing so, he can accumulate a large sum of money tax free. Remember my “free is good” motto, especially tax free!”
So, there you have it, the beginning of wisdom. The rest of the chapter contains insightful tips and techniques for anyone truly interested in becoming a Great Investor.
I would encourage you to pick up a copy — it’s chock full of great ideas on How to Be a Great Investor.
It’s also worth every cent.
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Thanks and Blessings,
Richard Everett
[*] A Roth IRA is an individual retirement account which allows a person to set aside after-tax-income each year. Both the earning and withdrawals after age 59½ are tax-free.