Reflecting on my investing revelation...oh, and Happy 4th of July!
As I perused The Motley Fool website today (many links can be found from Yahoo's pages), I noticed an article that interviews one of their founders, Tom Gardner, for advice on how to start out investing. His response matches me to a "T" on how I started out and I am continuously amazed at how much investing makes more logical sense the longer you have been doing it. But this is an excellent description of how to get started. Here it is paraphrased:"Tom suggests that an investor with $5,000 open a discount brokerage account, paying something like $10 per transaction. That person should split his money into about 15 different investments, including funds, individual names that are larger and pay a dividend, and smaller companies that are under the radar of Wall Street investors.
A Lifelong Investor
That's sound counsel -- smart diversification is key to long-term success. 15 names? Doesn't that seem a tad high for just $5,000? "Au contraire," says Tom.
"I hope that a person will become a lifelong investor. And I've found again and again that the biggest risk is that a person gets in with too few and bails. They take their $5,000, they put it in four stocks, and two of them go down 20%. And by the way, one of them that went down 20%, two and a half years from now is up 60%."
"By spreading out your money, you also beat away the speculative instinct. What happens if you go to the blackjack table with $200, and you've just lost $50? You begin to have this speculative mentality: 'Things aren't working, so I'm going to bet it all.' Or maybe you say, 'I'm getting out of here because I can't afford this.' If instead of placing a large amount into one or a few stocks you spread your $5,000 among 15 investments, the chances of doubling your money or seeing it cut in half, in short order, rounds to zero. Then you think, 'Oh, this is more like a bank account than I thought. I'll just keep adding.'
How to Proceed
For starters, begin socking away money with a brokerage, preferably in a Roth IRA. With a Roth, you can contribute up to $4,000 each year, and once you reach age 59½, you won't owe Uncle Sam a dime on withdrawals. That feature provides a powerful incentive to stick to your investing game plan, and what's more, because you kick in after-tax dollars to a Roth, you won't pay taxes or penalties on your principal if, in case of emergency, you have to tap those contributions prior to reaching 59½."
This is how I started out investing 5 years ago. It works and I couldn't agree with it more. Don't have that 5 grand to start out with? Check out that ShareBuilder link to the right and you can start small, NOW, or start putting away $100 a month...really, $100 a month?...Anyone can find a way to not spend $25 a week...can you?Happy & Safe 4th of July!
posted by daBears @ 11:22:00 AM
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