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Newbie Investors: Listen Up

Christine Benz

Young investors: Morningstar.com readers would like to have a word.

They'd like to tell you to keep it simple on the investing front: Choose low-cost investment vehicles and make good use of tax-sheltered wrappers. And once you have your straightforward portfolio up and running, they'd advise you to be hands-off with your holdings. Ups and downs are just a part of getting to your goals.

Most of all, though, they'd like to tell you to just get going: Start socking money away in earnest as soon as you can--even if it means making due with older cars and smaller houses. Feeling poor when you're young is a lot more fun than actually being poor when you're old, posters agreed.

Those were some of the key words of wisdom that poured forth when I asked Morningstar.com readers to share what advice they wish someone had given their younger selves when they were just starting out. Posting in the Investment Basics area of our Discuss forums, readers imparted wisdom on all matters money-related (and some matters not so much, such as spousal choice). Many respondents to my query said they'd been busily preaching their own best financial wisdom to the young people in their lives, in the hope of saving them from the mistakes they had made themselves.

Indeed, even though some of the advice might be familiar for the seasoned investing hands who frequent Morningstar.com, I think the thread is a good "print and distribute" item for the young people you plan to see on Thanksgiving Day.

To read the complete thread or chime in with your own advice, click here (http://news.morningstar.com/articlenet/article.aspx?id=620584).

'If I Never Saw It I Would Never Miss It'
How many different ways can you say "start saving now"? This particular conversation thread tested the limits, as seemingly every poster shared this piece of advice as the one they wish they had gotten when they were younger.

Nightrider wrote, "Start young. Younger the better. Don't think retirement is far, far away. It is closer than you think."

DavidG offered several pieces of solid advice, but this one is the baseline for everything else: "The most important thing is to, first, save and invest. An investment genius who doesn't save and invest doesn't end up any better off than an investment dummy."

"Pay yourself first" is time-tested advice for financial security, and Dan6912 is a true believer. "When I started my very first job, I paid myself 10% right off of the top starting from my very first paycheck. I figured if I never saw it I would never miss it. This was even before 401(k)s and IRAs."

BobB62 correctly notes that people who defer saving can't harness the power of compounding like the young folks can. "It is difficult for a young couple who are starting a family, buying a house, etc, to look far into the future--but it is well worth the sacrifice. It is a lot harder to catch up in your 40s and 50s."

'We Drove Cars Until the Wheels Fell Off'
Of course, in order to get an early start, living below one's means is essential.

That's exactly the strategy homebrewer employed as part of an aggressive savings plan, and it ended up being worth it. "We drove cars until the wheels fell off. We did not take expensive vacations, own cell phones, have cable TV, eat out much, had no debt other than the house which we paid off as fast as possible. We now travel here and abroad when we want."

Cgajowski is on the same page, "Buy stocks, not shoes!"

Keeping one's priorities in order is essential to keeping spending in check, in the view of zorkl55: "Toys are fun to spend money on, but they don't count as much as experiences with the people you love."

Posters like Chief K also believe that scrimping is far easier--and less unpleasant--when one is young. "My advice is that if you are going to be poor (for example because you saving/investing a lot of your income), be poor while you are young. Because being poor and old is extremely, very unpleasant."

Needless to say, posters also agreed on the importance of minimizing debt, the presence of which can negate the benefits of having investments.

GTB1954 wisely noted that it's also possible to make a difference on the other side of the ledger: Maximize income by getting a good education and doing a killer job at work. "Invest in yourself," this poster advised. "Even if you work for a company consider that you are working for yourself. Think of it as 'Me.inc' because your most important asset is your reputation. If you work hard, do a good job, go the extra mile you will be noticed, if not by your own company, then by someone else. If you need extra education to enhance your job (such as an MBA, and so on), by all means do it. Go to night school; go on weekends even if your company won't reimburse you. It's an investment in your future. Take on extra assignments even if it's the dirty work that no one else wants (you will learn more about your company and other aspects of your job). It may take time. Don't be impatient. Rather think of it as someone is paying for you to learn."

'Keep It Simple. Keep It Cheap.'
When it comes to investment selections, posters said that they wished someone had advised them to choose simple, sturdy investments rather than mucking about with more complicated and/or trendy ones.

Nittwit favors inexpensive equity exposure for those just starting out. "In terms of 401(k) investing, be all in with an S&P 500 index fund," this poster advised. "Do not bother with bond funds until you are 50 and than only if the yields are good."

"Don't stress over individual stocks. You don't know enough. Buy (and just keep on buying) index funds." Nateoh agreed.

But posters didn't universally eschew individual stocks. For bobk47, well-chosen individual stocks can work hand in hand with broad-market index funds. "When it comes to stocks, buy only high-quality, dividend paying stocks and stick with them as long as the business retains its wide moat," this poster advised. "Invest a portion of your money in low-cost index funds. Keep a cash cushion to buy when the market drops sharply and take some cash after a long run-up or when P/E ratios get historically high."

Wilbodave also believes buying and holding high-quality individual companies can help fuel long-term investment success. "Buy shares of corporations that produce products that nearly everyone uses nearly every day and don't sell them unless the company is going under."

In favor of truly keeping it simple with an all-in-one product is Mysticaltyger, who wrote, "I wish someone had told me to invest in a solid balanced mutual fund and to hold on for decades. The best balanced funds have returns that often match or exceed the returns of the S&P 500 Index with less volatility. Even if they don't quite keep up with the returns of the S&P, they'll come close, and the 'sleep at night' factor of lower volatility makes them easier to stick with." This poster went on to share a short list of investments that fit the bill, including T. Rowe Price Capital Appreciation (PRWCX) and Vanguard Wellington (VWELX).

EFHutton offered this superb guidance: "The best advice to a fledgling investor is to keep it simple. Keep it cheap. Keep it tax-efficient. Keep it systematic/rules based as opposed to actively managed. Something like Vanguard Balanced Index (VBINX) is an excellent starting point."

Annacz urges newbies to start with an all-index portfolio and segue to a more conservative option. "A low-cost total stock market or S&P 500 fund which you look at about 10 years before you retire is my favorite idea. Then maybe switch to an inexpensive good balanced fund like Vanguard Wellington."

Baldingowl thinks people just starting out need to get a grip on the importance of asset allocation and reinvesting dividends. "What I think is a little harder to understand is the impact of dividend reinvestment and the choice of an appropriate portfolio mix to mitigate risk when choosing funds or stocks."

Posters were also generally enthusiastic about the virtues of taking full advantage of tax-sheltered investment vehicles, especially the built-in discipline that comes along with investing in a 401(k).

Dennygal advised, "Max out your tax-deferred investing options."

"The 401(k) plan did not exist when I started my work life," Dragonpat said. "If it had I would say: Put more money (at least 6% to get the whole match) in your 401(k)."

For Wartybliggins, an IRA is the essential starting point. "Open an IRA now even if you need to borrow to meet a minimum investment requirement and pay yourself first by feeding it regularly."

Evolence believes that Roth IRAs can make good sense for newbies. "Open a Roth IRA while you're young and poor--and paying lower taxes. Fund it at all costs."

Carman is a fan of doing both, starting with a 401(k) and then moving on to an IRA. "Start saving early and put aside the maximum funds allowable or available (without starving your family) at every opportunity. Once you max out your employer's plan . . . and still have more than you need to live on, open an IRA and try to max that out too. Even if you don't qualify for a deduction on the money, it will still appreciate free of taxes."

'Long-Term Investing Should Be Boring'
Posters also shared valuable all-purpose advice. Bruzer offered, "Never invest in anything that you don't understand, and always diversify. (I'm not as smart as Warren Buffett.)"

Retiredgary offered valuable wisdom on a number of important issues, including the virtues of being patient and avoiding speculation. "Don't hurry. If you miss one train, there will be another one. Keep your gambling money separate from your investing money."

Similarly big-picture was zorkl55, who wrote, "When times are good, don't be fooled into thinking that good times last forever; they don't. Times will get tough, and that's when your savings and investment plan will matter the most."

When it comes to monitoring, rforno believes that less is more. "Buy and monitor for a long term portfolio is appropriate. Long-term investing should be boring anyway. Obsession is the key to failure!"

An essential part of getting an investing plan up and running is gaining some basic knowledge about what you're doing. Thus, posters exhorted newbie investors to empower themselves with information. "Do independent research and educate yourself on investing," advised ColonelDan.

Sschullo, meanwhile, offered the contrarian viewpoint that some of the most important knowledge comes with experience--even if one makes a few mistakes along the way. To newbie investors this poster would advise. "Nothing! No, really. At the end of the day all the mistakes and dead ends in finances, personal life, and careers ended up as extremely valuable lessons on life."