College graduation for many young Americans is right around the corner. Along with starting a first job and maybe learning to navigate in a new city, starting to stash cash in an investment account now may be one of the most important financial moves new grads can make.
It's important to start forming a good investing habit, so it becomes part of your adult financial life. "The earlier you begin investing, the more likely you are to stay the course," says David Geibel, senior vice president at Girard Partners, a wealth management company in King of Prussia, Pennsylvania.
While you might have student debt to pay off, other financial obligations may be minimal. "Most college grads are actually at the perfect time in their lives to invest, because they are healthy and do not have any family obligations. That means there are less unpredictable out-of-pocket expenses that may scuttle your investment plans," says Henry To, partner at CB Capital Partners in Newport Beach, California.
Putting off investing can have huge consequenses as would-be investors age, To says. "If you start investing at age 25 and put away $200 every month into a tax-deferred retirement account such as an IRA or 401(k), you would accrue more than half a million dollars by age 65, assuming an annual investment return of 7 percent. Conversely, if you do not start investing until 10 years later, when you turn 35, you would only accrue half of that," he says.
Financial advisors suggest investing as much of your disposable income as you can. Ten percent is a common investing goal. "But, if someone has high-interest debt, etc. they should be aggressively paying down debt primarily and putting a smaller amount into savings. If a new grad can ultimately put 5 to 10 percent of their salary in a company 401(k), that's a great start," Geibel says.
Be more aggressive on the savings amount if you can. "I suggest a minimum of 15 to 18 percent of salary for retirement. This may sound high, but young people today will not be able to fall back on pensions and it is likely that their Social Security benefits will be reduced as well. What's more, young people today are likely to live longer, so they'll need to save more to cover the costs," says Ann Minnium, certified financial planner and founder of Concierge Financial Planning in Scotch Plains, New Jersey.
The best vehicle for investing for adults is a tax-deferred account where taxes on your capital gains could be deferred until you retire and start withdrawing funds from your accounts, To says. "I would not suggest opening a regular stock account because all your gains would be taxed in the year that you sell your investments, which detract substantially from your investment gains," To says.
And if your employer offers a 401(k) or or other retirement savings plan, use it. "The funds will be automatically deducted, so you won't have a chance to spend them by mistake. Most employers also offer some sort of savings match. Try to contribute enough to your 401(k) to maximize the free money," Minnium says. Also, "Many companies offer employees the option of investing in traditional 401(k) or a Roth 401(k). If you are in a low tax bracket now and expect to be in a higher tax bracket in the future I suggest you consider going for the Roth option."
Here's a look at five investments for young adults to consider now.
Target-date mutual funds. "If you don't know anything about investing and don't want to learn, you can opt to invest your retirement savings in a target date mutual fund for the year you think you may retire. These are all in one diversified balanced funds with asset allocation appropriate for your time horizon and are offered by most retirement plans and many mutual fund companies," Minnium says.
Diversified stock mutual funds or exchanged-traded funds. "For recent college grads to pick a number of individual stocks is difficult," Geibel says. He points to two funds that offer diversity: Vanguard Total Stock Market Index Fund (VTSMX) and Vanguard 500 Index Fund (VFINX).
Wells Fargo & Co. (WFC) provides retail, commercial and corporate banking services in the U.S. and internationally. "The company's management has been very conservative over time. The bank still reported a profit in 2009 and was one of the world's best-performing banks during the 2007-2009 global financial crisis. I also like buying bank stocks in the current economic cycle as I expect long-term interest rates to rise for the rest of 2016 as fears of a global economic slowdown and ever-declining oil prices subside," To says.
John Wiley & Sons (JW.A, JW.B). Most college grads will recognize this company as a respected and prolific book publisher in the education industry. "What they do not know is that three-quarters of the firm's profits are generated by its research business unit, which caters to the global academic journal industry by selling high-priced, must-have subscriptions to professors, researchers and educators. The global academic journal industry is highly insulated from new competition and has the ability to charge high subscription fees on an ongoing basis. Because of this, John Wiley's earnings power are predictable and sustainable in the long-run. No new technology or company would be able to remove John Wiley from its perch as a leader in the global academic journal industry," To says.
Orbital ATK (OA) designs, builds and manufactures space, defense and aviation-related systems worldwide. "Orbital ATK is in a perfect position to take advantage of the ongoing increase in U.S. military hardware spending," To says. "It is a leader especially in industries such as satellites, aerospace composite-based structures and precision weapons, all of which have long-term high-growth trajectories. It has worked very well with NASA for the delivery of cargo to the International Space Station since 2013 and will be a very important commercial partner for NASA for the planned increase in U.S. space-exploration and defense related spending over the next decade."
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