Advice for a Young Investor

Posted by: Ben Steverman on December 18, 2008

I have a story up now, “Personal Finance: 20 Dos & Don’ts for 2009.” Reader “Alex” responded to my tips with a great question:

I’m 22, working, and have the option to start a 401k. Seems tempting, but what about saving that 3-5K/year towards a down payment on property or other entrepreneurial paths. I’ve seen my parents’ 401k disappear. Why shouldn’t such a drop happen again to stocks by the time I’m 65? Yes, historically the stock market has always grown, but why risk it. Property in the right location seems like a less volatile investment, and would require only 5-10 years of saving. Any thoughts?

Do you have any advice to Alex?

One reader, Justin, points out that stocks have provided better returns than real estate historically. Another responded to his comment by pointing him to the story’s tips number 10, 19 and 20. Those are:
“Don’t give up on stocks.”
“Do make sure safe investments are actually safe.”
“Don’t take more risk than you can handle.”

My thoughts: I think Alex should definitely start a 401(k) if his employer is matching contributions. Doing otherwise is leaving money on the table. Also, I think — or at least I hope — that Alex’s fears about his 401(k) contributions “disappearing” are unfounded. By investing now, Alex will have 33 years (before he hits 65) to build wealth and ride out any storms, even if this crisis persists or another serious one comes along.

However, at 22, Alex should have other priorities than retirement. Like getting an education, starting a family or a business, buying a home, and even having fun. Investing some extra money now will make him richer long-term, but I wouldn’t advocate a 22-year-old sacrifice his dreams and live on the cheap just so he can retire a little earlier.

Agree? Disagree?

Reader Comments

Alex

December 22, 2008 12:02 PM

Ben, thanks for starting this blog based on my question. I'm sure other readers will benefit from it.
Point well taken about not planning for retirement at age 22 and actually living.
Speaking of school/career only, and not friends/hobbies/etc: having just graduated college is an interesting time because every year prior to this has been dominated by making sure that what is currently taking place (i.e. school, grades, test scores, etc) is benefiting the future (i.e. get these grades in high school so you can get into this college, take an extra class this semester to free up a spot next semester for an internship, etc, etc, future, future.) But now, working, and being stable enough leaves some time to figure out/enjoy life without having to constantly be planning for the future, is very nice.

This blog is a good opportunity for people my age as well as those with more experience to share some thoughts.

Robin

December 29, 2008 9:59 PM

I find myself in a similar situation, Alex. My personal views are that we young people are in a very good position to take advantage of some inevitable growth, both in the long and short term.

Nonetheless, diversification will be important for us and our peers in these uncertain times. I'm going to split my investment contribution directive by percentage into several vehicles.

20% retirement (half roth and half traditional not sure about the tax ramifications here)

30% stocks (for the experience primarily to explore while I am young and able to recover loses)

50% index funds

It makes sense to me as a young person to invest heavily in short term opportunities with a healthy concern for the future.

Zeke

January 7, 2009 3:48 PM

I agree with Robin in that it may be a better idea to diversify our portfolios instead of only having one investment. I am also in my 20's and will have paid of my home before 09 is over but now is really the time to invest in stocks like DRYS. Making a killing on this one. Alex I recommend you contribute to the 401(k) and don't count on social security being around 43 yrs from now. If you have $500 extra in the bank to play around with open an investment account (Scottade, etc.) and invest in some stocks. Believe me pretty soon you'll be hooked and you can start adding to it over time. One suggestion Robin if I may, invest more in stocks and less in index funds. Stocks are low!!

Daddy Paul

December 16, 2009 6:40 PM

The 401K will grow if properly invested.
Many people who could be taking advantage of the savers tax credit are not and that is a shame.
http://hubpages.com/hub/saverstaxcredit

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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