All Graduates Need Apply!
I know - he's only 14 - but I so want him to have the right tools to learn financial responsibility and the importance of investing at an early age. I began investment accounts for him and his younger sister shortly after their births. Each year, when we receive the annual reports for their investments, I attempt to discuss the companies with them. Of course, the only one in which they have any interest is McDonald's - and only then, because of the coupons for free food in the annual report!
Nonetheless, I am not deterred! The poor kids are constantly subjected to "Aunt Nancy's Long-Term Financial Plan," but they are good sports and humor me.
I didn't have to think too long and hard about possible graduation gifts, of course. More shares, it is! But in the process of selecting the shares to purchase for him, it occurred to me that today's graduates - whether from high school or college - are in dire need of some solid advice to help them begin their investing life.
So, if you have a graduate near and dear to your heart, I hope you will share this article.
Where to Start
Hopefully, your graduate has a head start, with accounts set up by some member of his family. If so, he has one leg up, but if not, now's the time to begin!
Before he can truly maximize his investment plan, the first item on his agenda should be a basic lesson in finance, or how to handle his newfound income. I hope that your graduate has by now learned something about the value of money, but if not, a frank discussion is in order, including:
- Goal-setting
- How to build and stick to a budget
- The temptation of debt and how to avoid it
- The beauty of steady investing and compounding
Once the basics are down, it's time to tackle investing! The easiest and smartest investment for a new graduate with his first job is to take advantage of his employer's 401(k) plan. If your graduate's employer offers this benefit, I encourage you to advise him to run, not walk, to the nearest sign-up window! He will most likely have an option to enroll in the plan sometime within or shortly after his one-year anniversary on the job. And since most employers will match at least part of his contribution, that's "money-for-free," an investment in his future that he will not want to pass up. For comprehensive information on 401(k) plans, please see my August 9, and August 15, 2006, Financially Fit articles.
Your graduate should have a basic understanding of the types of investments generally available to 401(k) participants. The above articles offer substantial details about utilizing mutual funds for 401(k) programs. And recently, 401(k) administrators have been adding exchange-traded funds (ETFs) as plan options. For more information about those investments, please see my, August 1, 2006, Financially Fit article.
Next, once your graduate maximizes his 401(k) contributions (or if he's not yet eligible for his 401(k)), it's time for him to open his own individual retirement plan (IRA). At this early stage of his career, he likely will meet the earnings requirements for pre-tax contributions, so that will be more money in his pocket - or in his account, in this case. For a comprehensive look at IRA options, please refer back to my Financially Fit October 24, and March 13, 2007, articles.
Non-Retirement Investing Options
Once your graduate's contributions to his retirement accounts are maximized (and if he hasn't spent his extra money on cars, sound systems or video games!), his next step should be to consider an easy, scheduled investment option, like a dividend reinvestment plan (DRIP). For a nominal fee, your graduate can enroll in a DRIP, which will enable him to invest small sums to buy fractional shares of companies. More than 1,500 of these plans are currently available. For more information, please refer to my July 18, 2006, Financially Fit article, which details several paths to DRIP investing.
Your graduate may want to consider another route to investing with small sums - joining an investment club. By pooling his funds with other investor friends, he will soon see his investment account growing by leaps and bounds. Most investment clubs are associated with the NAIC, whose website is www.better-investing.org. One of my first investing forays was through an all-women investing club that a friend and I started. By the time I left it (10 years later), these women had an investment portfolio of almost one-half a million dollars! And in addition to growing his investment dollars, the NAIC clubs offer a tremendous wealth of investing education.
Of course, your graduate may choose to dive right in and begin purchasing stocks from a broker. If that's the case, please make sure that he receives a copy of our special report, The Investor's Guide to Choosing an Online Broker, available at http://www.brokeradviser.com/.
A few more suggestions
These pages are too short to enable me to detail a comprehensive investing plan for your graduate, but let me close with a few more important recommendations:
- Diversification is his friend. No matter how little money your graduate invests, please help him make sure that his portfolio is diversified in terms of industry, company size, and risk profile.
- Greed is not his friend. As Rome wasn't built in a day, neither will his investment riches come overnight. Careful, steady investing in solid, fundamentally strong companies is the key to successful investing.
- Holding on to a sinking ship is futile. Help your graduate determine when his investments have outlived their usefulness.
- A good investment strategy includes steady monitoring of his portfolio. Many websites are available for portfolio monitoring, but one I especially like is http://finance.yahoo.com
I hope this information will help speed your graduate along the road to investment success.
Happy Investing!
About the Author
Nancy Zambell, Contributing Editor to BrokerAdviser.com's Financially Fit, has enjoyed a diversified career in the financial services industry.
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