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February, 2012


Just starting out with saving and investing? Here is a three-phase plan for how to do it.

I. Fundamentals - I am no expert myself but have heard from financial professionals advice such as the following to assure fiduciary integrity prior to serious long-term investing:

  • Eliminate (other than home mortgage) debts.

  • Exclude from the above, however, regular additions to a 401k or related plan, when the employer is matching some portion of one's contributions.

  • Accrue sufficient reserves (money market funds, Certificates of Deposit, low risk and short-term bonds, cash, etc.) to cover expenses for several months (in case of medical emergency, job loss, or other contingencies).

  • Put away funds for anticipated expenses (vehicle, house down payment, and so on).

  • Then one would also do well to start with mutual funds. Purchase of their shares should generally be limited to holdings one will keep for many years.

  • Do not consider individual stocks or closed-end funds unless one has the time, ability, and inclination to do a lot of research and make one's own selections.

  • There are good stock mutual funds to consider, both from among those which carry a load (charge a commission at the purchase and/or sale of shares) and among no-load funds.

II. Education - While it might be better if financial planning were a significant part of the curriculum in high school or, at least, in undergrad college programs, the fact is that most of us do without the basics of money management. In my view, this is a deficiency that it is well to overcome as early as practicable. If one's regular coursework in higher education does not already include, as a minimum, how to create and stick with a budget, how to value stocks and/or pick good mutual funds consistent with one's objectives, and how to manage a portfolio, then it is best to seek convenient ways to fill in these gaps in one's level of knowledge. Here are a few tips along these lines:
  • Motley Fool has numerous discussion boards and other informational offerings about budgeting, financial planning, stock selection, etc.

  • The American Association of Individual Investors (AAII) also has good investment education resources.

  • If one has a chance, it can be helpful to get into an investment club. One might even start one if none are available that can be easily joined.

  • Investment or financial planning workshops are another fine way to augment one's knowledge in this sphere. Some are offered for free by brokerages or other financial institutions. Others, such as through AAII, can be participated in at reasonable prices.

  • Reading books, magazines, newspapers, and online articles can be vital to enhancing one's knowledge base in this arena. Here are my top investment related tomes:

    1. The Intelligent Investor, by Benjamin Graham, revised edition, updated with commentary by Jason Zweig (Collins Business Essentials Edition, 2006);

    2. The Money Masters, by John Train;

    3. The Essential Buffett, by Robert Hagstrom;

    4. The Great Crash 1929, by John Kenneth Galbraith;

    5. Value Investing from Graham to Buffett and Beyond, by Greenwald, Sonkin, and Van Biema;

    6. Value Investing Made Easy, by Janet Lowe.

III. Wealth Building -

  • When practical, purchase a reasonably (or even bargain) priced and modest home.

  • Also when possible within one's budget, pay cash for one's autos (seeking slightly used vehicles and looking for deals that may be better due to upfront payments).

  • Save and invest a significant portion of one's income each month, a minimum of 10% (more if in a two-earner household).

    James Stewart and Paulette Goddard in "Pot o' Gold" (Wikipedia)

  • After covering precautionary fundamentals, as noted above, decide on a portion of one's liquid assets to be invested in bond mutual funds or closed-end funds, and then carry out that plan. Candidate financial instruments might include: Vanguard Intermediate-Term Bond Index Fund (VBIIX) plus BIV, TEI, and GIM.

  • Decide what percentage of liquid assets to put into stock (equity) mutual funds or closed-end funds, or to invest directly in stocks, and gradually purchase appropriate shares until this allocation level has been achieved.

  • Besides 401K and similar plans (as noted in Fundamentals), invest as much as possible (without debt) in Roth or regular Individual Retirement Accounts (IRAs).

  • When at the point of beginning to set aside assets for longer term objectives, a Roth IRA can be worthwhile, if one qualifies.

  • Continue to add to one's bond and stock holdings, but rebalance the portfolio periodically to assure one's preferred allocations are maintained within a reasonable tolerance, i.e. plus or minus 10%.

  • Continue to acquire new investment knowledge and skills, and with flexibility adjust one's approach as indicated to maximize returns while minimizing overall risk and taxes.

  • Remember, however, that the best investment strategies can involve the least activity. Higher average returns often go hand-in-hand with lower trading frequency and fewer assets held, so long as these have been selected with great care.

  • Allow the dual effects of dollar-cost-averaging and compound annual returns to work their magic. If starting young, one day you too may be "the millionaire next door."*

*By my calculations, a couple, each of whom starts with $10,000 invested in a taxable account and $5000 in an IRA, each adding $2000 annually to the taxable account and just $150 a month to the IRA, leaving their funds invested and earning an average return per year of 8%, can reasonably expect to be a millionaire household in about 30 years. (Of course, if one does not invest a little more than that, for instance in the peak earning years, the impact of inflation might be severe. With a 3% average annual inflation rate, that million dollars might have the buying power of only $420,000 by 2042.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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