Introduction
A brilliant college professor at wits’ end about investing first planted the seed for this book a few years ago.
Despite his accomplishments in the social sciences at St. Thomas University in St. Paul, Minnesota, he didn’t have a clue about how to invest his money. He was in his 40s, had been saving for retirement for years, and didn’t like the look of his future.
“There will be no golden years for me,” he told me when he called my newspaper office.
This man had diplomas on his office wall and accolades for research in his field. But like the great majority of Americans, he felt like a dunce when it came to his money.
Every time he read a headline about the unstable future of Social Security and Medicare, he imagined himself eating cat food in retirement. He had just read an article that said people would need $1 million to provide $40,000 a year for living expenses after they retire. “Getting there is hopeless!” he said.
Actually, he wasn’t in the bad shape he imagined. He had amassed almost $200,000 the hard way—socking away large amounts from his paycheck into a savings account. It was a flawed approach. He was earning virtually no interest. If he kept that up, I told him, he would never get anywhere.
Fortunately, he had options, and they wouldn’t be difficult. They’re the same options available to everyone. If he just invested money in a smart mixture of mutual funds in an IRA investment account, fed his retirement plan at work on payday, and kept stashing money regularly into the appropriate stock and bond mutual funds, he’d still have time to transform his lethargic, go-nowhere savings into the $1 million he wanted. He could actually save less than he had been saving and still make it to $1 million by investing with a little finesse.
During my years as a personal finance columnist, I have received calls from thousands of people asking for help with investing. They are surprisingly alike—rich and poor, young and old, highly educated and less educated. Yet they are all wresting with the same basic confusion as the professor.
Overwhelmed with the responsibilities of building careers, putting food on the table, or taking kids to music lessons and soccer practices, they have little time or money to devote to investing.
And they feel inept. They put money into a savings account, and it never amounts to anything. They put money into a mutual fund, and it evaporates through some mysterious process known as the stock market. They try to listen to financial experts, but they hear a language that seems to come from a foreign country. They consider investing, but they get those school-day pangs of math phobia. So they procrastinate and ruminate or defer to friends, spouses, or even incompetent financial advisers who know little more than they do.
When they call me for help, they think they are unique. Whether they’re millionaires checking on the stocks their brokers picked or 21-year-olds trying to make sense of their first 401(k) at work, they are sheepish. They confess their ignorance to me and think they should know more than they do about investing in general or some aspect of it.
They think that somehow—maybe through osmosis—they are supposed to know how to handle their money. In fact, the majority of Americans do not.
In a 2004 Harris Poll of Americans, 76 percent said they didn’t think people could handle private investing accounts if the federal government offered them for Social Security money. Since the horrifying financial crisis and market crash of 2008–2009, polls have shown that many individuals are so traumatized that they have stopped putting money into retirement savings plans at work. Others are shooting themselves in the foot with knee-jerk investing and setting themselves up for more losses and a disaster in their retirement years.
It doesn’t have to be this way. The concepts involved in investing are not difficult. But the insider language of the financial services industry has made investing seem difficult. And neither schools nor employers have done much to help Americans understand the few basics they need and can handle.
People feel paralyzed. Stock market news sounds like chatter. People let valuable years pass by without starting to save in 401(k) plans or IRAs. Others invest but repeatedly commit the same mistakes, choosing mutual funds that were wrong for them or letting the stock market wipe out a chunk of savings they worked so hard to build in the first place.
If people get beyond the mystery language the financial world tosses at them, the concepts are simple. The average person can make them work with less time than they devote to planning an annual vacation.
And if you’re nervous about math, relax. You need nothing more than fourth-grade arithmetic. In fact, with the free Internet calculators that I help you find and use, you don’t even need to do any math.
I hate gimmicky books. And this is not one. I’m not going to promise to make you a millionaire. But I am going to assure you that if you start investing as little as $20 a week early in life, use a few basic investing concepts, and follow the steps I lay out in this book, an ordinary American can accumulate $1 million for retirement without living like a pauper or winning the lottery. If you missed out early in life, knowing just a few techniques that financial planners use will help you catch up.
All the conversations I have had with people like you tell me that, when you finish this book, you want to be smart, right, and fast about using simple ways to invest money. This book is designed to give you exactly that. I’ve listened to the investing messes people get themselves into and the confusion that thwarts their good intentions, and I’ve written this book to spare you the grief and give you easy strategies that work.
Too many books, articles, and workplace 401(k) instructions start you in the middle of the investing process. So you never get it, no matter how hard you try.
It’s comparable to telling people not to get hit by cars when crossing a street but failing to tell them that a red light means “stop” and a green light means “go.”
Somewhere along the way, someone taught you to recognize the lights, so you know how to take care of yourself in traffic. Now you are going to know how to take care of yourself as an investor, too. And as you step off the curb, you should feel comfortable, not worried.
Whether you are 15 and trying to figure out where to invest summer job money or 55 and coming up short for retirement, this book will help you. In easy language, I’m going to tell you what financial planners know so that you can think like they do instead of feeling like a foolish outcast from a complex secret society. But I don’t bog you down with theory and rules. I just explain the gibberish and tell you how to apply it so that you can make wise, fast investing decisions yourself.
This is not complicated. You will find it reassuring. You will carry solid investing concepts in your brain from now on so that they become common sense—like stopping at red lights and driving through green ones, with barely a second thought.
How to Use This Book
Here’s how to navigate this book.
I’ve organized this book based on the way people seem to think—step-by-step through the investing process, with everything explained simply. I start with your basic questions about how much money you will need by the time you retire and why: Is it $50,000 or $1 million? Without that information, you can delude yourself or worry needlessly. I don’t want you to do either. I want you to have the facts so that you can take control.
Chapter 2, “Know What You’ll Need,” should be eye-opening for you as you contemplate your future and how to get there through investing. If you are in your 20s, you can move through Chapter 2 quickly to get a flavor for where investing is supposed to carry you. Whatever you do, don’t skip the section on compounding. It’s vital. It tells you how to apply magic to your money so that nickels and dimes turn into hundreds and thousands.
If you are older, you might wish you’d known how to harness that magical power earlier, but go for it now while you can still turn hundreds into thousands. Also, if you are approaching 35 or are older, spend some time in Chapter 2 and run the easy calculators I suggest so that, in ten minutes, you will know whether you are headed to the retirement you want or need to invest smarter. If you are approaching 50, running these calculations is essential so that you can catch up for lost time.
In Chapters 3, “Savings on Steroids: Use a 401(k) and an IRA,” and 4, “An IRA: Every American’s Treasure Trove,” I start giving you the investing strategies you need to begin making a major difference with your money. I don’t want you to suffer like the professor, pulling painful amounts of money out of your paycheck and getting nowhere.
If you’ve wondered what to do about a 401(k) or 403(b) at work, I answer every question you’ve ever had so that you harness the power of these money-making gizmos and transform pocket change into thousands. I do the same with IRAs, another tremendous money grower.
If you’ve maxed out all of these, I’ll tell you what to do next. And if you have only a little money and are trying to figure out whether you should fund college for the kids or your retirement fund first, advice is on the way.
Then it’s on to the stock market because you must invest in stocks and bonds and know how to do it right. If you’ve never invested a cent, you will find it fascinating to understand how stocks move up and down, and why, and what mutual fund managers do to try to make your money grow. If you’ve been investing for a while and mutual funds seem to act in mysterious ways, eating your money instead of growing it, I put an end to that.
I know that some people feel betrayed by Wall Street and misled by investment professionals. Too many empty assurances and stock market cheerleaders misled people in the financial crisis. Too many short-sighted financial advisers lulled individuals into thinking that stocks were safer than they are. I am not a stock market cheerleader.
Instead, in Chapter 6, “Why the Stock Market Isn’t a Roulette Wheel,” I unveil the Jekyll-and-Hyde nature of the stock market. Then in subsequent chapters, I show you how to survive and thrive no matter how cruel the stock market becomes.
In Chapters 8, “Making Sense of Wacky Mutual Fund Names,” and 9, “Know Your Mutual Fund Manager’s Job,” I decipher the wacky names you see on mutual funds so you know what to pick and why. You can read over Chapter 9 quickly at first, but you’ll want to come back to it whenever you have a mutual fund choice to make for a 401(k) or another retirement fund. For IRAs, some specific fund names in Chapters 9 and 13, “Index Funds: Get What You Pay For,” will help.
Ultimately, I teach you to mix and match the right funds so that they do no harm and give your money a good jolt. Chapters 10, “The Only Way That Works: Asset Allocation,” and 11, “Do This,” keep you from running in front of oncoming traffic. Chapter 11 is like a paint-by-number chapter for mutual funds, or a cookbook with easy-to-follow recipes. It helps keep you from using too much of one ingredient and not enough of another.
When you arrive at Chapters 13 and 14, “Simple Does It: No-Brainer Investing with Target-Date Funds,” you will be ready to take some shortcuts with your money. You might wonder why I didn’t start there. People destroy thousands of dollars by using shortcuts in the wrong way because they didn’t understand the stock market or mutual funds at the outset. With shortcuts, you can make money easily, but only if you don’t commit the mistakes the earlier chapters help you avoid.
This book is all about making money and keeping the money you make. So learn the logic and basics of investing first, and then head to the shortcuts if you want.
Finally, Chapter 15, “Do You Need a Financial Adviser?” helps you find reliable advice if you think you need it. Some people go to advisers as a first step, an easy way out. That would be fine if all financial consultants were capable and interested in people like you. Unfortunately, too many aren’t. They can’t put food on their own tables if they spend time telling you how to invest a couple of thousand dollars in a retirement fund at work.
So get informed about both investing and picking qualified advisers. Then if you seek help, you will be the type of client that good financial planners say they like best: informed, smart, not a coward, and not a daredevil.
Jump right in—no more thrashing about in the dark, no more second-guessing. You are about to become a competent, confident investor.