Invest Gen Y

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Dear Young Person, you’re young.  Really young.  So invest a good chunk of your assets in stocks.  It’s the only way to beat inflation over the long term and that’s what you want to do.  You want to save as much money as you can, beat inflation, and retire on a coast that is far from the Polar Vortex.

So you want at least 50% in stocks and probably more like 70% or even more depending on your risk appetite.  This can be scary since stocks fluctuate and can have periods of downward spiral action.  But over time, the stock market outperforms.  So it makes sense to pick a number that you’re comfortable with, invest that amount in the stock market and keep yourself at that percentage and never touch it until you’re old.  Of course you might have to use it at some point, but as long as you have at least a 10-year horizon, take some risk.  I’ll give you an example of why it is okay.

Scenario 1:  You buy a share of stock for $100 and by the end of 12 months, it’s worth only $50.  You get upset, sell it and put it into a money market account with an annual interst rate of 2%.  You add another $100 to your account because you’re saving $100 per year.  At the end of 2 years you have $153.

Scenario 2:  You buy a share of stock for $100 and by the end of 12 months, it’s worth only $50.  You don’t sell it, but buy 2 more shares of stock with the $100 you add to savings.  Now you have 3 shares of stock.  Say it goes up 10%.  At the end of year two you’ll have $165.  That’s $12 more than in scenario #1.

And you might be thinking it could keep going down or that it will go up more than 10%.  And you’re right.  That’s why it’s important to have a longer time horizon when you are dealing with stock investing.  Historically, stocks have averaged a return of 10% a year over longer periods of time.  That means you would double your money every 7 years.  And if the average moves to 8%, then you’ll double your money every 10 years.

However, the stock market has been really flying this past year, so it’s a good idea to buy into the market over the course of a year.  This way you’re averaging the total cost of the purchase (like scenario 2 above).  If you want a total of $5,000 in the stock market, you would put $3,500 in a domestic equity ETF and $1,500 in an international equity ETF and buy into those over the course of a year.  You could make the purchases quarterly to save on commissions.

In your Roth, you want to have dividend paying stocks and high yield bonds.  All that dividend income and all those high coupon payments go untaxed until you retire in a gazillion years, It’s great!  Here are some funds that would work – check them out.

Disclaimer:  These are ideas, not instructions to buy.

ETF ~ Value Funds holding large company stocks that pay a dividend.  The price is as of 1/28/14 and the returns are as of 12/31/13

Symbol	Name	Price/shr	Yield	Expense	1-yr return	5 yr	5 yr rank	risk category	MS rating
FVD	First Tr Value Line Div Index Fund	20.81	2.28%	0.70%	26.8	16.3	Bottom 25%	Low	5 stars
CVY	Guggenheim Multi-Asset Inc ETF	24.30	5.36	0.82%	19.5	20.8	Top 25%	Avg	4 stars
DEF	Guggenheim Defensive Equity ETF	33.18	2.30	0.78%	22.4	16.7	Top 50%	Low	4 stars
VYM	Vanguard High Div Yld Index ETF	60.17	2.81	0.10%	30.0	16.8	Top 50%	Mod/Low	4 stars
	S&P 500 Index				32.4	17.9
	Large Value – Morningstart Cat				30.0	17.3

ETF ~ High Yield Bond Funds – higher risk, higher yield.  The price is as of 1/28/14 and the returns are as of 12/31/13

Symbol	Name	Price/shr	Yield	Expense	1-yr return	5 yr	5 yr rank	risk category	MS rating
PHB	PowerShares HY Corp BD Port	19.23	4.62	0.50%	4.4	10.7	Bottom 25	Mod/Low	2 stars
BSJI	Guggenheim Bullet 2018 HY Copr	27.11	4.66	0.42	8.2	na	na	na	na
	High Yield Morningstart Cat				6.2	14.8
	Barclays US Agg Bd TR USD				-2.0	4.4

There is a much better selection of ETF’s that represent the stock market.  Below are some Mutual Funds ~ High Yield Fixed Income.  The NAV is as of 1/27/14 and the returns are as of 12/31/13

Symbol	Name	NAV	Min Inv-Std	Min Inv-IRA	Subs Inv	Yield	Net Expense	1-yr return	5 yr	risk category
PONDX	Pimco Inc Fd	12.35	2500	1000	500	5.18	0.82	4.55	14.04	Avg
JNBAX	JPMorgan Inc Bldr	10.14	2500	1000	500	4.34	0.76	4.27	13.85	High/Mod
STHTX	Ridgeworth High Inc	7.14	2500	1000	500	5.96	0.79	7.29	19.18	High Mod
	Category Average							5.71	15.94
	Barclays US Credit							-2.01	7.89

Source: Charles Schwab Exchange Traded Funds Report Card

Again, these are just ideas.  You should talk to your representative at the firm that is in charge of your IRA.

More homework: check these funds out.  Learn how to search for funds through Schwab or Fidelity or wherever you have your money.  Don’t pay Load fees and look for low expense ratios (mutual funds).  Index funds are great – diversify!  More on all this stuff soon.

Your true friend in asset management,

Connie

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