5 Retirement Tips for Young Investors

Source: Thinkstock

1. Start now

Young investors see retirement as something that is a lifetime away, but they need to start preparing now. If you don’t believe me, just think back to your high school math class, when you learned about exponential functions that start out growing slowly and then skyrocket.

Money that you put away today will grow and compound for decades, and even just a few hundred dollars here or there can make a big different when it comes time to retire. If you give yourself 40 years to prepare and you anticipate growing your money at 8 percent per year, then you will end up with four times as much money as someone who puts away the same amount of money but who allows just 20 years. That’s a lot of money.

Starting early also gives you a cushion in case you make mistakes. Young investors have less experience, but if you spend money when you’re young and start investing for retirement when you’re 40, then your skill level will be akin to somebody who is just starting out. So start early and learn from your mistakes in order to become wealthy in your golden years.

2. Avoid mutual funds

Mutual funds are slowly going extinct, but investors still have trillions in these once-popular investment vehicles. Mutual funds take your money and give it to an expert to invest. This so-called expert typically doesn’t beat the market, but he or she will take your money trying to do so and make excuses when he or she doesn’t.

Mutual funds also have several hidden fees, such as trading and research, and it means that the fund’s performance has to amply outperform the market in order to be worthwhile. Some mutual funds are winners, but most aren’t.

3. Buy ETFs instead

ETFs are cheaper, and they take the bias out of a strategic approach to the market. They are also much cheaper than mutual funds because they typically don’t have a manager working full time: Management in most cases is akin to buying and selling securities. Pick funds that try to achieve some sort of blanket investment goal, such as a dividend aristocrat fund (i.e., a fund that only owns stocks in companies that have increased their dividends for 25 years running).

Take advantage of the fact that ETFs give you easy access to international stock markets that were previously unavailable to American investors. Foreign stocks have lagged American stocks. They often generate sales in regions that have faster growth than we have in the U.S. They are also are cheaper than U.S. stocks in most cases and pay larger dividends.

4. Slow and steady wins the race

Buying cheap, low-risk companies with slow yet sustainable growth may sound boring, but they can generate astronomical returns over your career. Just stick to companies that have large profit margins and wide economic moats, meaning that they have very little competition, if any. These companies can generate returns of 8 percent to 12 percent every year for decades, and this can make you rich if you hang on to your positions and don’t become suckered in by overvalued hot stocks that end in disaster nine times out of 10.

5. Own gold

Gold is not often considered a retirement asset because it doesn’t generate a profit or pay a dividend. But gold holds its value over long periods of time, and it protects you during periods of economic chaos. America has, on average, had a recession every four to six years, and so if you work for 40 years, chances are we will have seven to 10 recessions during that time frame. Some will be bad like, in 2008, and gold will protect you.

Right now, gold is undervalued and investors want nothing to do with it. They want to own stocks, which seem to climb on a daily basis. But these trends are not going to last forever. Gold is extremely attractive right now, and if you buy gold now, then in a few years, you will be able to exchange some of it in order to buy some of the stocks that you want to own now but which are historically expensive.

Disclosure: None.

More from Business Cheat Sheet: