5 Retirement Tips for Young Investors
As a young investor in my 20s, I look at some of the staggering statistics that show how people in their 40s, 50s, and 60s are not even close to prepared for retirement. That leads me to the conclusion that now is a good time to start preparing. In so doing, I have come up with five tips that lead me to believe that I will be able to retire comfortably in 30 to 35 years.
1. Be patient
If you’re looking to make multi-decade investments that you hope will be paying dividends in your golden years, there’s no need to deploy your cash immediately. There are always going to be pullbacks, even in the best long-term investments. Make a list of stocks or exchange-traded funds that you want to own (more on choosing these in a moment) and pick entry points. For instance, pick a list of 50 stocks or ETFs that you want to hold and tell yourself that you will take positions in them if they correct by 20 percent. While you may not be able to buy all of the assets you want at the prices you want to pay, chances are you’ll be able to buy some of them, especially if your list is big enough. If you are especially interested in owning a particular security that just doesn’t seem to want to go down, then take a half of a position, or even a third of a position. If it comes down you can buy more, and if it doesn’t, then you own some. But keep in mind that every asset has significant corrections, and when you’re buying for the long run, you will do yourself a huge favor by buying on these corrections.
2. Use short-term market noise to pick up quality long-term holdings
Bad earnings reports, geopolitical tension, and fears of regulation tend to move stocks quickly to the downside. But more often than not this amounts to short-term noise. For instance, we have seen shares of Visa (NYSE:V) and Mastercard (NYSE:MA) dive on headlines that stricter regulations would hit their profits. This happened toward the end of 2011, and the stocks fell 10 percent very quickly. This turned out to be a phenomenal time to buy these stocks. The BP (NYSE:BP) oil spill was another example of an event that drove the shares of a stock substantially lower, but longer term, this turned out to be an excellent buying opportunity. Had you purchased BP shares at the low of $26 per share, you would have a 79 percent gain and would be earning more than 8 percent on your initial investment.
3. Buy assets that will perform well over the long run
Don’t worry about the short term. It doesn’t matter what your investment is going to do in the next few quarters if you are retiring in 30 years. Therefore, you want to look out several decades and try to determine how the world will look and which investments, purchased today, will be the beneficiaries. This advice goes well with the first two points I make. Take Chinese stocks, for instance. Chinese stocks are in a long-term uptrend going back 15 years or so, but over the past few years they have been weak. While China is facing near-term issues such as a real estate bubble and a decelerating economy, longer-term Chinese citizens are going to be wealthier and more productive than they are now. Given this, investors might consider taking a position in China Mobile (NYSE:CHL), which is trending downwards, but which is essentially the AT&T (NYSE:T) of China. It trades at just 8-times earnings and at just 5-times earnings with the cash backed out. These are the sorts of opportunities that stand out to me when looking for retirement stocks.
4. Your focus is on income later, not on income now
Investors typically want dividend stocks in their retirement portfolios. That’s fine if you’re near retirement, but remember that any money that is paid out as a dividend is not reinvested into the business. The same goes for share buybacks. While I wouldn’t avoid an investment simply because it pays a dividend, I want to focus on companies that are investing in their businesses. These are companies that are going to be paying dividends years from now, when you need them.
5. Diversify, but not too much
You should always own assets in various sorts of companies that are going to earn money in different ways. But at the same time, the more you diversify, the less you know about your investments. As Warren Buffett said, “Put all of your eggs in one basket, but watch that basket very closely.” Diversify to the point that you won’t lose most of your assets if the market moves against you, but at the same time, if you really like a sector or a country, then put 30 percent to 50 percent of your money there.