I recently wrote an article in which I presented five tips that young people should keep in mind when preparing for retirement. These tips included:
- Be patient and wait for asset prices to come to levels that you find acceptable.
- Use short-term market noise in order to pick up quality long-term holdings on weakness.
- Buy assets that will perform well over the long run.
- Buy assets that will generate income later and don’t worry so much about income now.
- Diversify, but not too much.
Here, I provide some more tips that young investors should employ in preparing for retirement.
1. Save regularly
Decide in advance on an amount that you want to save out of each paycheck and budget accordingly. Then, take the money you have allotted for retirement and put it away even if you don’t plan on purchasing any stocks with it at the moment. This might be hard to do, especially since retirement might seem to be so far away and a couple hundred dollars a week might not seem like that big a deal, especially if there is something you want to buy now. The way I overcome this psychological barrier is to think about what that money will be worth after it has compounded returns for 30 years. So, for example, don’t think of $100 as $100. Think of it as $100 compounded 10 percent annually for 30 years. That’s $1,745!
2. Avoid mutual funds
Mutual funds have historically underperformed the market. They are also often very expensive. Mutual funds have an annual fee, or a commission that is equal to a percentage of your holdings. If you take that 10 percent return from the first tip and hand over 1.5 percent per year to a fund manager, your $1,745 shrinks to $1,156! Furthermore, you might have to pay a fee to get your money into the fund — a “front load” — or you might have to pay a fee to get your money out of the fund — a “back load.”
Finally, you have to pay other fees. For instance when a mutual fund buys or sells a security you get to pay for it. These costs significantly diminish your long term returns. Therefore, unless there is a fund manager you really like, you’re better off taking the time to research and choose your own holdings.
3. Use ETFs
While I don’t like mutual funds, I do like ETFs. ETFs tend to be far less expensive than mutual funds. They also allow retail investors to get exposure to certain types of assets and particular strategies that they otherwise cannot access. For instance, I recently purchased the iShares MSCI Turkey Investable Market ETF (NYSEARCA:TUR) in order to play the long term growth in the Turkish economy. Accessing the Turkish stock market would otherwise be very difficult and I would either have to go overseas and purchase Turkish stocks locally or I would have to buy various American Depositary Receipts (ADRs) and illiquid OTC stocks, and this is very inconvenient.
4. Invest in assets that are in secular uptrends
When choosing your investments for retirement, you want to buy assets that will benefit from secular uptrends that are going to play out regardless of the strength of the economy. For example, there is an increase in the use of nuclear power. More and more, nuclear reactors are being planned and constructed, and we can be fairly certain that this trend will continue unabated. Therefore, you might want to add shares of uranium producer Cameco (NYSE:CCJ) to your retirement portfolio. Cameco is a low cost uranium producer that has enough uranium to produce for many years, and while the stock has been weak over the past few years, it should be strong going forward. This is just one example and there are many others that can help you achieve outsized returns in the coming decades.
5. Make your own investment decisions
There is certainly nothing wrong with taking the advice of a financial advisor or searching for ideas on Wall Street Cheat Sheet in addition to another source for financial news and analysis, but you should do your own due diligence when choosing investments. Nobody cares more about your money than you do, and you do yourself a great disservice when you simply hand your money over to a financial advisor or when you read an article and use it to justify a particular investment without additional research. You may mess up and make a lousy investment, but you’re young and you can afford to make mistakes, especially if you learn from them.
Disclosure: Ben is long Cameco and the iShares Turkey Investable Market ETF.