Advice for a Young Investor
I have a story up now, “Personal Finance: 20 Dos & Don’ts for 2009.” Reader “Alex” responded to my tips with a great question:
I’m 22, working, and have the option to start a 401k. Seems tempting, but what about saving that 3-5K/year towards a down payment on property or other entrepreneurial paths. I’ve seen my parents’ 401k disappear. Why shouldn’t such a drop happen again to stocks by the time I’m 65? Yes, historically the stock market has always grown, but why risk it. Property in the right location seems like a less volatile investment, and would require only 5-10 years of saving. Any thoughts?
Do you have any advice to Alex?
One reader, Justin, points out that stocks have provided better returns than real estate historically. Another responded to his comment by pointing him to the story’s tips number 10, 19 and 20. Those are: “Don’t give up on stocks.” “Do make sure safe investments are actually safe.” “Don’t take more risk than you can handle.”
My thoughts: I think Alex should definitely start a 401(k) if his employer is matching contributions. Doing otherwise is leaving money on the table. Also, I think — or at least I hope — that Alex’s fears about his 401(k) contributions “disappearing” are unfounded. By investing now, Alex will have 33 years (before he hits 65) to build wealth and ride out any storms, even if this crisis persists or another serious one comes along.
However, at 22, Alex should have other priorities than retirement. Like getting an education, starting a family or a business, buying a home, and even having fun. Investing some extra money now will make him richer long-term, but I wouldn’t advocate a 22-year-old sacrifice his dreams and live on the cheap just so he can retire a little earlier.