Where Should A New Investor Start?

Investment Strategies for Gay Men

Joshua Kennon, About.com Guide to Investing for Beginners, answers questions gay men have about investing and saving money.

I asked: Where should beginning gay investors start?

Joshua said: The key to building wealth long-term is to get started as soon as possible because you want to tap into the power of compounding. Take a 45 year old that invests $10,000 per year for retirement (including employer matching in a 401k). If he or she earns 10% on their assets, the portfolio would be worth approximately $572,750 by the time they are 65 years old. That figure isn’t adjusted for inflation (e.g., if inflation ran 3%, the purchasing power would be somewhere around $317,100.) Looking at that inflation- adjusted figure so we can get an idea of actual purchasing power, you could expect to generate roughly $17,440 in take-home income each year if tax-free municipal bond rates are the same as they are now (that works out to $1,453 per month). It would require someone who was working full-time about $26,830 in pre-tax salary to get to the same level of “take home pay” that the municipal bonds would generate on the portfolio each year.

Now, imagine that the same person had begun investing at 25 years old, instead. The same amount ($10,000 per year) at the same return (10% compounded annually) would result in $4,425,926. Given the same inflation rate, the result would be around $1,356,800 in today’s dollars. This might generate $74,624 in tax-free municipal bond income, or $6,218 per month. That’s the same as receiving a gross (pre-tax) salary of $114,806 from your day job!

By simply getting started earlier in life, someone with the same talents, skills, discipline, and investments can end up with 4.279x as much annual income! There’s a big lifestyle difference in take home pay of $1,453 and $6,218 per month.

With that said, the best place is often a 401k plan where the employer matches a portion of the funds you contribute. It’s like earning an instant 50%, 100%, or even greater return on your money with no risk. This single factor, combined with the tax benefits of such a plan, can result in substantially more wealth over a lifetime than just pouring money into a plain vanilla brokerage account. After that, I’d go for a Roth IRA because you will never have to pay taxes on any of the profits you generate in the account if you follow the IRS rules. Go with regular, fixed contributions (this is called dollar cost averaging) so you don’t have to think about when or at what price to buy. Then, reinvest all of your dividends. Historically, this has proven the most successful way to get rich.

Whatever you do, don’t trade. On a net basis, business owners are far richer than professional athletes, doctors, lawyers, movie stars, or pop singers. Start thinking about your stocks as shares of a real, honest- to-goodness business. A single share of Coca-Cola bought in 1919 for around $20 is now worth more than $5 million with dividends reinvested. Half a century ago, had you bought 100 shares of Philip Morris (now Altria Group and its various spin-offs, Kraft Foods and Philip Morris International), you would have paid about $44 per share, or $4,400. Today, with dividends reinvested, your shares would be worth more than $20 million. Find good, long-term businesses, buy the shares at attractive prices, continue to acquire them throughout your lifetime, make sure you have the safety net of diversification, and try to hold the assets through a tax-advantaged retirement account and sooner or later, you should end up very comfortable.

More Investing Questions:
Are bad economic times a good time to invest?
What about gay couples looking to invest together?
What's the one thing beginning investors should know before they start investing?
What should gays look out for when investing?
Should gay men invest in companies that discriminate?
How can a person calculate their personal level of risk when it comes to investing?