Three Rules for Young Investors

My daughter is typical of her generation. She has a budding family (twin 8-year-old boys) but her knowledge of finance is sketchy. Becoming a grandfather has given me incalculable joy. I want my grandsons to enjoy a secure financial future.

In that spirit, here are three investment tips for my daughter, her husband, and other younger investors, to help start and grow a retirement portfolio.

1) Harness The Power of Compound Interest

One of the most common pieces of retirement investing advice you’ll hear is to start early, or at least as early as possible. All the studies show that the earlier you get going, the more money you’ll have in retirement. That’s because the earlier you start, the earlier compound interest goes to work for you.

Younger investors often overlook the power of compound interest, but if you can set aside a small amount of money every month and stick to your program, the results can be dramatic. Even better if you can set aside, say, between $100 and $500 a month.

To illustrate both ends of that spectrum, let’s look at two hypothetical 25-year-old investors, Henry and Marie, both of whom are keen to get started on their retirement investing. Henry can afford to set aside $100 a month (or $1,200 a year), while Marie is fortunate enough to be able to tuck away $500 a month ($6,000 a year) for her golden years.

Let’s also assume a hypothetical 10% average annual rate of return, compounded monthly. By age 50, Henry’s savings would have ballooned to $133,789. That’s not bad, but Marie would be sitting on a plus-sized nest egg of $668,945.

The moral? As far off as retirement seems, getting going early is well worth the trouble. And setting aside as big a chunk of money as possible every month is a real game-changer. Your older self will thank you for it.

2) Emphasize Stocks

Younger investors should take advantage of their long time horizons and focus on stock mutual funds in their 401k plans. The fact is, 401k plans are long-term money. And over the long term, stocks have outperformed every other investment vehicle.

I’d never advise putting all of your eggs in one basket. But the younger you are, the more heavily you should weight your 401k portfolio toward stock mutual funds. This emphasis on stocks should diminish as you get closer to retirement.

Don’t ignore small-cap stocks. Small companies tend to be dynamic and convey outsized potential for growth. Over the long term, small caps historically outperform the broader market. The small fry are generally riskier, but young investors have sufficient time to ride out the ups and downs.

3) Deploy Dollar-Cost Averaging

One way to invest in the market for the long haul is through a technique called dollar-cost averaging. The name sounds complicated, but you’re actually already doing it if you invest part of your paycheck in a 401k or other employer-sponsored retirement plan.

The concept is simple: under dollar-cost averaging, you commit to buying a fixed dollar amount of a particular investment on a regular schedule, usually monthly, without regard for the share price. This way, you naturally buy more shares when prices are low and fewer when they are high.

Dollar-cost averaging allows young people who don’t have a lot of money to start investing. Younger investors’ long time horizons also give them an advantage here, because the market’s long-term course is generally higher.

A bonus? Dollar-cost averaging is a great way to ease anxiety. If you’re simply putting money into a certain investment on a regular basis, you can block out the ever-present temptation to try to buy low and sell high, acting on which, studies show, usually does more harm than good.

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John Persinos is the editorial director of Investing Daily. You can reach him at:

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This article previously appeared on Investing Daily.