What follows is a question posed to us after Jason’s article last week. As well as my response to that question. I hope to have answered the reader’s questions completely, and I hope that my response proves valuable as well. I’ve left the response as is, and I’ll be covering different sorts of investments and other strategies in weeks to come, as I build my own confidence and knowledge. I’ll close with a few comments that cover some areas that I feel my original response did not adequately address.

I read your Savings Speech article today, and it was not unlike many time-value-of-money articles I have read in the past. I am curious, though, what type of investment you would expect to see an average 9% return from?

I am 24 years old — graduated from college in 2003 — and I have yet to begin any serious investing because either the interest rates aren’t substantial enough to outweigh what I am losing in interest to student loans, or the risk seems to great to me to wager my hard-earned income.

For example, CD’s are very reliable, but only earn around 1-2%. Even with CD laddering (as BOA is so fond of advertising) you’re looking at maybe 2-2.5%. Savings accounts are a joke. Bonds are decent, but still don’t approach your 9% average, and the stock market is just too risky for the casual just-out-of-college investor unless you go with some nice, safe index funds — which once again take you back to fairly low (although steady) interest rates. Mutual funds can have pretty hefty fees, and from what I’ve seen also don’t quite get there as far as a rate of return goes. Is there some other significant investment opportunity out there that I am missing out on? If so, what is it? How could I get this mythical 9% you speak of?

As Jason mentioned, investment takes a certain risk tolerance. There are however ways to mitigate risk, and I’ll be writing about this in the future, but mutual funds are a great way to start. Take Oakmark Equity and Income I for example (data here: http://finance.yahoo.com/q/pm?s=OAKBX, full disclosure, I own some of this fund through my 401k). Their best one year return was above 26% and its worst one year return was a bit more than -2.5%. Over the last five years it’s averaged above 11%. There is some other interesting data on the site under performance, take a look around. (For instance their worst 3 year return was 9.99%)

I’m not saying that you should invest in this fund, but I am saying that there are a ton of investments like this out there, and they are definitely worth looking at. Again investment is about taking risk and thinking long term, so if you end up behind in the short term, you always have those 26% plus years to look forward to. My advice is to look around and find some investments that have a risk rating you are comfortable with, and a return you are satisfied with.

If you still don’t feel comfortable, you may do well to sit down with a financial advisor, and develop an investment plan based on what you want and what your goals are. Find someone you like, and you can trust, at a reputable investment firm. After sitting down with them, it may be as simple as just cutting them a check every month, and waiting for the quarterly statements. Then as you get more comfortable, take a more active role.

As an exercise I’d recommend creating a tracking portfolio, even if you decide to go with a financial advisor. This will help you learn and gain a level of comfort with the market. First I’d pick a percentage of your income that you’d like to invest. Then I’d pick a time period over which to invest it, are you going to be investing monthly, quarterly, yearly? After that I’d make my investment choices, and decide how much of my portfolio I’d want each investment to constitute. Then, using the amounts, time periods and percentages I’ve chosen I’d start “making” those purchases, and tracking them. (I do this through yahoo finance.) See what works; make up portfolios of different investments, as well as varying purchasing strategies. This will allow you to play around risk free, until you develop a strategy that you’re comfortable with.


I’d like to make two comments. First on BofA’s, which I assume is Bank of America, interest rates. Then I’ll talk briefly about some of the fees associated with mutual funds. Won’t take long and I promise it won’t hurt.

So, Congress passed a law that requires that a single bank take no more than 10% of the United States deposits. “Fine”, you say, “what does this have to do with Bank of America? They don’t take 10% of the country’s deposits.” Right you are, however after Bank of America completes the acquisition of MBNA, they’ll have slightly over 10% of deposits. This could prove to be a regulatory hurdle for the acquisition, so BofA needs to reduce deposits. What better way to do this, than to give consumers a terrible interest rate?

Now, Mutual funds, the reader noted that many mutual funds suffer from hefty fees. The solution: Look for funds with a low expense ratio, and no loads. A low expense ratio means that the fund is charging you less overhead for the operation of the fund. It’s also best to avoid any fund which charges a 12b1 fee. This is money the fund charges you to market the fund to other investors. A load is a fee charged either when you buy the fund (a front load) or sell the fund (a back load), by going with a no load fund, you avoid paying these fees. There are a few other things to watch out for when selecting funds, but I’ll cover that in a later post. I hope to have helped inspire you to take a good hard look at the market, and if you were already interested I hope that you found the article informative. Feel free to contact us with any questions, or jump over to the Forums and strike up a discussion.