To Finish Well, Start Early
When I was in my early 20s, I made my first investment in a mutual fund. I was working part time and took one paycheck and invested it in 20th Century Growth Fund (now called American Century Growth). The fund had a solid track record, and importantly to me, no minimum investment. I added to my investment over time, and the fund performed very well.
But the point is it got me started with mutual fund investing. Like many things in life, it’s important to get started. Not next year, not next month, not next week, not tomorrow, but now. Investing is governed by the laws of compounding, and the sooner you start, the sooner the high part of the exponential curve can kick in.
In the early 1980s, I made $2,000 annual contributions to my IRA. I contributed $8,000 in total (and then I stopped so I could use funds to start Morningstar). Today, more than 30 years later, that $8,000 account is worth a considerable sum—bolstered by rising equity markets and tax-free compounding. One great way to get started with investing is through a 401(k) or IRA account. Not only will you reap important tax advantages that will significantly add to your investment return, but you’ll also be less tempted to take the money out.
Since the financial downturn of 2008-2009, many people—especially young people in their 20s and 30s—have avoided equities and kept their funds in cash or fixed-income securities. This isn’t a great way to build wealth. The markets were up 16% in 2012 and 32% in 2013, and those on the sidelines missed the run-up.
Equity mutual funds had net outflows over the past five years. Then, last July, the tide turned and assets started coming back to equities. For 2013, equity funds had net inflows of $218 billion, a trend that has continued so far this year.
The longer you wait to build your investment portfolio, the harder the task of meeting your goal. Most wealth—be it in an investment portfolio or in building a business—is created over long time frames by stringing together many years of positive returns.
By waiting too long to save and invest, many people fall into a trap of overreaching for returns to make up for lost time. They fall prey to get-rich-quick schemes, the latest investment fads, or drifting into high-risk areas without sufficient knowledge. They end up with capital losses that are difficult to overcome. As one smart money manager I know likes to say, “You don’t have to worry too much about making money as long as you don’t lose money.” Starting early with appropriate expectations will help your odds of avoiding permanent capital losses.
Here are 10 funds I like that have a minimum investment below $2,500. I’ve also noted the Morningstar Analyst Rating for each, which is our analysts’ assessment of the likelihood that these funds will perform well over the long run:
Ariel Investor (Bronze)
Artisan Mid Cap Value (Silver)
Baron Growth (Bronze)
Dodge & Cox Stock (Gold)
Fidelity Small Cap Discovery (Gold)
Mairs & Power Growth (Silver)
Matthews Pacific Tiger Investor (Gold)
Primecap Odyssey Stock (Gold)
Royce Special Equity (Gold)
T. Rowe Price Mid-Cap Value (Gold)
You can also get started by investing directly into stocks. Right now the aggregate price-to-fair value for the 1,600 stocks we cover at Morningstar is 1.06. That means the market is fairly valued—not undervalued, not overvalued. If you have a long time horizon, you should be fine with investing in equities now. Ten companies I like that our stock analysts also rate highly are:
Baxter International ($76.11)
Berkshire Hathaway ($128.58)
Coca-Cola FEMSA ($116.00)
Clorox ($90.91)
Coach ($34.32)
ConocoPhillips ($84.53)
CSX ($31.14)
Deere ($87.64)
McCormick ($70.27)
POSCO ($74.03)
(Stock prices as of market close on July 21, 2014.)
Our lives are shaped by our habits. Developing the habit of investing will shape your life in a positive way. You’ll be a step closer to financial independence and the security and pride that come with it. For me, it was always important to be independent. It gives you freedom to do whatever you want—no matter what anyone else says. So take a paycheck—or part of a paycheck—and get started.
Photo: denphumi / Getty images
