Q Dear Rick:
I’m in my early 40s and the only thing I have ever done with my money is to leave it in the bank. I know the bank doesn’t pay that much, but I would rather do that than risk losing it in an investment. My homeowner’s insurance agent has been trying to convince me that I should invest in the stock market, and he gave me some stocks that I should buy. Some of the stocks he mentioned were Apple and Google. He told me that it would be virtually impossible to lose money on those stocks. I have read your columns for years so I do know that you favor investing in the stock market using mutual funds. My question to you is if I do decide to invest some money in the stock market, what mutual funds would you recommend? Currently, I have about $250,000 in the bank and of that I’m willing to take about $5,000 to invest in the stock market. Knowing that I am a conservative investor and I plan to work for at least another 20 years, my question to you is what investment would you recommend?
A Dear Terrance:
You are right; I do recommend you invest in the stock market. Your time frame for needing this money is 20 years down the road, and when an investor has a timeframe of 20 years it definitely lends itself to investing in the stock market. Furthermore, I would tell you that for a 20-year time frame, the conservative investment is the stock market, not CDs or bank accounts.
It is important for investors to understand that risk comes in different forms. The stock market has risk in the fact that we all know it goes up and down. However, if you look at any 20-year period in the stock market, the stock market has never lost money. On the other hand, money in the bank also has a risk known as purchasing power risk. Purchasing power risk deals with the reality that money today doesn’t buy as much as money did 20 years ago; and 20 years from now it will buy a lot less than it does today. Therefore, with purchasing power risk, you may have more money, but it doesn’t buy as much as it used to. Consequently, if you don’t take purchasing power risk into consideration, you will find that down the road you may have more money but unfortunately, that money doesn’t go as far. Purchasing power risk is a real risk and it is something that investors need to take into consideration.
The mutual fund I would recommend for you would be the Vanguard Total Stock Market Index (VTSMX) (Vanguard.com 877-662-7447). This fund invests in a wide variety of stocks of US based companies including large, mid and small companies. This fund would provide a great base to forming a balanced and diversified portfolio.
To buy Vanguard Funds is very simple. All you need to do is to contact the company either through their website or their toll-free number. What’s also good about Vanguard is there funds are no-load which means commission-free. I believe all investors need to do whatever they can to keep their cost of investing low and investing commission-free is one way of accomplishing this.
You should also spend some time on Vanguard’s website to learn about investing. Vanguard has a wealth of information on their website and you should take advantage of it. After all, the more you know about investing the better investor you will be and as a result, you will have more money in your pocked-exactly where it belongs.
If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.