I spend most of my spare time studying Wall Street activity and watching stocks on a regular basis–so much so that I become a little too sensitive to the daily swings of many of the most influential companies’ stock prices and quite possibly a little too hesitant to offer direct investment advice to those who are just getting started. My grandfather used to say, “Don’t invest money you can’t afford to lose.” There is great truth to that. I’ll tell you right now, money you borrowed is probably money you can’t afford to lose. However it is also possible that if you don’t take some risks and invest at some point, you’ll find you can’t afford the consequences of those actions either. So where is the happy medium? Where do you put your money?
You’ve started saving
In my first Yahoo! Article, “One Simple Solution,” I identified how young individuals can utilize the powerful tool of automatic deposit from their paycheck coupled with compound interest to yield a huge nest egg by retirement. In other words, click a couple buttons and put your savings on cruise control. I gave an idea of how much to start saving and what to expect, but I did not clearly identify where a person should actually invest that money. If you allow that money to sit and grow as a cash equivalent then you’ll earn a meager return, probably a fraction of a percent and see really no true growth over time, nothing worth writing home about. The truth of the matter is you’re young and capable of taking on much more risk at this point in the game. Your options include some very boring investment vehicles such as a savings account, a CD, a mutual fund, etc. Each of these pale in comparison to simply buying stock in a growing company, especially one paying dividends.
Buy something that you understand
It has been said that world famous investor Warren Buffett won’t invest into a company that he doesn’t understand (which may explain why many of his companies are in similar industries). If you don’t know a thing about technology, then why would you invest your hard earned money into a tech company that you can’t explain? Don’t do it. Take a moment to ponder the companies you do know, and do understand. I’ll bet you have a pretty good idea of who General Mills is (ticker: GIS) and what they sell. You don’t have to understand all the financial fundamentals of a business, but you should take a moment to look at least at the most immediate history of the company (its income statement is a good place to start) to ensure the company is still showing healthy, profitable growth. Perhaps glide through their key statistics and identify their revenues, profit margin, and debt. And finally, let’s take a look at their dividend (is there one?) and the history of the company’s stock price. Is the company a solid upward growth type business? In the case of General Mills you can find an investment calculator on their website that will allow you to identify investments from any era and their long term return.
How about a classic blue chip?
For example, you’re twenty years old, you’ve saved $3,000 so far (if you followed my first article), and now you need to know where to invest it. You’re hoping to retire in roughly 40+ years. If we use that calculator from General Mills we’ll find that $3,000 invested in GIS stock 40 years ago would be worth approximately $113,000 today! Now clearly this is not an exhaustive list of investment choices, but it should give you an idea of where to start. If you have a small savings started and are looking for a safe first investment that will provide a higher return than many of the other opportunities out there, I would consider General Mills to be a great way to get your feet wet. You’ll see dividends quarterly, splits occasionally, and long term growth inevitably.