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Financial advice

I have 3 main pieces of financial advice to give:

First, and most important, go to a bookstore and buy a copy of The Richest Man in Babylon and read it. If you can't afford to buy a copy, go to a public library and borrow one; use interlibrary loan if they don't have a copy. If you can't read the whole book, at least read the Wikipedia article.

Assume that you start work at age 22, fresh out of college. If you invest just $100/month and earn 8% a year, you will have over $400,000 when you reach 65.
"A part of all I earn is mine to keep".

Second, if a stockbroker suggests you should buy individual stocks, ask yourself this question: Where are the customer's yachts? Come to think of it, it wouldn't hurt to read the book of the same title. The meaning of that question is: the broker goes around in a $2,000 suit and owns a second home, an expensive car, and a yacht. But what about his customers? Most of them barely manage to keep up the payments on their first (and only) homes, and they don't own any yachts.

Third, regarding derivatives: I'll refer you to a quote from the movie "Guys and Dolls", (IMDB quotes page -- search for "cider"). If you buy (or sell) derivatives, you will wind up with an ear full of cider.

Amplifying on #1: in today's market it is probably better to buy mutual funds than individual stocks (see #2). It is good to diversify your investments: "Don't put all your eggs in one basket". But to do that with stocks requires researching -- and managing and tracking -- several dozen different stocks. Buy a mutual fund, you get over 100 stocks. It may not perform as well as a few really well chosen stocks, but the chances are you don't have the time (or the inclination) to do the in depth research necessary to figure out which companies are going to do well in the future. So you trade possible future gains for less risk. Not that mutual funds are risk-free. Just less risk than any individual stock.

As far as I'm concerned, a low-load or no-load fund is better than a regular (high-load) fund. If you pay a 5% sales fee on that investment I mentioned above, you will end up with $380,000 instead of $400,000. Just make sure you don't give it away on high "management" fees -- if you pay a management fee of 1%, that's the same as taking your 8% return and turning it into a 7% return -- and end up with under $320,000 instead of over $400,000. Anything over 1% is too high, unless you've found the next Warren Buffett. 1/2% is better.

As I write this, Vanguard mutual funds are not significantly worse than other funds available, have no "Load", and have low management fees. This is subject to change, of course.


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