Selecting an Ideal Beginner Investment

June 10, 2009 by  
Filed under Investing

beginner_investorToday you are going to read my views on first investments for beginners. That topic seems strange for a baby boomer who is probably considering his gazillionth different investment option. On the other hand, the high school and college graduation seasons have just concluded, causing me to reminisce about my first ventures into the investment world as a younger person.

Times Have Changed for Beginner Investors

Back in the day, the investment mindset of many young adults was: (1) find a job with a good pension; (2) buy a house you can afford; (3) enjoy a life of contented moderation; (4) put a little extra in savings; (5) retire on your pension and savings while living in your paid-for house; (6) pass a little on to your kids. Very simple. No IRAs, no 401ks. None of that had been invented. Even mutual funds were new-fangled contraptions.

This “investment” plan was so simple that we already know that for most of us, things won’t turn out that way. A few economic hard truths intervened. These include the demise of the corporate pension, costly divorces, no savings, McMansion lust, and excesses in debt-driven spending. Sound familiar?

My First Investment

I clearly remember my first real investment. It is memorable because it had some but not all of the characteristics of an ideal investment for the beginner.  I will explain.

My first job out of college was as a design engineer for Motorola. Shortly after I started, Motorola offered a plan that allowed employees to acquire shares of Motorola stock at a substantial discount. I signed up to participate by regular payroll deduction.

I owned that Motorola stock for four years of employment plus three years of law school. As a graduation present to ourselves, Mrs. ToughMoneyLove and I sold the stock (now appreciated in value) and used the proceeds to pay for an extended trip to England, Scotland, and Ireland. We took that trip before I started my first lawyer job.

That little story sets the stage for conveying my views of the …

Characteristics of an Ideal Beginner Investment

1. Low Cost. The costs to acquire and maintain an investment can be a significant barrier to entry for a young, novice investor. Moreover, because the size of that first investment is usually small, the impact of transaction costs is magnified. It did not cost me anything to buy or hold that Motorola stock except for the actual purchase price.

2. Automatic. The easiest way to make investing a habit is to make it automatic. This can be through payroll deduction into an employee-sponsored plan (like my Motorola stock) or by automatic transfer from a bank account to an investment account.

3. Difficult to Liquidate. By this I do not mean an illiquid investment. Rather, there should be administrative obstacles and/or tax disincentives to selling the investment for use other than for its original purpose. This makes it easier to resist spending temptations. IRAs are ideal for this.  My Motorola stock was easy to sell. Should I have held it and not used it for a vacation? Yes and no. Mrs. ToughMoneyLove worked extremely hard to help support us through law school. Her lifelong dream to that point was to visit Ireland, the land of our ancestors. We had relatives on temporary assignment in England who would provide a place to stay. We had other relatives who offered us travel to the UK as a gift but only while our other relatives were there. When else would we have the time and means to take that extended trip? I think it was a good choice for us.

4. Transparent Growth. An excellent way to create investing enthusiasm in the novice investor is to make it easy for that investor to watch the investment appreciate in value. Any security and investment account that is easy to monitor online should qualify.

5. Low Risk. This one is going to be controversial. The standard line is that young folks are in it for the long haul so taking significant short term risk is appropriate and necessary.

I agree. Except for that first investment.

You want the beginner investor to be encouraged, not hit in the face with a loser right out of the chute. Let them experience success – even a little bit – before diving into the riskier asset allocations. Imagine the psychological damage that has been done to young investors who moved into the market in 2007.

In this market and economy, I’d suggest TIPS or I-Bonds as that first investment for the beginner. Why? Because inflation protection should be part of any long term investment strategy. So start off with that asset, watch how it securely grows, gain confidence, then move on to equities. I-Bonds are particularly appropriate because there is no cost to buy or own them, they can be bought and tracked online, they have built-in disincentives to early liquidation, and they are tax-deferred, making them ideal for owning outside a retirement plan.

That’s my story on the ideal first investment. I’m sticking to it unless one of you convinces me otherwise. Care to try?

Photo Credit:  Matt Stratton

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7 Responses to “Selecting an Ideal Beginner Investment”
  1. My Journey says:

    I am not sure I am just nit-picking, but I would bet most people don’t even know about high yield online accounts! That meets all your criteria. Its low cost (free), Automatic, Difficult to Liquidate (usually have to transfer money to your normal account first), transparent growth & Low Risk

  2. Gail says:

    I think young people (and probably a lot of older ones too!) should definitely have practice managing their own savings accounts BEFORE they move into investment accounts. It’s important that they practice the fundamental habit of saving for a goal and learn about the power of compound interest…it’s no use learning about investments if you don’t have the savings habit down pat (which gives you the means to invest). A high-yielding online savings account is an excellent choice. ING Direct allows you to set up multiple savings accounts for different goals. For investing, they also have a sharebuilder program that allow you to buy stocks in specific dollar amounts automatically for a modest fee.

  3. LAL says:

    I think failure is a part of learning.

  4. Right now (through Oct 2009) I-bonds are paying 0.00%. This is because of recent deflation.

  5. Holly says:

    I think the best beginning investment would be to learn as much as possible at an early age about personal finance…it sure would have saved me a lot of financial heartache. If only I had known one-quarter of what I know now about the importance of saving, investing, and spending in moderation! Why didn’t any other older adults teach me, I wonder? Surely some of the people that I had looked up to had made decisions w/their money (good and bad). Couldn’t they have shared w/me a lesson or two? I feel I was left to flounder on my own w/absolutely zero guidance. Maybe thay wanted for me to fail? Is that paraniod? Oh, well…that was all before the internet. Enter: Mr. TML.

    My husband and I could have had a huge nest egg by now; instead we have squat.

  6. Mark says:

    Solid post. I like a hybrid mutual fund as the first investment. It provides the beginning investor with exposure to stocks and bonds. It’s important to learn about different asset classes as a beginning investor.

  7. Laura H says:

    Good post with solid guidelines. As a recent college grad with a nice chunk of money sitting in my savings account as a graduation gift, I am starting to look for good options for me to invest my money rather than spending it. I know I still have a lot of research to do (you are at the beginning of the timeline – a long one at that), but these are great tips that I’ll look out for when I’m making decisions now and far in the future.


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