Fundamental principles of investing

Investing can take many forms. We can buy U.S. Treasury obligations, federally insured CDs, EE Bonds, individual common stocks, mutual funds or commodities. We can buy real estate or gold and precious metals. We have a wide variety of choices. For many of us boggled by information overload but interested in investing, the question we are left asking is: 'Where do we begin?'

Where to begin

Set goals and objectives. When we are younger, most of us are concerned with buying a home and saving for our children's educations. Unfortunately, the last thing we think about is planning for retirement.

When asked, most of us say we would like to retire at age 55. But with life expectancies approaching 80, we will need considerable assets that must continue to grow after retirement if we want to retire at 55. Recognizing this problem early, and devising a financial "game plan," offers an obvious benefit because it allows us to take steps that will help us meet our goal.

To show you the benefit of saving early, consider the case of Mary and John. (See figure.)

The moral of the story is that although Mary stops saving the year that John starts, and John saves the same amount during a period twice as long, Mary has substantially more assets than John.

If you are 25- to 30-years old, the best way to become a millionaire at retirement is to maximize your pre-tax contribution to your company's 401(k) savings plan. Ideally, this means contributing 15% of pay up to a maximum of $10,000 for the year 1998. Too many people do not understand the value of long-term compounding of money. But it is especially important to have a long-term view of your 401(k), as this plan is designed to get you through your retirement years.

Overcome market jitters

For the first time last fall, many investors began to question the validity of investing in large cap common stocks or mutual funds comprised of large cap stocks because of the downturn in the stock market. We experienced a market that, after two or three days of significant downturn, did not rebound.

But at press time, the problems associated with Southeast Asia, Russia and Brazil and Monica Lewinsky were less in the public eye, and the market had recovered most of its losses since August. Sound policy-making by our Federal Reserve Board and Alan Greenspan helped the market recover, and ensuing advances reminded investors of the importance of maintaining a long-term perspective.

To quote Peter Lynch, the former fund manager of Fidelity's Magellan Fund, most of us have come to expect 25% rates of return in good years and 5% to 7% return rates in bad years. But, if you are going to be in the market for the long-term, you have to be prepared for a 35% downturn along the way.

Currently, long-term interest rates are not abnormally low. In fact, if you go back to 1926 they are about where they should be. Presently, inflation is very low to non-existent. If we have any flation at all, it is deflation because of improved productivity through technology. With both interest rates and inflation low in a stable and growing U.S. economy, the U.S. stock market is the place to be.

Make smart choices

The trick is to identify those areas of investment that will reap above-average returns in the future. Tracking the baby boomers (those born between 1946 and 1964) is one key to successful investing in the near future.

Baby boomers are in their peak earning years, their houses are paid for and they are largely out of debt. They are more interested in doing things than in buying things. They exercise more, have better eating habits and enjoy greater advances in medicine. As a result, their life expectancies are prolonged.

Furthermore, their habits and lifestyles tell us that investing money in entertainment and leisure stocks is a logical choice. Investing in the health care industry is also a good idea. With baby boomers living longer, investing in pharmaceutical stocks should be very rewarding.

Also, as baby boomers earn more, save more and inherit more, they will need the assistance of the financial services industry in order to invest money wisely. Although these stocks were severely punished during the recent market volatility, recent mergers and the baby boomer factor may make them good choices for the future.

As a general rule, follow demographics and trends when choosing common stocks and mutual funds for investment. Consider the growth potential of technology stocks and stocks in companies that have worldwide consumer product power brands, such as Coca Cola and Procter & Gamble.

Start early

Begin saving early. Follow basic trends, stick to your convictions, don't get greedy, be patient, avoid being influenced by the media and realize that home runs are hard to hit in the stock market. Educate yourself by reading the Wall Street Journal and the Money section of USA Today.

By following these guidelines, you should enjoy success as an informed investor, In most cases, smart investing - coupled with participation in your company's 401(k) savings plan and pension plan - will mean you will have more money to live on in retirement than you do while you are actively employed. Which means you may be able to retire at 55 after all. PR