Posted Mar 21, 2006 11:01 am CST
Thomas A. Haunty
Thomas A. Haunty, CFP, has provided financial assistance to lawyers and their clients since 1982. His first book, tentatively titled Real Life Financial Planning for Young Lawyers, is due out in spring 2006.
Haunty offers investment advisory services through Marathon Advisors Inc., securities through CRI Securities LLC and Securian Financial Services Inc., Member NASD/SIPC. Securian Financial Services Inc. is not affiliated with Marathon Advisors LLC. CRI Securities LLC and Marathon Advisors Inc. are affiliated. CRI Securities LLC, Marathon Advisors Inc. and their affiliates operate under the marketing name North Star Resource Group. Tracking #0716-2006-17508 DOFU: 1-9-2006.
Virginia Grant POSITION Senior consultant with Altman Weil in Newtown Square, Pa. AGE 32 GOAL to learn how to start investing in the stock market
For a lawyer who claims to have no particular expertise in personal financial matters, Virginia Grant has done pretty well for herself.
At 32 years old, the Newtown, Pa., consultant owns a home, has consolidated her student loans at a low interest rate, is building a savings account and regularly contributes to her 401(k) plan at work.
But one piece of her personal financial puzzle is missing–personal investments. Grant knows she needs to be investing in the stock market for its growth potential, especially if she wants to meet the financial goals she has set for her future. But there’s just one tiny problem: She has no idea how to start.
Grant is willing to start out investing $100 a month, but that’s not enough for most stockbrokers to take her on as a client. And many large mutual fund companies have minimum investment requirements that far exceed $100.
Grant feels that her only option is to teach herself to invest, but she also knows that dabbling in the market is not going to produce the results she wants, especially after one previous, disastrous attempt at DIYing it.
Last year, Grant invested a small sum through an online brokerage company. The company picked investments for her based on her answers to a series of questions. Grant was steered to two different funds and took the plunge. One of them, a bond fund, quickly tanked while the other, a stock fund, made slow but steady gains.
With no guidance, Grant quickly bailed out on both funds. “By the time I sold the [bond] fund, it was worth about $12,” she says. “Then they took a $4 fee to sell it.”
A chastened Grant says the experience taught her a thing or two about investing. She now knows she has little appetite for investment volatility, that she would like to earn dividends and that she does not want to be paying a lot of fees for the privilege of investing her money.
Grant also learned there are a lot of things she would like to have clearly explained, such as the differences among stocks, bonds and mutual funds. Or why one investment should be made over another, and why diversity is better than putting all one’s eggs into a single basket.
As Grant’s brief flirtation with the stock market taught her, investing requires a substantial time horizon and patience, says Life Audit personal finance and investment expert Thomas A. Haunty. And no matter how much or how little she has to invest, it’s a job best left to experts who have the professional experience to manage her money to get the best long-term returns.
For an inexperienced investor like grant who is working within a limited budget, Haunty says that starting with mutual funds will be the easiest and most cost-efficient way for her to invest.
Mutual funds provide instant diversification because they generally own numerous individual securities. Moreover, mutual funds are professionally managed, so Grant does not have to burden herself with researching the best individual stocks or bonds to buy, Haunty says.
Grant should look for no-load mutual funds–those that do not charge a commission for trades–as well as those that have no or low initial investment thresholds. Haunty also wants Grant to understand what type of fund she is choosing to invest in. Mutual funds have stated objectives that will tell her what they are composed of, such as stocks, bonds or a combination. A fund’s printed prospectus will also tell her more about the companies it will or will not invest in.
Because Grant is risk-averse and likes dividends, Haunty suggests she buy into a “balanced” or “income” fund that invests part into stocks and bonds to start. But Grant also has to understand that when she invests, particularly in a fund with stocks, she must have a long-term horizon. That means once she gets in, she needs to stay in. For years.
Even if the market drops in the near term, don’t get cold feet and cash out, Haunty warns.
Instead of going with a gut instinct to sell, he says, she could consider buying more because it could be an opportunity. She also could just hold the fund. As long as she has adequate emergency cash and a long-term goal for the money, she can worry less about the fund’s short-term fluctuations.
“It’s counterintuitive. If you put $100 a month in and it goes down in value, it feels like you are pouring water into a sieve, right?” he asks. “Wrong. Because what generally happens over longer time periods is the markets go back up and your fund’s value goes back up as well–if you can just hold on. Selling too soon–into declining prices–undermines an investment’s potential to achieve growth.”
If Grant wants to help her money grow even faster, she also needs to increase her monthly investment. Haunty wants her to up her monthly contribution each year to accumulate more shares of the fund she chooses.
Doing all of that takes confidence, Haunty admits, and the best way for Grant to build her investing bravado is to start reading more about the market. His recommended reading list includes Kiplinger’s Personal Finance magazine, The Wall Street Journal’s Money & Investing section and Morningstar.com.
Learning more about the market also is likely to pique her interest about other types of funds. Haunty encourages Grant to invest eventually in other funds with differing objectives so that she can build a more diversified portfolio that can better weather the market’s fluctuations.
No matter what she invests in, Haunty reminds Grant that investing is a long-term proposition, and that she should have patience.
“Stick with it,” he says.
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Life Audit HOT TIP: Paying it back vs. paying it forward
Virginia Grant graduated from law school with a great job and a six-figure student loan debt. Wouldn’t it be wiser for her to use the extra cash to pay off her student loans instead of dabbling in the stock market? Life Audit personal finance and investment expert Thomas A. Haunty says there’s an easy way to answer that question: Can she beat the interest rate on her student loans by investing? Over longer periods of time, the stock market has offered higher returns than the cost of today’s low-fixed-rate student loans. “You have to consider the opportunity cost of the lost return by not investing,” he says.