by Donald Gould
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Question: My young son is saving faithfully and has amassed a few thousand dollars and continues to save at least $100/month. Currently, he has no access to a 401k/403b. He wants to invest in the stock market but I’m reluctant to encourage him in the current market. If he does, what is the best way to proceed?
First, congratulations on having a son who is already saving at the age of 22! He is mastering the key ingredient to investment success, which is managing to save some money in the first place. One’s rate of savings invariably is more important than even the rate of return on those savings.
I suggest your son consider a Roth IRA. For the long-term investor, the Roth IRA is ideal because all earnings are tax-free upon withdrawal (assuming at least a 5-year holding period) and penalty-free beginning at age 59-1/2.
As for whether to buy stocks, I think your son has the right idea. The “current market” always looks (and is) hazardous at a given moment in time. But long-term investors have been hugely rewarded for simply buying and holding the market over the long term. For example, in the 50 years ended 12/31/15, a $1,000 investment in the S&P 500, with dividends reinvested, would have grown to $99,233. Even adjusting for inflation, the original investment’s purchasing power would have grown more than 13-fold! Of course, there’s no guarantee that the stock market will perform as well in the next 50 years, but the odds that it will substantially outperform bonds and cash over the long run are, in my opinion, extremely high.
I would urge your son to keep things simple and cost-effective by buying a stock index fund with his Roth IRA contributions. Either a US total stock market or a world total stock market index fund will do just fine.