Stephen Gandel is a senior writer at Money magazine, covering real estate and investing. He was the senior Wall Street reporter for Crain's New York Business. He also held positions at Individual Investor magazine, and as a business reporter at The Riverfront Times in St. Louis, MO. His work has also appeared in Fortune and on CNNMoney.com. Gandel has made numerous television appearances, including "CBS 2 News this Morning," MSNBC, "The CW-11 Morning News," New York 1 and "Good Day New York." Here, he discusses why contributing to a 401(k) is the smartest investment anyone can make.
Sometimes people have to be tricked into investing. In 2006, we passed this law that companies can automatically be enrolled in 401(k) plans, because they do these studies that people want to be in plans but they just don’t do it. If we just put everyone in plans few people will opt out.
I feel that we need mechanisms to trick ourselves to do better behavior, not just in finances, but in life, like lists and other things—whatever we can do to force ourselves to do the things we want to do. That’s the way to it. It’s very hard organically to learn how to change.
It depends where people are. The first step is to get out of debt—which includes all your high interest credit card debt and high interest student loans. Once you’re done with that, you want to start with the 401(k) plan, if you work at a place with a 401(k). Contribute as much as [your company] will match.
Also if you have the ability, max out the total contribution to the 401(k), which is $15,500 in 2008. You want to start with stocks and go with a diversified fund. When you get started, the best thing is an S&P 500 index fund. That will give you a diversified portfolio of stocks, and as you get older you can move some of that into bonds.
Start investing in a brokerage account or an account that lets you buy funds directly. Index funds or ETFs are the best way to go. If you’re young, go with technology funds. Energy isn’t a bad idea. Energy prices are rising so much and that’s affecting our cost of living, so a good way to offset that is to buy some energy funds. Invest in oil companies. It’s not guaranteed, but they’ve continued to do well.
The S&P 500 is the lowest cost fund, so that’s a great way to go. If you’re a little more risk tolerant, you may want to go with technology and energy or sectors. I don’t think anyone should go for stocks unless you’re a professional money manager. It just takes too much of your time. Mutual funds are great things, where you just pay a little money for the broker’s fee because there are so many other people getting into the mutual fund.
If you like drinking red wine, then you should buy red wine. If you like art in your house, buy the type of art you want to hang in your house. These are not good for your portfolio.
Since stocks split, it’s difficult to see the same kind of return on the investment. People can say, “Oh, I bought this house at $50,000, and now it’s worth $800,000,” but what they don’t realize is that along the way, they put money into maintaining it. However, over time, stocks always outperform all other routes of investment.
I try not to think about it too much. In times of my own change, I ask my wife what we’re doing.
...You don’t have to do the stuff you hate.
Marrying my wife was a great change. However, I liked buying a house. For me, it’s been incredibly rewarding. You want to put more of your heart and soul into the house. You’re willing to put your weekends into making it your own place. Those aren’t necessarily economic benefits, but it’s really just a nice thing.
For more information on Stephen Gandel, visit www.timeinc.net.