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Jason Kelly

Jason Kelly

Author of The Neatest Little Guide to Stock Market Investing

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Lauren Young

Journalist and department editor at BusinessWeek

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Jason Kelly on Smart Investing

Jason Kelly on Smart Investing

Jason Kelly is the author of the Neatest Little Guide series, which includes titles such as The Neatest Little Guide to Stock Market Investing and The Neatest Little Guide to Personal Finance. Kelly also writes for many financial web sites, including iStockAnalyst.com and TheMicrocapSpeculator.com. Prior to giving you advice about smart investing, he worked as a technical writer at IBM. Here, Kelly shares why he thinks people should invest, and reminds us that it takes long-term strategy to reap the rewards of investing.

What is smart investing?

Finding companies of interest to you, studying them carefully, knowing their typical price range, waiting for them to get cheap for no reason or a reason that makes no sense, then buying as much as you can to profit from the eventual recovery.

Investing this way brings little stress because you know the companies well and time frames are long enough that you don't have to care about what happened on Wall Street five minutes ago.

Why should people invest in the first place? Isn't the market particularly volatile as of late?

People should invest in stocks because they are volatile in the short term, but rise over the long term. The market has averaged about 10% per year for the past 70 years, but not in a straight line. Stocks go up and down each minute, hour, and day, but head generally higher over time.

If you plot out the rising and falling, you'll see that stocks rise about 2/3 of the time and fall about 1/3. As for recent volatility, it's a media fiction. The market is no more volatile recently than at other times in history, it's just that investors became used to the lack of volatility that preceded it for a little while. Besides, volatility is good. It's just moving prices. With some education, people can learn how to identify good companies or strategies, and then put money to work in them when they're cheap. Without volatility and market nuttiness, we'd never get bargains.

With so many options for smart investing, where does one start?

I recommend the permanent portfolios featured in my Neatest Little Guide to Stock Market Investing. The approach I take is to get started with something that's proven and can bubble on the back burner while you figure out how to invest in individual stocks for even greater performance.

Another simple way to dip a toe in the water is to just index. Buy the S&P 500 via an index fund and you'll own the stock market. You won't go bankrupt. You can't make a big mistake. The value of your account will fluctuate, and that will teach the nature of stocks.

Once you have an established core in a permanent portfolio or index fund, you can venture out into the woolly world of stock picking with a small amount of money at first, then larger amounts later when you've built confidence.

How can you tell what type of investment is right for you?

I can make this real simple if you're young: own stocks via index funds if you don't want to do much work, and then if you want bonus performance spend some time learning about individual stocks, as I mentioned above.

If you're over 70, then be careful. Don't go for growth; go for safety. You don't want any crises in your golden years.

If you're somewhere in between, ramp down the money you have in stocks as you get older, but not too quickly. People are living longer these days and need their money to go further, so some oomph from stocks is useful even into your 60s.

Dividend paying stocks are a nice middle ground for some people. Because they pay a dividend, there's profit from them even if the stock price stays the same or declines a bit. A steady stream of cash each quarter is nice to see, and adds up while you wait for the stock price to head higher as well.

What about non-traditional investment routes, such as art, collector's items, burgeoning businesses or real estate?

Except for one's own business and real estate, almost nothing comes close to the stock market for performance and—this part is key—convenience. The stock market is liquid. You can add money and take it out as easily as you can with a checking account, and even easier now that investing happens entirely online.

Stamps, art, wine and other stuff can work, but it's harder to find a market, you sometimes have to deal with storage, and most people find that they don't make any more than 10% per year anyway, so stocks would have made more sense.

Now, this is not addressing the non-financial rewards that come from other investments. There's a lot to be said for joy in life. No stock can compare to a well-stocked wine cellar or a beautiful painting on the wall when it comes to personal satisfaction. When it comes to financial performance, though, stocks are hard to beat.

What are some simple steps to take in the first 30 days of smart investing?

Open a brokerage account, put your first amount of money into an index fund, and set up a regular automated investment schedule to put more money in each month.

If that's all you ever did, you'd come out ahead of 80% of investors. That's the dirty little secret of the investing world. No broker wants you to know that you don't need any of their services, but it's true.

SIGNATURE QUESTIONS

What is the belief you personally go to during times of change?

That this too shall pass and that the same skills that served me before will serve me again, and that I rather like all this excitement because there's nothing worse than boredom.

The best thing about change is...

...It can be carried in a pocket. Oh, not that kind? Then I guess the chance to improve.

What is the best change you have ever made?

Leaving my life in Los Angeles behind and moving to Japan without speaking a word of the language. I was 31 and everybody said I was too old for such things.

Posted: 7/17/08
KarenLola1

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