Chapter 12 - Investing

By Richard Valentine Reily, author of Gregory's Hero.


Savings grow like magic. Savings are fun because they deliver a sense of security, a sense of getting something more than everyday work out of life. You may have noticed that I like savings.

One fine day you will look at your operating savings and your capital savings and notice that there’s a lot of money sitting around not doing much of anything. The savings just lie in the bank winking at you with each statement. Now that’s a good problem so let’s discuss some options to putting savings to work to create even more wealth.

At some point your operating savings should go into a money market account. Your money market account can be held by your local bank, by a brokerage firm or by a mutual fund company. Operating savings belong in a money market account simply because money markets typically pay a little more interest than a traditional savings account and generally have similar withdrawal restrictions.

The money market account is really just a super savings account. It may require a minimum balance to open, and like a savings account it has limitations on how many and what type of withdrawals you may make within a monthly period. You will incur fees if you attempt to use your money market account like a checking account, even though the account will provide you with checks for access to your savings.

But, this won’t be a problem for you since you have broken the spending habit and are focused on the savings habit. You won’t want to send your savings; you have worked to hard to accumulate them! Now checks to access your money market account are a convenience – not a threat.

Open your money market account at your local bank if that makes you more comfortable. There are some differences in the rates of interest on various money market accounts and they are worth reviewing. However, the rate differences are typically small and at this point in your savings career comfort of knowing where your savings are may be more important to you than another ten or twenty basis points of earnings.

If you will eventually begin to buy mutual funds with your operating savings you may consider a mutual fund company to hold your money market account. Then when it comes time to make your mutual fund purchase you can simply transfer funds from the money market to the fund that you purchase.

If stock purchases are in your future you may want your money market account with a brokerage. Your brokerage will give you a cash account with your brokerage account anyhow. You need it for your earnings if they are not reinvested and for holding assets between investments. Brokerage accounts can have some hefty annual fees attached and at this point you might just as well keep your money and use a fee free, interest paying, account.

For now, your local bank will do fine. When you have a thousand dollars in your operating account consider moving that money to a money market account. With the move you place one additional barrier between you and ready access to the cash. Once your thousand dollars is moved, begin again to save another thousand dollars in your savings account. The savings account is where you go for money to cover planned or unexpected expenses. The money market account becomes a backup account for the savings account and is used only to fund the savings account. Resist the temptation to spend from the money market account because it is for building wealth.

On the other hand capital savings is another matter entirely and takes a bit more consideration. Do you remember the purpose of capital savings?

Capital savings is your future. This is the house you will one day buy, a college fund for your child, the business you dream of one day owning or your retirement. Capital savings needs to be invested with greater risk because you will want the greater return often associated with greater risk.

Investing risk is what separates the men from the boys or the women from the girls. There are two types of risk. One we will not address here because it does no fit into our savings efforts. That risk is high, immeasurable and more often than not will leave you broke. Conquering your overspending, paying down your debt and beginning your savings is work enough. You needn’t place your hard won savings at total risk.

Long term investing risk is the risk you want to take with your capital savings. Over your lifetime the stock market will return an average twelve percent. Not bad. Your money will double about every seven years, and compound even faster when you have many years between your investment and the time you need the money.

The stock market is a friend with whom you need not get intimate. You do not have to be a stock investing guru to do it well and right. Actually you are probably better off applying the same rules to investing that you apply to house plants – the less attention the better.

There was a young guy working in my office who begrudgingly opted to participate in our new 401K plan a year before the market crash in 2000. Four or five years later I asked him how he was doing in his 401K and what was he invested in. He gave me that blank look, a shrug of the shoulders and an ‘aaaa ummm I don’t know?’

He went on to say that he had never opened a statement from the investment company, never reviewed the account on line and never changed any investment choices in all the years. With each paycheck he simply funded his original investment choices. Choices I had originally helped him make. With a huge lack of commitment he promised to bring the next statement for us to review; which he finally did and handed it to me unopened.

The statement showed that he had earned 9.5% total return over five years in the same mutual funds including the crash of 2000 and lingering recoveries of 2001-2. A lot can be said for making a good investment choice for the long term, sticking with the choice and consistently funding it.


If you save well from twenty to thirty you need save no more for retirement. Time will take care of everything for you. If you begin saving at thirty you will need to save all the way to retirement. Time is your friend when you make the decision and commitment to saving.

Back to long term investment of your capital savings. The capital savings account will soon reach a balance of one thousand dollars. That is the point at which you will take the savings and put it to work in a mutual fund. Mutual fund companies hire the market experts and you simply need choose a good fund with a good company. The managers will take care of everything after that.

For years I was fascinated by rich people who were fleeced by their accountants and money managers. I always wondered how that could happen. If they were smart enough to earn the wealth what could be so difficult about managing and keeping it?

As it turns out there is a lot to managing it and keeping it. Sometimes it seems it’s easier to earn it than to keep it. Since we are talking about savings, we are talking about keeping it. Don’t fear a professional manager, use it.

Making a mutual fund choice is very simple. Choose a big well experienced company. Some financial magazines prepare all sorts of lists – the biggest, the most profitable, the most productive, etc. Which company you choose is not near as important as choosing one and getting on with it.

Within the mutual fund company choose a reasonably aggressive fund. Each fund is rated by Morningstar and many are featured in Value Line, a periodical available to financial professionals, and to everyone at most libraries. Know the fund you are investing in, just don’t let fear of the unknown stop you from getting started.

The mutual fund company will offer you various options to associate with your fund when you set it up. Regular deposit is a good one for you. Regular deposits can be set up to automatically deduct a certain amount from an account of yours each month. If you have a regular amount deducted from your checking account each month you will have created an additional savings vehicle. Or have a regular deduction from your capital savings account to the mutual fund.

Regular periodic investing is one of the fundamentals of building wealth. You have the opportunity to buy when the market is down and you always buy when the market is up. You never miss a chance. The best time to buy into your mutual fund is whenever you have the money.

There are some don’ts about your mutual fund investment. Don’t take the credit card option. There is never a necessary time to use a credit card in relation to your capital savings. I also recommend that you do not take any checks, or destroy them if they arrive, associated with your mutual fund account. When the money needs to be transferred into some other long term financial vehicle, you can have it electronically transferred without every taking possession of the funds. That limits a lot of temptation.

Choose to reinvest your dividends. When your fund receives dividend payments from its underlying investments your portion of that income is reinvested into your account giving you additional shares. Reinvestment is a key to building wealth. This is your compounding. If you still have a problem understanding the concept of compounding go on the Internet and find a savings calculator. Enter parameters that suit you and I assure you that you will be amazed at the amount of money you can accumulate over a long period of time without a significant investment. Go on, go look!

Stocks are not the place for you to be, yet. This is not to say that you should never invest in individual stocks. A certain level of knowledge is required to successfully invest in individual stocks. Most investors do not do their research but simply respond to friends or family who suggest they buy this or that stock because it’s cheap, is going to go through the roof or a friend’s cousin’s sister works there. These are all bad reasons to give away your money. Let the professionals manage it for you.

If you insist on getting into the stock market as an individual investor research how the pros have done it. Michael Milken was famous for picking stocks and when asked how he chose good stocks he said, “I go into the store and look at what people have in their carts. I go to the office and buy the stock.”

There is a lot to be said for his analysis. If you know a company well and have good reason to believe it will do well, or continue to do well by all means invest in it. Chances are you will do better long term, including your trading costs, to simply let the professional managers take care of the investing for you via mutual funds.

Bonds are for old people. Not really, but I know you’ve heard that. As people reach retirement they move to bonds in an effort to protect their nest eggs from the fluctuations of the stock markets. Bonds, after adjustment for inflation, historically return something on the order of four percent. This is not a spectacular pace to get rich and no place for your investments while you are young, earning and saving. You need to be aggressive since you still have the power of time and earnings.

A primary error people make when moving to bonds is underestimating their financial horizon. If I ask you what your time horizon is for your investments you will probably tell me some time around when you expect to retire. This is not long enough.

Your investment time horizon must extend to how long you expect to live. If you are fifty years old and expect to retire at sixty five you do not want to go defensive on your investments in ten years. You will eat up your assets long before you die at your estimated life span of between seventy five and eighty, and getting older everyday. Your investment horizon at fifty is thirty years, at least.

Cash is king! How often have you heard that? Cash is a great thing. Lots of it flowing out of your pocket, stuffed under the mattress and jarred up in mayonnaise jars.

Cash is generally the worst investment you can have. Okay, hold that scream! Ever heard of inflation? With every one point rise in inflation your dollar becomes worth one cent less. At a one point rate of inflation you now have a ninety nine cent bill. Over time inflation will eat away at the purchasing power of your cash.

My old friend Thelma was left well off by her husband who met an untimely death in the early 1960’s. The Sixties were a low interest time followed by the high inflation Seventies and Thelma quickly found herself with dwindling assets and a long life expectancy.

Her son, who worked in the financial industry understood the problem and took possession of Thelma’s cash and invested it in Blue Chip stocks. He returned Thelma her living expenses and she lived another thirty eight happy years. On her passing her son had a significant asset base of stocks purchased with Thelma’s dwindling cash; far more than he had paid for her expenses during all that time.

You want some cash around, and we have discussed how you will get cash around. But, yield to the temptation to invest in cash for the long haul. It is a false security and will leave you far less assets in the long run than someone who has taken the same money and invested it in a stock mutual fund.

Most financial mangers and planners want to discount the asset value of your home for planning purposes. I don’t.

Your home, especially after you have paid off the mortgage is a primary asset. And, real estate can be a valuable investment and wonderful place to park your capital savings. Buying your first house is one of the best places to invest your capital savings. Saving for a house is also a great motivator to get going saving in the first place.

The federal government has created several terrific investment vehicles; 401K, IRA, Roth IRA and derivatives of each. The idea behind these is to invest with tax free money, and pay the taxes later.

Your employer probably offers a 401K plan. This plan allows you to have a portion of your income withheld from our paycheck. You don’t even notice it is missing.

The best part is that a 401K is what is generally known as a salary reduction plan. It works like this. Assume you earn $500 and are in a 28% tax bracket. If you contribute 5% of your earnings to your employer’s 401K plan, you now earn $475 and your federal taxes fall from $140 to $133. The $25 you contribute to the 401K plan only reduces your take home pay by $18, because $7 would have gone to pay taxes on the $25. In addition most employers match a portion of your contribution, usually 50% of the first 5% of your earnings. So in addition to the $25 that only cost you $18 take home, your employer will contribute another $12.50. Now you have $37.50 in your 401K plan and only $18 less in your pay check.

Your 401K plan is a no-brainer. Don’t over think it, just join it. Everyone who is serious about achieving a secure financial future will invest in an available 401K plan. The really serious people will max out their annual contribution.

If you are not eligible for a 401K plan, you can set up your own IRA, Individual Retirement Account. IRA’s have contribution limits, and no matching contributions but they are still tax deferred and a good option if a 401K is not available to you.

A Roth IRA is similar to a traditional IRA except that the money used to fund the Roth IRA has been taxed already. The benefit here is that the earnings in the Roth IRA account are never taxed, even when you eventually withdraw the funds.

Learning to save is like learning anything else. Start with a desire, take a few baby steps, get comfortable with the success and begin to take major strides. I promise you will be chest swelling proud of your results!