Five tips for young investors

You’re a twentysomething, just out of school or a few years into working life. It’s time to start some serious investing.

That’s because time is the investor’s best friend, and you have plenty of it — perhaps two decades to save for a child’s college costs, and probably four decades to build a nest egg for retirement.

I know — retirement seems eons away. And thinking about it makes you feel so settled and middle-aged.

But look at it this way: If you invest a little each month starting now, you won’t have to invest as much as you would if you were to wait another 10 or 20 years to get going.

Imagine, for example, that you want to have $1 million by the time you retire in 40 years. That would be enough to provide an annual retirement income of $40,000 for the rest of your life.

But in fact, you’ll need $3.26 million, because if inflation averages 3 percent a year, that's how much it will take to buy what $1 million buys today. The $3.26 million should produce an annual income of $130,000 — equal to $40,000 in 2007.

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about $7,400 a year to get to $3.26 million in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly $20,000 a year.

Start early with whatever you can afford. It will make life much easier later.

So what are the key things to know as you launch a long-term investing plan? Here are five tips:

Stocks, stocks, stocks
Stocks are riskier than bonds or bank savings, so in any given year you could lose money. But overall, the stock market doesn’t often lose money over periods longer than five years, because there are fewer losing years than winning ones.

Over long periods, returns in the stock market have averaged about 10 percent a year, while bonds earn a little over 5 percent. Cash, such as bank accounts or money market funds, averages about 3 percent

Look at mutual funds
Though the stock market offers good returns over time, many individual stocks lose money and never recover.

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You would need at least 20 or 30 different stocks to safely “diversify” your money — spread it around to reduce risk. To find them you might have to read prospectuses, annual reports and news accounts on 200 or 300 stocks. Even if you know enough to do this — and most individual investors don’t — it’s an enormous amount of work.

Fortunately, we have mutual funds, which are investment pools run by professionals. Even if you have just a few thousand dollars to invest, with a single fund you can spread your money among dozens of stocks, sometimes hundreds. For a small fee, the fund manager does all the hard stock picking. One of the best place to research mutual funds is at Morningstar.  Other financial Web sites like Yahoo Finance and Microsoft's MSN Money offer tools to evaluate mutual funds. (MSNBC.com is a Microsoft-NBC Universal joint venture.)

Focus on fees
The average stock-owning mutual fund charges investors annual fees equal to about 1.3 percent of assets — $1.30 for every $100 in your account. That little bit adds up. If your fund held stocks that returned 10 percent, the fee would cut your fund’s return to 8.7 percent. Instead of making $10 for every $100 invested, you’d make $8.70. You’d take a 13 percent pay cut.

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