Monday, August 25, 2008

How to Invest $10,000 and Sleep Well?

A former student emailed me a question about investment:

Hello Professor Yu,

I'm not sure if you remember, but I took your Econ 202 last spring. I was hoping I could get a little advice from you. I have around $10,000 that I can invest in something. I would like to invest the money since I am still young, it should have more time to compound that way. I don't really know what type of investment would be a wise choice at this age and with that much money. If you could give me a little advice on what to consider I would really appreciate it. Thank you for your help and time. Have a good semester.

[Name Withheld]

Below is my response:

I am glad to hear from you.
It is good to have some extra money to invest for the future.
If you could hold the money for at least five years (the longer, the better) , I would suggest you to put the money in some kind of stock index fund. There are two reasons for this.
First, it has the lowest management fee compared to mutual funds. Second, it is well diversified compared to single stocks.
Never ever buy a single stock because it is too risky. You might buy a stock like Google when you are lucky or Enron (or Bear Stearns) when you are not.
In the long run, stock index will give you a higher return than bond or money market index.
If you ask me what kind of stock index fund, I will say the simplest form: S&P 500 in the US. For example, Vanguard 500 Index Fund is a good one.
I put my 401K money in this kind of funds. By the way, NOW is a good time to buy stock index fund since stock market price is not high.
Also, I won’t give the advise for those who cannot hold their investment for at least five years. So if you only want to do the short-run speculation, ignore what I said above. I am not certain for this kind of investment.