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Sell In May? -- NOT!

I made a pretty good living giving advice, and old habits die hard. So I've been thinking how I would advise young adults about coping with current economic conditions. Of course I can't predict the future, but most serious students of the economy believe in economic cycles, and I've been following financial markets long enough that I've seen several cycles and profited from them. We're in a very challenging time. Young people are making decisions that will affect the rest of their lives, and being inexperienced they tend to assume that the future will be like the recent past. That's usually NOT a safe assumption. More likely is that 'History does not repeat itself, but it does rhyme' and 'Those who cannot remember the past are condemned to repeat it.'

Our recent economic crisis was based on people getting too deep into debt to purchase inflated assets. Ironically, this is a perfect time for you to borrow up to the hilt: interest rates will never be this low again in your lifetime, and it's likely that inflation will wipe out most of your debt within a decade or so. Just make sure you borrow long, and borrow to obtain something of lasting value. A nice house with a 30-year fixed mortgage would be ideal. An education that will boost your life-long earning capacity is also a great investment. A car is not a good thing to buy with a loan that will likely outlast it, and credit card debt is HORRIBLE because of the high interest rate. Just as a quick rule of thumb, at 10% compound interest, your debt (or nest egg) doubles every seven years; at 7%, it's every 10 years. Currently, you may be able to get a secured loan for just 3.4%. That should make you SALIVATE! Of course it's not that easy when you're young to get credit, and banks are being very cautious right now, but not carrying enough debt has been my worst financial mistake, so grab some if you can. And try really hard to keep that credit rating up so the loan will be there when you need it.

The stock market has been particularly disgusting recently, so what are most investors doing? Just when I say you should be a borrower, they have become lenders. Go figure! For those who can possibly live on less than they make, this is a perfect time to invest in common stocks and a lousy time to own bonds. I would advise using a tax-advantaged retirement account if at all possible. What that means is you won't pay income tax on the money you save, and your savings can compound without you paying taxes on your investment earnings (until you start to draw down your savings in retirement.) Suppose, for example, you earn $100,000 this year. About a third of that will likely go to the tax man, so you get to keep $67,000 to live on. But if you contribute just 5% to an IRA or other retirement account, you pay no tax on that amount, so you just saved $1650 in taxes. Let's assume you do a reasonable job investing and your money grows about 7 percentage points faster than inflation. The $1650 you saved from the tax man's grasp this year is worth $3300 in 2023, $6600 in 2033, and over $13,000 in 2043. But if you save like this every year for the next 30 years... well, I aced calculus in college but that was a long time ago, so I'll let somebody else run the numbers. I'll just promise you you'll be VERY glad you did!

Where to put the savings? If it's a company plan, your options may be constrained. In general, you want to avoid buying shares in the company you work for unless you are REALLY sure they're going to the moon. A lot of people working for established companies put their retirement savings into their employer's company stock, only to see their life savings wiped out when the company went bust. A few people bought MSFT at 7 cents in 1986 and sold at $33 this month (adjusted for splits), but do you know any of them? Unless you have insider knowledge that you're very confident of, you're better to buy a basket of likely winners. This is known as diversification, and it's a good idea for most investors.

The easy way to diversify is through a mutual fund, essentially a company that buys shares of other companies. A good source for information on funds is a newsletter called NoLoad FundX ( which has earned consistently high ratings from Hulbert Financial Digest over the past 30 years. They specialize in no-load and exchange-traded funds, which are generally more cost-effective than those a "no-fee" investment advisor would try to sell you. I think anybody with a high school diploma can be a successful investor using this tool.

If you don't have enough to justify a newsletter subscription ($89 annually online, two free trial issues available) then your best bet would likely be to grab up a broadly-diversified low-fee fund like Vanguard Index 500 and DON'T READ THE MONTHLY STATEMENT! In fact, you'd be better to throw away everything except the reports marked as needed for tax preparation. After about five years, you'll likely be very pleased with your account balance, and you'll easily be able to afford the subscription.

I'm describing a 'buy-and-hold' approach, which is absolutely the best thing you can do in saving for retirement. Some of you are math wizzes and traders by nature, and you'll probably want to see if you can be smarter than Mr. Market. Bearing in mind that Mr. Market represents the collective wisdom of millions of investors, many of whom are very bright, full-time professionals, you might well be able to do better than 'buy-and-hold' if you learn a lot about market cycles, technical analysis, and economic forecasting. One smart fellow I follow faithfully is an economist turned investment advisor named Jeff Miller who publishes "A Dash of Insight": I ran into him on a service called "Seeking Alpha" that I would highly recommend to traders: Their "Wall Street Breakfast" newsletter gives you an excellent summary of financial news and views. Finally, for the quant crowd, there's "Technical Analysis of Stocks and Commodities" which is not cheap but gives traders a lot to chew on. They have free content on their website, too.

If you're not fortunate enough to work for somebody offering a tax-advantaged retirement account (costs nothing to ask HR), you can still open a Simplified Employee Pension plan for your own company or an IRA for yourself and spouse. I use Fidelity brokerage service: They have a very professional staff and I've had no complaints over the past few decades. Other brokers are cheaper and you may need that if you're an active trader, but discount brokerages have to make money somehow and some may not give you the best order execution or may even be front-running their clients. If you don't know what those terms mean, stick with Fidelity.

Best of luck in the years ahead! I hope this advice is worth more than you paid for it.