Investment Allocation for Recent Grads


New grads are facing one of the worst job markets in years. Unemployment continues to rise. The financial markets are in the red and few companies are hiring. With so much doom and gloom to worry about what’s a new college grad to do?

You may not be able to get the high-paying job you wanted right off the bat in today’s economy. That’s just a fact of life. But the silver lining is, if you start investing anyway, you might be able to make up the difference on the back end. You may end up with a more moderate income than you expected, but that's no reason to stave of contributing to a retirement account. In fact, now is the best time for new college grads to start investing. If you don’t you’ll really be kicking yourself when it’s time to retire.

Think about the stock market like a supermarket. If suddenly virtually everything in the supermarket went on sale 40%, would people buy more or less food? Well, thanks to the recession, the stock market is on sale right now. So, right now is the time to buy. The time length of an investment is a major contributor to the success of that investment and getting started right out of college can net you hundreds of thousands more dollars in retirement than if you waited 5 or 10 years. Besides, when the market rebounds you’ll end up getting less shares for your investment.

Your first stop should be your employee retirement plan, or 401(k). If your new employer offers matching funds, you should aim to invest in that account up to the maximum matching funds amount. If you don’t contribute up to that limit, you will have missed out on free money your employer provided for your retirement.

When you are just starting out, your asset allocation should be heavily weighted towards risky equity investments. According to Bogle's rule, the percentage of your assets that are allocated to stocks should be equal to 100 minus your age. So if you are a 22-year-old college grad, you should have about 78% of your investment monies in stocks. Managing a 401(k) is relatively simple because much of it is handled through your employer. It can be a tiny bit trickier to deal with an independent retirement account, or IRA.

IRAs are available to everyone and you can choose between a traditional tax-deferred IRA and a Roth IRA. For recent college grads, a Roth IRA is generally best because it offers more flexibility. Unlike 401(k)s and traditional IRAs, the money you put in can be withdrawn whenever you like without penalty before retirement. Only the earnings on the money are subject to early withdrawal penalties. Of course, you should only withdraw funds in a true emergency, but it’s nice to have the option, especially if you haven’t amassed an emergency fund yet.

A great way for new grads to manage their investments and banking needs is through an integrated account at a brokerage firm like Charles Schwab (Stock Quote: SCHW). An integrated account combines checking, savings, investment and credit card services into one. This allows you to seamlessly transfer money between accounts. Call it one-stop investing.

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