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The Worst Financial Advice to Give a College Grad

I think just about the worst financial advice you can give to a recent college graduate is: “Buy stocks in companies whose products and services you like.”

On the surface, advice to “buy what you know” is well-intentioned. After all, saving and investing early and often helps a young investor harness the amazing power of compounding.

How amazing? Let’s use an example. Suppose a young person, Logan, starts saving $5,000 a year for retirement at age 25, continues to save that amount each year until age 65 and earns 7% annual returns. Logan will end up with a $1 million nest egg. Let’s say Logan waits until age 45 to start saving for retirement. Logan will need to save nearly $25,000 a year to end up with that same $1 million, or will have to generate an annual rate of return north of 20% (a figure that would put Logan on par with Warren Buffett, but not a statistically likely event, to put it mildly). So, mathematically, the advice to save early on, and to have a significant portion–if not all–of your retirement savings in equities, is correct.

Read the rest of the article on The Wall Street Journal.

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