If you want to save enough for retirement, you’re probably going to want to put your money to work for you by investing it. We’re not going to tell you how exactly to invest your money in this article. Instead, we’ll talk about what investing can do for you, the different investing risks that are out there and general investing wisdom. Sit back, relax and let us break it down for you.
About half the country doesn’t invest their money at all. There’s a difference between not investing because you can’t afford to invest and not investing because you have misconceptions about how investing works and what it can do for you. If you’re in the latter camp, you’ve come to the right place.
Investing lets you take advantage of the powerful effects of compound interest. Say you make $50,000 a year and you diligently save 10% of your salary in a jar every year for 30 years. Assuming your salary remains unchanged and you don’t have to dip into your savings, you’ll have $150,000. Not bad!
But if you took your 10% savings and invested them, you’d do better than that. Although their value fluctuates, in general stocks appreciate over the long term. Plus, they often pay dividends. That means that $5,000 worth of stocks grows in value over time. Investing is putting your money to work for you, also known as making money from money. Sounds good, right?
How to Start Investing
Many people assume that you have to be rich to start investing. That’s not necessarily true. If you want to get started trading your own stocks, you may need as little as $100. To buy into a mutual fund or index fund, you’ll generally need around $1,000. If you’re just starting out, $1,000 could be a lot. But once you start investing, you could see that amount grow.
To invest money, you’ll need to go through some sort of middle man. That could be a no-frills website like E-Trade that charges you a per-trade fee to buy and sell stocks. It could be a big brokerage firm like Vanguard that charges fees as a percentage of your assets. Or, it could be a man or woman who sits down with you for lengthy discussions about your financial goals and then makes investing decisions on your behalf, charging you for their services. You’ll have to choose one of these brokerage arrangements, because plunking your cash down on the floor of the New York Stock Exchange is not an option.
If you were paying attention during the last financial crisis, you’ll remember that markets can crash. Investment portfolios can go from healthy to meager in a flash. The risk that stocks you own will decrease in value is known as “equity risk,” and the amount of equity risk you take on an as an investor is known as your “equity exposure.”
Another risk associated with investing is that the company whose stock or bond you buy could go out of business altogether, defaulting on its obligations. Both of these risks are relatively dramatic scenarios, but they happen.
There’s another form of investing risk that’s not so dramatic. It’s more insidious and less commonly understood. That’s the risk that your investments will under-perform through lack of attention or lack of knowledge on your part. You might put all your 401(k) contributions in a money market account where they won’t grow enough to beat inflation. You might try to beat the market, throwing good money after bad in a series of risky trades. You might panic and sell off your stock when its value has plummeted in a downturn, only to have to re-invest when stock prices have risen. These mistakes are easy to make.
To help you on your road to investing success, we’ve compiled some of the investing wisdom that experts generally agree on. Some investing advice is evergreen for a reason.
Take the advice to “buy low and sell high.” It makes sense, doesn’t it? You want to pay a reasonable price for a stock and have its value increase over time. Then, you can sell it for more than you paid. Of course, if you follow the much-recommended buy-and-hold strategy, you won’t be involved in individual decisions about “selling high,” but the principle still stands. You don’t want to sell all your shares in a downturn or buy stocks that are already very expensive.
Another piece of advice you’ll hear a lot is to avoid high fees. Research shows that the actively managed funds that charge the highest fees tend to under-perform passively managed index funds that merely aim to track the market. Some investing advisers steer their clients into higher-fee investments that offer lower returns – or risks that might make their clients uncomfortable. You don’t want this to happen to you. Every dollar you pay in fees is a dollar you can’t spend in retirement.
Speaking of retirement, conventional wisdom states that you should reduce your equity exposure as you get closer to retirement. Say you’re 65, with 90% of your portfolio in stocks and 10% in bonds. If the bottom drops out of the stock market, the portfolio you were counting on to help you retire at age 67 will be seriously depleted. You’ll probably have to retire later and you may never recover the money you had. To prevent this kind of scenario, experts generally advise investors to reduce the percentage of their portfolio dedicated to stocks as they approach retirement. That way, you’ll still have the growth potential of stocks to help your money grow throughout your retirement, but you won’t have extreme volatility.
Investing doesn’t have to be complicated. You don’t have to read obsessively about company fundamentals, check stock tickers or read 50 books about how to “beat the market.” Most people will be well served by setting and forgetting a balanced portfolio of stocks and bonds that charges low fees.
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