Investing Intelligently

As an investor, your general investing objectives are to grow your money and invest for the long-term.

Investing can seem challenging since there’s an overwhelming amount of investing information, choice of investment accounts, and strategies out there. Plus, the markets fluctuate and are volatile, and the idea of potentially losing money can create stress, fear and uncertainty.

The lesson for the investor: The fears you feel when you think about starting investing or during periods of market volatility are very similar to those many seasoned feel after decades of investing. The doubts. Negative thoughts. The fear and uncertainty that lead us to think about giving up. The encouragement you get from focusing on the future and your long-term goals. And the satisfaction of crossing goals of financial freedom that you thought were all but impossible.

Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility — a stock market downturn simply means that many stocks are on sale. And for long-term investors, time tends to reward their behavior, though research has shown that it is as difficult to practice as it is uncommon.

Most investors never hold stocks long enough to benefit from the fact that the market rises over the long-term. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating and diversifying a portfolio of stocks for the long-term, typically over decades.

https://youtu.be/hE2NsJGpEq4

By learning more about the process of investing in stocks, understanding the financial markets, and knowing what securities you are investing in— you can gain more confidence and understanding that you are on the right path, according to SoFi.

Investing your hard earned money

Historically, the return on stock investments has outpaced other asset classes like bonds and real estate, making them a powerful tool for those looking to grow their wealth over the long-term.

The average interest rate on a savings account at the top five U.S. banks this year was 0.08%, while the average return on the S&P 500 from 1950 through 2009 was 7%. So, what does this mean for your money? If you had $10,000 today and put it in a savings account with an interest rate of 1% (some banks have rates this high), you would have $11,046 in 10 years. If instead you took that money and invested it, earning an average annual return of 7% and compounding annually, you would have $19,672 in that same time period!

Next year is a fresh slate—we all get a “do over,” and this time we think we can all do better. What’s your financial goal for #2021? Share the emoji version of your goal in the comments. pic.twitter.com/d0LIFwNtfi

— SoFi (@SoFi) December 29, 2020

Everyone should have these two, what SoFi calls “bookend goals”, as their primary short-term and primary long-term goals:

Create an emergency fund and
Save for retirement

Getting started investing is simple.

Investing in stocks will allow your money to grow and outpace inflation over the long-term.

Investing is not just for the wealthy; it’s for anyone who wants to achieve their financial goals and achieve financial security. And your focus should be on the opportunities and rewards of achieving financial goals.

It’s important to understand your goals. Selecting an investment strategy depends on your goal amount (how much you want to save) and the time horizon (when you’d like to use that money).

Before you invest, you should make a list of all of your accounts (bank, investments, retirement, credit cards, other debt) and their interest rates. Know and calculate your personal net worth. And, know your cash flow. How much do you make after taxes? How much do you spend?

First goal: Emergency Fund

Your emergency fund is a cash account that you can easily access should an emergency arise—for example, if you face an unexpected health cost. This fund should be 6 -12 times the amount you spend monthly, depending on how risk-averse you are.

For example, if you’re unable to work, you may be comfortable with having three months saved. You want to keep your emergency fund money “liquid,” or available to access as soon as you need it. With that said, many savings accounts only pay you 0.01% interest on cash balances. This doesn’t keep pace with inflation, so you’re essentially losing money. Instead, you might consider opting for a high-yield savings account that earns 1% interest or more.

Ultimate goal: Retirement

Retirement should be your highest priority and your largest financial goal. Even if it feels very far away, it’s important to start saving early, diligently and purposely. You may share the same priority and retirement goals as many retirees, such as:

Essential Living Expenses
Reserves in an emergency fund to cover unexpected expenses
The stuff that brings joy, emotional well-being, and provides purpose like vacations and spending time with others
Leaving a legacy for your family, a charity, or something else

Remaining financially independent and understanding ways to ensure there is enough money to last a lifetime is of great importance to retirees.

https://twitter.com/tdameritrade/status/1362095933387927562

Let’s say you and your partner will need $6,000 per month in retirement income (in today’s dollars). If you start saving at 40, you would need to save $46,000 per year to be on track for retirement at 67. However, if you start saving at 30, you need to save $32,000 per year. (Note: This assumes you’ll both receive Social Security.) This illustrates the importance of starting early and giving your money time to work for you.

Need to catch up? It’s never too late! You may need to save more or be more aggressive, but the most important step is to start saving (and investing) as soon as possible.

Investing should be for long-term goals

If you’re investing for a far-off goal, like retirement, you should be invested primarily in stocks or stock mutual funds and ETFs.

This is an important lesson for the investor: When you think about investing, you usually feel that you know exactly what you are looking for. In your mind, you have defined the plan that will lead to success and you begin to execute it hoping to be able to fulfill it to the letter. The truth is, it rarely happens. The path of the investor is full of surprises, of unintended consequences that you did not appreciate, of outcomes that you did not expect to face. Let yourself be surprised by them, live them and just like the best investors do, dare to take the first step that could take you to achieve financial freedom in retirement.

To start investing for retirement, most financial experts and institutions advise you to invest in an employer-sponsored tax deferred retirement plans. There are several investing options for longer-term goals like retirement and college, according to Navy Federal Credit Union. Here are a few you may consider:

As part of your employee benefits package, you may be offered a retirement plan such as a 401(k), 403(b), or 457 plan, Thrift Savings Plan (TSP), or pension. Your contributions to an employee-sponsored plan aren’t taxed until they’re withdrawn in retirement, and your contributions may even be partially matched by your employer.
Individual retirement accounts (IRAs): IRAs can operate standalone or in addition to an employer-sponsored plan. Depending on the type of IRA you have, you’ll either pay taxes when you contribute (as with a Roth IRA) or when you withdraw (as with a traditional IRA). A Roth retirement account that allows individuals to pay taxes on contributions to the plan at the time they are made, but when funds are withdrawn during retirement, they are tax-free.
529 college savings plans: 529 plans allow you to make large contributions, some with limits beyond $300,000, with withdrawals used for qualified K-12 and college expenses free from federal income taxes. These plans are a great way to save no matter your level of income or timeline for your or your child’s academic career.
Coverdell education savings accountA trust account designed to help fund educational expenses for individuals under age 18. The maximum yearly contribution is $2,000.
(ESA): ESAs let you save for school with a greater variety of investment options than 529 plans. If your gross income is under $110,000 (or $220,000 on a joint return), you can set aside up to $2,000 a year for college or K-12 expenses.
Brokerage accounts: Brokerage accounts allow you to purchase and sell investments, including stocks, bonds and mutual funds, through a brokerage firm. These investments aren’t insured and are subject to taxation, but you may be able to earn more in returns than with other savings vehicles, and you can use the money for any purpose, such as for retirement.

And, do not be too conservative or risk adverse with your investments. The most successful investors have done little more than stick with stock market basics. That generally means using a low cost S&P 500 index fund for the majority of your portfolio and choosing individual stocks only if you believe in the company’s potential for long-term growth.

Your Tolerance for Risk

“Practice patience in stock investing and give your investments a chance to grow into mighty oaks.”

Learning to invest means learning to weigh potential returns against risk, according to TD Ameritrade. Basically, no investment is absolutely safe, and there’s also no guarantee that an investment will work out in your favor.

Furthermore, the risk of losing money can be daunting and upsetting to typical retail investors. This is why it’s important for you to know your risk tolerance level. When it comes to your choice of assets, it’s important to understand that some securities are riskier than others. This holds true for both equity and debt securities (i.e., “stocks and bonds”).

Consequently, the best thing to do after you start investing in stocks, ETFs or mutual funds may be the hardest: Don’t look at them. It’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day. Instead, stay focused on your values and long-term goals. and periodically check your investments.

Additionally, the toughest thing in stock investing is to do nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action.

Most investors lack patience, which is a shame, because almost every successful investor you’ll ever meet or read about has an abundance of patience. You should wait for the right time to buy. And, being patient means you are the best prepared when opportunities emerge.

Many times, the stocks you purchase don’t move much in price for many weeks after your initial purchase. But if you have the patience to stick with those stocks, a few can turn out to be huge winners. And in the end, those big winners are what make all the difference.

References:

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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