“One of the best ways to build wealth over time is to invest!” The Motley Fool
The stock market is a fantastic tool to build wealth. If you don’t have much money to spare, The Motley Fool video below explains how to start investing with just $100 or less.
Good investing has little to do with how smart you are and a lot to do with how long you stay invested for.
— The Motley Fool (@themotleyfool) March 7, 2021
“America has been on an unsustainable fiscal path for many years, since long before this pandemic.” The Peter G. Peterson Foundation
The $1.9 trillion federal stimulus package will help many families, businesses, and state and local governments hard hit by the pandemic. But it is also fueling concerns about the ballooning federal debt, inflation, and how investors can protect themselves.
The Congressional Budget Office projected that the federal budget deficit will rise during the second half of the decade and climb steadily over the following 20 years. By 2051, the federal debt is expected to double as a share of the economy.
The projections by the nonpartisan office forecast a more challenging long-term outlook, as interest costs on the national debt rise and federal spending on health programs swells along with an aging population. “A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets,” the CBO report said.
Today President Biden signed the #AmericanRescuePlan into law. Here’s a breakdown of the major programs and how much they cost. https://t.co/4JwRXW0Grv
— Peterson Foundation (@pgpfoundation) March 11, 2021
Our federal fiscal budget has structural problems, driven by well-known and predictable factors that include an aging population, rising healthcare costs and compounding interest—along with insufficient revenues to meet our commitments, according to The Peter G. Peterson Foundation.
Over the last 20 years, the federal government’s debt has grown faster than at any time since the end of World War II, running well ahead of economic growth. In addition to COVID-related spending, rising federal debt has been driven by longer-term trends including increasing Social Security and Medicare spending for an aging population. Today, according to the Congressional Budget Office, the federal debt is $22.5 trillion, more than 100% of gross domestic product (GDP).
New Fidelity research suggests that higher debt can slow economic growth, and ultimately lead to higher inflation and more volatile financial markets. Warns Dirk Hofschire, senior vice president of asset allocation research at Fidelity Investments: “Debt in the world’s largest economies is fast becoming the most substantial risk in investing today.”
In the short term, Fidelity’s director of global macro Jurrien Timmer says a market consensus has emerged that inflation will rise in the second half of 2021: “An inflationary boom could result from the combination of COVID infections falling, vaccinations rising, ongoing massive fiscal stimulus, pent-up consumer demand, and low interest rates.”
Longer term, Hofschire says, “The rise in debt is unsustainable. Historically, no country has perpetually increased its debt/GDP ratio. The highest levels of debt all topped out around 250% of GDP. Since 1900, 18 countries have hit a debt/GDP level of 100%, generally due to the need to pay for fighting world wars or extreme economic downturns such as the Great Depression. After hitting the 100% threshold, 10 countries reduced their debt, 7 increased it, and one kept its level of debt roughly the same.”
Only time will tell which way the US goes and when. But Hofschire thinks “government policies are likely to drift toward more inflationary options.” Among them:
In the longer term, if further free-spending fiscal policies are adopted while interest rates stay low and credit remains abundant, the likelihood of inflation could increase. But history suggests the magnitude and timing is uncertain. Many predicted an inflation surge the last time the federal government embarked on major fiscal and monetary stimulus after the global financial crisis, but inflation mostly failed to appear.
Why the national debt matters, according the The Peter G. Peterson Foundation:
The U.S. faces a range of complex, unprecedented health, economic and societal challenges, set against the backdrop of a poor fiscal outlook that was irresponsible and unsustainable before the crisis.
Building a brighter future for the next generation must become an essential priority for America, and the high cost of this health and economic crisis only makes that challenge more urgent. Once America has emerged from the pandemic, it will be more important than ever for its elected leaders to address the unsustainable fiscal outlook and manage the burgeoning national debt, to ensure that America is more prepared, better positioned for growth, and able to meet its moral obligation to future generations.
Interest on the #NationalDebt will become the fastest growing part of the federal budget. https://t.co/6UZd8vy5N0
— Peterson Foundation (@pgpfoundation) March 10, 2021
References:
* The Peter G. Peterson Foundation is a non-profit, non-partisan organization that is dedicated to increasing public awareness of the nature and urgency of key fiscal challenges threatening America’s future, and to accelerating action on them. To address these challenges successfully, we work to bring Americans together to find and implement sensible, long-term solutions that transcend age, party lines and ideological divides in order to achieve real results.
Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial
Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.
Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:
To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.
The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.
Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.
Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.
“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.
Invest in stocks.
Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.
Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.
Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.
Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.
The power of compounding
Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.
Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.
Purchasing power protection
Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.
In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.
Invest for the long term.
Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.
Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.
Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.
No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.
Take a closer look at why we recommend staying invested long-term, with a strategy that aligns with your financial goals. https://t.co/HT8CZyTGxk pic.twitter.com/FgV4FaBS94
— Edward Jones (@EdwardJones) December 21, 2020
References:
Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc.
“Successful investors had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.” Phil Town
Getting started investing can be intimidating. The learning curve combined with the fact that you are putting your own money at risk is often enough to scare many people away from one of the safest ways to put ‘your money to work for you’ and financial freedom.
However, the most successful investors like Peter Lynch and Warren Buffett had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.
This beginner’s guide to investing, according to investment advisor and NY Times Best-Selling author Phil Town, covers everything you need to know to start investing on your own and make smart investing decisions.
Step 1: Pay Off Bad Debt and Avoid Money Traps
Don’t even think about making any major investments before you have paid off unnecessary debt.
These things shouldn’t hold you back from starting to invest, but if you have “bad” debt from credit cards and high interest personal loans that will get you in trouble with interest payments, pay that off before you put money in the stock market.
Additionally, don’t fall into the common money traps. People of all ages trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house.
“Money traps are things that will take all your money so you have nothing left to invest.” Phil Town
These are money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.
Step 2: Create an Emergency Fund
If you have figured out how to spend your money wisely, you have probably figured out how to save it. An emergency fund is part of your savings that you set aside in case of an emergency.
It’s a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen a pandemic!
If your car breaks down, you get laid off, or you have unforeseen medical expenses, you will have the funds you need. An emergency fund will also come in handy in case of a recession.
Even if you don’t have to tap it, you will have peace of mind knowing there is a cushion available if you need it.
Step 3: Learn the Investing Basics
You wouldn’t start driving a truck without knowing the basics driving, so you shouldn’t jump in the stock market without knowing the basics of investing.
Before you begin building wealth, it’s important to understand the basic goal of investing as well as the basic process that you will use to reach that goal.
Step 4: Embrace a Positive Investing Mindset
Your investing psychology (mindset and behavior) and how it affects your investing are important aspects to understand and appreciate. It will dictate how you as an investor will actually behave, the reasons and causes of that behavior, why the behavior can hurt your wealth and what you can do about it.
Understanding the psychological aspects and how psychology affects investing are an important and critical aspect of investing. Knowing that you belong in the market and that your capable of investing in the market are important first steps.
Successful investing has much to do with you needing to be a pretty good amateur psychologist of both your own biases and the market’s, according to Nick Murray. Virtually all market tops and bottoms occur at emotional extremes:
The theory behind sentiment analysis is quite simple. Market peaks occur when buying power has become exhausted. This happens because those buyers have become either complacent, overconfident or just plain greedy. Once they’ve all bought in, who’s left to buy?
Step 5: Create an Investment Plan
Once you have a positive investing mindset and know you know how investing works, you can move on to the next steps, but don’t get your wallet ready just yet.
Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.
The best investment plan is one that is customized to your lifestyle, so it’s necessary to create an individualized strategy that will set you on the path to success.
Having a clear investment plan will give you a ton of clarity as you begin investing.
Step 6: Decide What Type of Investment to Make
Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish. There are several different types of investments that you should be aware of before you start investing your money.
Step 7: Establish Your Investing Strategy
Investing is more than picking a few stocks and hoping for the best. If you’re doing it right, there’s a real strategy involved. Now, you can choose from a plethora of investment strategies for investing beginners. These investment strategies include:
There is one investment strategy that is recommended which follows the principles of value investing. When you value invest, you buy growth companies, small-cap companies, and impactful companies, but you buy them when they are on sale.
This investing strategy will give you the highest rates of return with the lowest amount of risk. When you buy wonderful high-value companies for half or even a quarter of their value, you can ensure big returns.
Step 8: Determine Where To Invest
Once you decide that you are ready to start buying and selling stocks, you need to choose what platform or service you will use to make your investments.
For most investors, an online broker will be the best option because online brokers allow you to place trades for a relatively small fee while still offering all of the resources and information you need to make wise investments.
There are many online brokers available to choose from and most are fairly competitive in regards to the fees they charge and the services that they offer. And, you really can’t go wrong with any of the major online brokers.
Step 9: Build a Stock Watchlist
It’s time to start investing. If you decided stocks are the right type of investment, you can start picking stocks…carefully. A stock watchlist is your own personal list of companies that you have researched and found to be worthy of your investment. Once you build your watchlist, you watch and wait for the companies on it to go on sale.
To build a watchlist, you need to do your research
The best companies to invest in for beginners are companies that have been around for at least ten years, companies that you understand, companies that exhibit past growth and the potential for future growth, companies that are run by trustworthy management, and companies that have been placed on-sale relative to their value.
You can break down these qualifications into what we call the Four Ms of Investing. It will take a bit of research to discover the Four Ms for each company, but the payoff will be worth it.
If you find a company that meets these qualifications, you will have found an ideal investment for any investor, beginners included.
If you find a company that meets all of these qualifications, you will likely have found an ideal investment opportunity.
Practice Patience and Wait
Once you have found a company that meets your qualifications, it still may not be prudent to invest in it right away. Instead, you’ll want to put the company on your watchlist and wait until the stock market places it on sale.
The good news is that the market puts wonderful companies on sale all the time. If you’re patient, the companies on your watchlist will eventually dip to a price that allows you to buy them up for a bargain rate and profit once the price of those companies goes back up to their true value.
Investing Tip: Check Your Emotions
By far, the most important investing tip for beginners to follow is this: keep your emotions in check.
If you invest in wonderful companies at a point when the market has placed them on sale relative to their value, it’s hard not to make money; that is, if you don’t let your emotions get the better of you.
Even great companies can experience dips in price over the short-term, and these dips often cause inexperienced investors to become afraid and sell off their shares.
By the same token, greed causes many investors to buy into a company at times when the company is overpriced. This leads to lower returns or even losses.
If you want to succeed as an investor, you have to avoid letting fear or greed drive your decision-making process.
Remain patient and logical as you invest and you’ll be able to avoid many of the pitfalls that beginner investors often fall prey to.
Step 10: Know When to Buy Your Stocks
Succeeding at investing in stocks is all about choosing the right companies as well as the right time to invest, but the right time won’t last forever. Once a company on your watchlist goes on sale, it’s time to buy.
Making money requires some degree of timing. Investment legends like Warren Buffett may condemn market timing, however, they would not disagree that there are far better times to enter a stock position and exit a stock position than others.
Entering a new position when there is panic is a far better bet than when the stock price has increase to levels far above its intrinsic value due to fear of missing out.
At this point, all you need to do is place your money in the company and keep it there for the long-term. If you made a wise investment, your money will grow in value for many years after you invest it in the company.
References:
Imagine operating a boat without the basic understanding of nautical rules of the road or even how to operate a boat. Scary thought.
Here’s another scary circumstance – one that is all too real. Many Americans are making financial decisions with minimal financial knowledge of investing, budgeting, and credit. The TIAA Institute conducted a survey on U.S. financial literacy, asking 28 basic questions about retirement saving, debt management, budgeting, and other financial matters. The average respondent answered only about half of the questions correctly.
Another study, conducted by Pew Research, found that one in four Americans say that they won’t be able to pay their bills on time this month.
It has been said that knowledge is power, and if that’s true, then too many Americans lack the power to control their financial futures. Financial success rarely happens by accident; it is typically the outcome of a journey that starts with education.
Talking about money is one of the most important skills to being a fiscally responsible and a financially literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one, according to CNBC.
Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, it is considered rude to discuss money and wealth.
The missing component is financial literacy education and training.
Mastering personal finance requires you to look at your financial situation holistically and come up with a plan for how to manage your money. In this TD Ameritrade video, we’ll look at helpful principles for six personal finance topics:
Make high impact adjustments to your finances to improve your financial future.
References:
From Fidelity Investments
Learn the fundamentals of options trading. This introduction to trading option contracts is all about getting to know the basics of options investing and trading; learning the key terms and concepts essential for a new or novice options trader.
Put/Call Ratio
High put/call (P/C) levels are a sign of fear (bullish from a contrarian view), while low P/C levels are a sign of complacency (bearish from a contrarian view). The trend of P/Cs is more important than absolute levels. When the intermediate- to longer-term trend of P/Cs is lower, it is bullish for stocks. When the trend is higher, it is bearish for stocks from an intermediate-/longer-term basis.
“Black Americans are already behind the eight ball, and it is disheartening to see that at current savings and investing rates, the wealth gap will continue to expand, endangering our futures and leaving our families exposed.” Mellody Hobson, co-CEO & President of Ariel Investments
The annual Black investor survey by Ariel Investments and Charles Schwab was recently released.
This year, the survey revealed that Black Americans continue to have less opportunity to benefit from stock market growth than white Americans at similar income levels, according to Ariel Investments. The data also showed signs of hope, including increased young investor engagement.
For more than 20 years, the Ariel-Schwab Black Investor Survey has compared attitudes and behaviors on saving and investing among Black and white Americans.
This year’s results show the deep-rooted gap in participation between the groups persists. The survey conveyed several important trends:
It is encouraging to view that younger African Americans are investing in greater numbers. Yet, a significant gap persist in the overall number of who invests by race and ethnicity.
More Black Americans became first-time investors in 2020 than in any other year, according to the results of a new survey by Ariel Investments and Charles Schwab. The rise has primarily been driven by younger investors: 63% of Black Americans under 40 now report participating in the stock market, equal to their white counterparts.
On the whole, however, wide gaps remain, with 55% of Black Americans and 71% of white Americans reporting stock-market investments. “This disparity, compounded over time, means that middle-class Black Americans will have less money saved for retirement and less wealth to pass onto the next generation,” the report’s authors write.
The ongoing pandemic has only exacerbated the imbalance, according to the report. In 2020:
“Financial literacy is a great equalizer, and a life skill that everyone needs.” Carrie Schwab-Pomerantz, President of Charles Schwab Foundation
Financial literacy and education are desperately needed in the African American community. And, it needs to start at a very early age before the vestiges of debt and negative spending behaviors becomes a difficult to break habit.
Trust Remains an Issue
Trust in the financial services industry continues to affect stock market participation among Black Americans. While similar proportions of Black and white investors believe that financial services institutions are not trustworthy, only 35 percent of African American investors feel they are treated with respect by financial institutions versus 62 percent for white investors. As a result, Black Americans are less likely to work with financial advisors.
Additionally, what works against new African Americans investors is that most wealth and financial advisors will not work with you if you don’t already have large amounts of money you either earned or inherited. This leaves the vast majority of American (Black, White, etc) out of the financial advisory equation.
Black investor participation in the stock market is at its lowest levels, according to recent findings from the Ariel-Schwab survey. Learn more. https://t.co/9tXJT9Avfb pic.twitter.com/7OPQtAmupH
— Charles Schwab Corp (@CharlesSchwab) February 25, 2021
There will be a conversation among leading financial services experts from Ariel Investments, Charles Schwab, and CNBC discussing the challenges driving the racial wealth opportunity gap. This group will discuss the research findings, broader trends, and how the financial services industry can challenge the status quo.
The The Racial Wealth Opportunity Gap Widened in 2020 conversation will occur on Tuesday, March 2, 2021, 3:00 – 4:00 p.m. EST.
Join us for a panel discussion hosted by @MellodyHobson and @CarrieSchwab on the challenges driving the racial wealth and opportunity gap. March 2nd 2021. Register Today. https://t.co/yQIiesMWfQ pic.twitter.com/ef5yeIgFM7
— Charles Schwab Corp (@CharlesSchwab) February 24, 2021
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Many successful investors follow one extremely important rule of thumb: Never invest in something you don’t understand.
Selecting the right companies to invest is very difficult and the decision shouldn’t be taken lightly. When you invest in the stock market, you will be tempted often to buy companies or products that you don’t truly understand.
Consequently, if you can’t understand the investment and understand how it will help you save for the future, build wealth over the long term or achieve your financial goals, do not buy the asset. You need to resist temptation, and focus on the only question that counts:
“Do I understand the business of this company well enough so that I am reasonably confident that it is going to be a good investment?”.
Warren Buffett famously said he has three boxes for investment ideas: in, out and too hard. If a company’s business or product is too difficult to understand, it’s better to just file it in the “too hard” category and move on to another opportunity.
Investors should always remember that a share of stock represents partial ownership of a company. “Just as you would never purchase a private business from someone else without at least looking at its sales, profits, debt and trends of all three of those things at a bare minimum, you need to do the same thing before purchasing stock in a company,” Cornerstone Wealth chief investment officer Chris Zaccarelli says. “If you are doing anything else, you are just hoping what you bought will go higher – and hope is never a good strategy.”
Be sure to always read an investment asset’s prospectus or disclosure statement carefully. And, if you are still confused, you should think twice about investing.
Don’t put your more money in a business you don't understand. Never put your money in something because someone said to. Never invest in something that you don't fully know how it works. That includes stocks, bonds, annuities, real estate etc. Be smart with your money!#investment pic.twitter.com/dpxGAv4ERu
— Lifted Finance Consulting Ltd (@FinanceLifted) November 16, 2019
The bottom line for investors is simple: If you don’t completely understand how an investment works, or creates revenue, earnings and cash flow, then don’t buy it.
References:
“An idiot with a plan can beat a genius without a plan.” Warren Buffett
Creating budgets and financial milestones are great, but you need an actual investment plan to help you stay on track. It’s one of the most critical steps to meeting your long-term financial goals. According to Warren Buffett, “An idiot with a plan can beat a genius without a plan,” and this is especially true in investing.
Planning helps you focus on long-term goals, not short-term fears and market volatility. If your goal is 20 years away, a loss over one month or year probably isn’t all that important. Focus on your individual goals and time horizon. People who invest more time planning their finances invariably make better decisions, get better results, and achieve financial independence.
It’s also important to know why and for what you are investing in because it will influence how and in what you invest. This is the basis of an investment plan. The best investment plan is one that is tailored to you, and includes an individualized strategy and goals that will set you on the path to success. That means a plan that takes into account your individual goals, situation, and time horizon—and one that’s diversified.
“People who invest more time planning their finances invariably make better decisions, get better results, and achieve financial independence.” Brian Tracy
Diversification doesn’t mean you won’t ever lose money. But owning a mix of investments can help reduce the risk. That way if some investments drop, others may rise, helping you reach your goals. And, you should always manage your risk—by choosing an asset mix that is appropriate for your current circumstances, and creating diversification within that asset mix to improve your risk/return relationship.
Step 1: Evaluate Your Current Financial Standing
The first step in creating your investment plan is to evaluate your current financial standing and determine how much you have to invest.
Step 2: Define What You Want to Accomplish
Your short or long term goals that you want to achieve in your life will impact your investing strategy. Where do you want to be when you retire? Do you want to own a house? Do you want to create passive income? Do you want to create generational wealth for your family?
Defining what you want to accomplish will help you determine how much risk you can take and what type of investments to make that will help you achieve what you want to accomplish in your lifetime.
Step 3: Determine How Much Risk You Can Take
Rule #1 of Investing is to not lose money, but there is always some risk involved when investing in an unpredictable stock market. How much risk can you take based on what you want to accomplish (what we just talked about) and how much time do you have to accomplish it?
If you want to earn money for retirement and retirement is 30 years away, you have a lot of time for your money to grow and recover from economic downturns, so you can afford to be more aggressive. However, if retirement is only a few years away, you will need to make more conservative investments that ensure you will have enough money, but won’t lose it.
Step 4: Decide What Type of Investment to Make
You need to decide what type of investments will help you accomplish what you have set out to accomplish. Consider building a mix of stocks, bonds, and short-term investment. You should learn about the different types of investments that are available before you start investing your money.
Step 5: Establish Your Time Horizon
Time Horizon is the period where one expects to hold an investment for a specific goal. The longer the time horizon, the more aggressive, or riskier portfolio, an investor can build. Simply put, your investment time horizon is the length of time you need your portfolio to work for you.
Planning and goals are really just the means to the end. The end being the tangible things (retirement security, house, generational wealth, etc.) you set out to accomplish. You should make a promise to yourself that you will accomplish that thing and make a plan to go after it.
And monitor your investments per you plan and progress toward your goals on a set, not-too-frequent schedule—perhaps quarterly or twice a year, or if your goals or circumstances change.
By developing and sticking to an investment plan that’s squarely focused on achieving your individual goals is essential in successful investing.
Regardless of your plan, it is critically important to recognize that investing involves the risk of loss. Having a plan that aligns with your objectives and risk tolerance, educating yourself on investing and doing your research to know the risks associated with investing are all vitally important.
Bottom line is that financial plans don’t fail people. Instead, people fail to plan.
The only way to find financial security is to draw yourself a map. Folks who have specific financial plans that detail what they want save more than people who don’t…Why? Because human beings are easily distracted (especially by shiny new things). So unless you have a road map that tells you where you’re going, it is very, very hard to get there. It’s not that the map will never change. Revising your specific plans for the future is far better than not having any plans at all.
References:
“The less you spend on investing, the more you get to keep.”. Rick Ferri
When investors who don’t manage their costs, they pay a significant price for their inaction and inexperience. As John Bogle has famously said, “In investing, you get what you don’t pay for.” The primary issue is that investment product providers, especially annuities and actively managed funds, and financial intermediaries are selling commission-based products that take advantage of unsophisticated investors by marketing high-fee, high-commission funds that earn low returns.
Cost Matters Hypothesis.
It costs money to try to beat the market, according to Bogle, and you pay whether or not the manager succeeds. When a group of financial people try to out perform the market, some will win and be successful, some will lose, but collectively they will get the market’s return—before fees. After fees, they will get much less. Bogle once calculated that “active stock investors lose close to 3% a year in fees, trading costs and taxes.”
“Costs matter. They matter more than past performance.” John Bogle
Occasionally, you might get lucky for a year or five or ten. Eventually, though, your luck will run out. With each passing year it becomes more likely that you will be overtaken by the law of averages.
John C. Bogle, the titan of low-cost investing, dies at 89. He leaves behind the $4.9 trillion Vanguard empire, a collection of devoted acolytes and millions of investors whose retirements will be fatter because Bogle spread his gospel https://t.co/XBo2KToPck pic.twitter.com/v4ioFFbe3i
— Forbes (@Forbes) January 17, 2019
Buffet advice to investors
Billionaire investor Warren Buffett recommends that most investors should buy low-cost index funds. In his sage opinion, buying index funds would go a long way toward solving this serious problem of overpaying for investments. Buffett’s recommends inexperienced investors and investors without time or inclination to conduct research buy index funds. His view is that index funds, such as those that mimic the S&P 500 benchmark, are a smart investment that almost anyone can follow.
“Costs really matter in investments,” Buffett says in a CNBC interview. “If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement.”
The appeal of index investments is their low cost compared to most actively managed mutual funds and ETFs. With active funds and ETFs, according to Fidelity Investment, a manager attempts to deliver performance that outpaces a chosen index, often referred to as a benchmark. Passive ETFs and mutual funds, on the other hand, try to match the performance of a benchmark.
Benchmarks may include familiar indexes such as the S&P 500, as well as custom benchmarks created by a fund’s managers. Passive investments may not offer the potential to outperform an index, but they typically offer lower costs than active funds managed against a similar index or benchmark.
When evaluating cost, most investors focus on the expense ratio—the annual percentage of assets that mutual funds and ETFs charge investors to cover services such as investment management, recordkeeping, compliance, and shareholder services. In general, these costs are much lower for passive strategies than for active ones. And, even this expense that can vary dramatically even among seemingly similar passive index funds and ETFs.
Labor Secretary Thomas Perez said during a Senate panel meeting: “The problem with our [financial] system in the U.S. is it incentivizes complexity when simplicity is all too frequently what’s called for. … It incentivizes complexity because complexity generates more fees.”
The solution and best defense against those who prey on investor ignorance, according to Rick Ferri, is investor education and requiring financial literacy in our schools and colleges. Perhaps we need to scream continuously, “Just buy low-cost index funds!” every time an investor is pitched a hyped-up mutual fund advertisement or a high-cost fund.
Not all index funds are built the same. Keep in mind these five considerations when shopping for index funds to invest in.https://t.co/G1JkARUq0s
— TheStreet (@TheStreet) November 28, 2020
Investing in index mutual funds and ETFs can be an outstanding low-cost strategy. And, like any other investment strategy, investing in index funds requires that you understand what you are investing in. You need to ensure that you are investing in a low-cost product that tracks a benchmark that fits with your investing strategy.
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