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How To Start Investing In 2016

How To Start Investing In 2016

Investing can be scary. The fear of the unknown always is. And the case for Millennials is worse, especially considering many of them graduated into a financial crisis and witnessed the stock market plummet nearly 40% in 2008. That kind of traumatic experience sticks with you, just as the Great Depression forced an entire generation of Americans to develop very frugal habits.

However, it’s important that young adults overcome their fears and start investing to secure their financial future. Waiting too long and starting too late can result in not having saved enough for retirement. After all, the stock market doesn’t plunge every other year and investing volatility is why experts always recommend you pick long-term investments, not short-term trades.

Below, we will discuss how to start investing in 2016, including the power of compounding interest, the average return of the stock market over the last 100 years, how to choose a brokerage account that is right for you, and finally, investment tips for beginners who may need some guidance.

Average Stock Market Returns

For starters, let me provide some basic background on expected average stock market returns. Between the beginning of 1900 and the end of 2015, the stock market returned an average 11.53%. To make sure that these dates were not cherry-picked, let’s remember what happened during this time period: two World Wars, the Great Depression, Vietnam War, Korean War, an oil embargo, multiple terrorist attacks, and a number of recessions caused by economic boom and bust cycles.

Even if you decide to solely focus on the most recent recession, including the roughly 37% drop in equities in 2008, the stock market has returned over 8.40% between 2007 and 2015. This is because the drop in the S&P 500 was closely followed by a slow recovery that ultimately helped investors recover their investments and then some. The point is, despite recessions and individual years with negative returns, the stock market averages a strong positive return over time.

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Time in the Market vs. Timing the Market

It is also important to point out that investors cannot time the market. In fact, research shows that a handful of days each year are actually responsible for the majority of the gains in that year.

The chart below, which reflects data compiled by JPMorgan Asset Management, demonstrates that an investor would have earned a 9.22% return if they were fully invested between 1993 and 2013. But if an investor were to have missed the top ten trading days out of ten years, the return would have decreased to 5.49%.

Investing - Time in the Market

    New investors should ask themselves: out of the more than 2,500 trading days in that 10 year period, would you have been able to pick the top 10 highest earning days?

    Start Early – The Power of Compounding

    Another reason why Millennials and young families should start investing as early as possible is the power of compounding. If you aren’t familiar with the concept of “compounding” returns, it is when you earn a gain on your principal the first year, and then begin to earn returns on your previous returns.

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    For example, if you invest $1,000 and earn an average 10% return annually, your investment will grow to $1,100 after the first year. After the second year, you won’t just earn another $100 but $110, for a total of $1,210. And the third year you will earn $121 for a total value of $1,331.

    On a small scale, this doesn’t seem like much, but assume you invest $1,000 per year for 30 years and average a conservative 8% return. Instead of having $30,000 in a checking account, you will have accumulated a little more than $132,000.

    Now let’s make this more realistic – assume you have a Roth IRA and you contribute the maximum (for your age) $5,500 per year for 30 years. At an average rate of return of 10% annually, you will have nearly $1.1 million dollars. But here’s why investing as early as possible is essential – if we change the number of years we’ve invested from 30 to 25, we only end up with $654,000 in retirement. Those final 5 years of investing on a large capital base comprise a significant amount in terms of gains and mean the difference between a comfortable retirement and a strained one.

    Compounding returns are critical to investors because they allow you to turn small principal contributions over a long period of time into large nest eggs. Keep in mind that Albert Einstein called compounding interest “the most powerful force in the universe.”

    How To Choose A Brokerage Account

    Once you’ve made the decision to start investing for your future, you must decide on your investment strategy and how to execute it. There are many brokerage houses or investing platforms available today – some of which have been around for decades, while others have leveraged new technology to offer consumers alternatives to traditional companies.

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    Traditional Investment Management

    A decade ago, investors had to choose between mutual fund managers such as Vanguard, Fidelity, and BlackRock (iShares) and discount brokerage firms such as TD Ameritrade, E*TRADE, and Scottrade.

    Mutual and index fund managers are ideal for passive investors. If you don’t know much about investing except for the basics, an index fund or ETF from Vanguard or Fidelity may be best – both securities use broad indexes as benchmarks and can be a way for investors to mimic returns from the S&P 500, Dow Jones Industrial Average, or NASDAQ.

    On the other hand, if your employer 401K is already held with one of those mutual fund managers, you may want your private investment portfolio to be at a brokerage house. Discount brokers offer a variety of services, but they are ideal for investing in specific securities or trading stock options.

    Nevertheless, most investors aren’t stock-pickers, and evidence confirms they shouldn’t be. Research shows that “actively managed funds lost out to their passive peers in nearly every asset class during the 10 years between 2004 and 2014…”

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    So why pay your financial advisor a costly fee if they are going to have you invested in passively-managed index funds? Enter the robo-advisor.

    What Are Robo-Advisors?

    The robo-advisor is technology’s response to high fees charged by useless financial advisors and planners. Robo-advisors, such as Wealthfront and Betterment, are online wealth managers that provide automated, virtual investment and portfolio management advice without the intervention of a physical human being.

    By asking you a handful of questions regarding your financial goals, risk tolerance, and personal financial circumstances (e.g. income, assets and age), algorithm-based robo-advisors are able to determine your ideal investment plan. Their programs then recommend a number of investment options and allocations, taking into account the need for diversification across different asset classes and geographies. The other benefit to investors is that, because robo-advisors don’t rely on individual advisors to manage clients, their fees are much lower.

    Although both alternative asset managers are cheaper than traditional financial advisors, both companies have pros and cons. If this investment style seems appealing to you, it is crucial investors research and compare Betterment vs Wealthfront to determine which one better fulfills your needs.

    Stock Market Investing Tips – Dos and Don’ts

    Finally, when you pick a platform and start investing, it is important to develop a basic investment philosophy. While each investor has a different risk tolerance and way of choosing his investments, here are a few stock market tips to help you understand the fundamentals.

    • Set long-term goals. Investing is not a get-rich quick opportunity, and taking on too much risk can easily result in financial ruin. Evaluate your age, risk tolerance, time horizon, and financial goals (e.g. income generation, wealth preservation, or growth).
    • Control your emotions. Hope, greed, fear, and passion are emotions that will cloud your judgement. Investing with objectivity will protect you from making costly mistakes.
    • Minimize risk and maximize reward. Don’t take on excessive risk for small gains. Ideally, take on little risk for huge potential gains.
    • Don’t worry about taxes. If you think a stock has overshot its true value, sell. It is better to take your gains and pay capital gains taxes than to lose money holding a stock too long.
    • Buy best-in-class companies. Unless a mediocre company is deeply misunderstood by other investors, always buy the best and strongest companies in an industry.
    • Don’t be afraid to hold cash when you don’t see any bargains in the marketplace.
    • Don’t believe the hype on Wall Street and always be skeptical of financial analysts. They have a vested interest in keeping you invested, especially when they have positions in the names they are advertising.
    • Don’t let a financial advisor convince you to make an investment you aren’t comfortable with. If the investment, company, or industry doesn’t make sense to you, why invest in it?
    • Life insurance is not an investment. Unethical financial advisors make exorbitant commissions selling whole life insurance, which they claim is an investment opportunity with guaranteed returns. The high premiums you pay outweigh any returns you may earn. Term life is the best life insurance you can buy, then take your savings and invest in an index fund.

    Final Word

    Starting anything new can be intimidating, but that’s no excuse to procrastinate and avoid securing your family’s financial future. To eventually reach financial independence, young adults and families need to start investing early to take advantage of time and compounding returns. If you are skeptical or fearful, starting small is an option. Ultimately, successful investing is all about taking simple steps and executing on fundamental principles on a regular basis. Let 2016 be the year you begin your journey to financial freedom!

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    Gary Dekmezian

    Entrepreneur

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    Published on May 7, 2019

    How to Invest for Retirement (The Smart and Stress-Free Way)

    How to Invest for Retirement (The Smart and Stress-Free Way)

    When it comes to stocks, I bet you feel like you have no idea what you’re doing.

    Everyone who’s not a financial expert has been there. I’ve been there. But, time is passing and you need to be crystal clear with how you’re investing for your retirement.

    Otherwise, it’s back to work until you can afford not to. So, how can you invest for retirement when you’re not a financial expert?

    You take the time to learn the fundamentals well. If you do, you can grow your wealth and retire happy. The best part is that you don’t need to be a financial expert to make smart investment decisions.

    Here’s how to invest for retirement the smart and stress-free way:

    1. Know Clearly Why You Invest

    Odds are you already know why should invest for retirement.

    But, maybe you know the wrong reasons. It’s time you get clear on why you’d like to retire. Here are some questions to help you get started:

    • Will you spend more time with your family?
    • What does retirement mean to you?
    • Are you looking to launch that business you’ve been holding off for years?

    Everyone wants to retire but not for the same reasons. Once you’re clear for why retirement is important for you, you’ll focus on making it happen.

    Investing in the stock market allows you to take advantage of compound interest.[1] All this means is that your money earns money on top of its interest. A reason why investment in the stock market is one of the best ways to plan for retirement.

    2. Figure out When to Invest

    “The best time to plant a tree was 20 years ago. The second best time is now.”– Chinese Proverb

    It’s true if you’d had started investing when you were 10 years old, you’d have a lot more money than you do today.

    The reality is that most people don’t start investing until it’s too late. So, if you’re currently waiting for the perfect time to start an investment, it would be today. Open your calendar and block out 2 to 3 hours to choose how you’ll invest for retirement.

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    A quick way to get a snapshot of where you stand is to use Personal Capital. Input all your personal information and spend some time setting your retirement goals. Once completed, you’ll know where you stand with your retirement.

    Having a savings account for retirement isn’t planning for retirement. Why? Your money loses value when you factor in US inflation.[2]

    3. Evaluate Your Risk Tolerance to Create the Perfect Portfolio

    Investing your money well depends on your emotions.

    Why?

    Because when the market drops most people panic and withdraw their money. On average, the US stock market yields an annual 6% to 7% ROI (return on your investment.) But, this won’t happen if you’re worried about short-term loses.

    Before you invest your next dollar, know your risk tolerance.[3] Your risk tolerance determines the number of risky and safe investments you’d have.

    Regardless of your investing style, you need to view investing for retirement as a long term game. Know that some years you’ll lose money but recoup this in the long-term.

    Avoid watching market-related new. Also, create a double authentication to log in your investment account. This way you’re less likely to withdraw your money.

    4. Open a Reliable Retirement Account

    Depending on your circumstance, you may need to open a new brokerage account. This is the account is where you’ll invest your money.

    If you’re currently working for a company, odds are that they offer a 410K investing account. If so, here’s where you’ll invest most of your money. The only problem with this is that you’re limited to the stock options that are available.

    You do have the option to open a separate IRA (individual retirement account.) Here are some of the best brokers:

    1. Vanguard
    2. TD Ameritrade
    3. Charles Schwab

    5. Challenge Yourself to Invest Consistently

    Committing to invest for retirement is hard, but continuing to do so is harder.

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    Once you’ve started investment for your retirement, you run at risk from stopping. Often you’ll want to contribute less, so you’d have more money in your pocket.

    That’s why it’s important that you create a budget that allows you to invest each month. If you’re working for a company, you can set a percentage for the amount you’d like to contribute each month. Most people by default contribute 1% but aim to contribute 10% to 15%.

    Be the judge for how much you can afford to contribute after covering important expenses. To stay motivated, use Personal Capital to view your net worth.

    A benefit to contributing money to your retirement account is not taxed. For example, if you earn $100 and invest 10%, you’d contribute $10, then get taxed on the remaining $90. As of 2019, the most you’re able to contribute towards your 401K is 19K but this can change.

    6. Consider Where to Invest Your Money

    The most common way to invest your money is in stocks, but it’s not the only way. Here are other ways to invest:

    Robo Advisors

    Robo-advisors[4] are fancy algorithms that’ll choose the best investments for you. Sites like Wealthfront make it easy for first-time investors to invest their money. You’d input information about yourself and set your risk tolerance.

    Then, set your monthly contribution amount and your robo-advisor would do the rest. Robo-advisors charge a fee to manage your money, but less than regular advisors.

    Bonds

    Think of bonds as “IOUs” to whomever you buy them from.

    Essentially, you’re lending money and charging interest. Like stocks, not all bonds are equal. Some will be riskier than others depending on their rating.

    Here are the different types of bond categories:[5]

    1. Treasury bonds
    2. Government bonds
    3. Corporate bonds
    4. Foreign bonds
    5. Mortgage-backed bonds
    6. Municipal bonds

    Mutual Funds

    Picture a group of people dumping all their money in a jar that’s managed by a professional. This is how mutual funds work. The fund manager manages the money looking to earn capital gains (interest.)

    One of the best types of mutual funds is index funds. Since these funds don’t try to beat the market and instead follow it, they need less research. Because of this they often charge the lowest fees and yield the best long-term results.

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    Real Estate

    Yes, buying a home is an investment when done correctly.

    Imagine buying a home and using it as a rental property. After repairing it, you receive a monthly surplus check of $100 to $200.

    This may not sound like a lot, but repeat this process enough times and you’d earn a large amount of passive income. That’s why real estate is one of the best investments to not only retire but become wealthy.

    But, it requires a lot of money to start and you should expect losing money along the way as you learn the process.

    Savings Accounts

    Your money can still grow in a savings account. Nowadays most online banks offer a 2% annual return. Although the average inflation is higher your money will be available when you need it.

    7. Master Disincline to Dodge Short Success

    Investing for retirement is a long-term strategy. That’s why you need to master delayed gratification. All this means is delaying short-term pleasure for something bigger in the future. Research shows that those who have delayed gratification are more successful.[6]

    So how can you master delayed gratification?

    By building your discipline.

    Think back to what retirement means to you. A clear purpose will help you avoid withdrawing your money during a market downturn. It’ll help you contribute more towards retirement when you’d want to waste it instead.

    Your journey towards retirement will be long, so reward yourself along the way. Choose a reward that’s relevant and meaningful, so that you reinforce positive behavior. For example, after contributing more towards retirement, treat yourself to dinner.

    8. Aggressively Invest on This One Investment

    I’ve mentioned several types of investments but haven’t covered the most important one.

    It sounds cliche but here’s why you’re your best investment towards retirement. The more you know, the more money you’ll be able to make. The more good habits you adopt, the more secure your retirement will be.

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    More importantly, investing in yourself is an investment that no one can take away. There’s no market downturn nor tragic circumstance that’ll wipe your knowledge and experience.

    But, how can you invest yourself?

    Reading books, blogs, and anything that’ll help you learn new topics daily. Listen to podcasts and audiobooks on your commute to/from work.

    Save money to buy courses and hire coaches. I used to believe hiring coaches was a waste of money when I could learn the subject alone.

    But, coaches see your blind spots and hold you accountable. Hiring the right coach will help you achieve your goals faster than you would’ve alone.

    Retire Happy with Excess Money

    The key to a secure financial future doesn’t only belong to financial experts.

    It’s possible for you and I. What if you were able to retire earlier than most people and weren’t a financial planner? What if you were able to focus on what you enjoy doing the most while your money was working hard for you?

    I know this sounds impossible now, but the truth is you’re capable of taking charge of your retirement. I’m not a financial expert but I’ve learned how to invest my money by reading books and learning from others.

    Investing your money is scary. So start small and invest a small amount of your money with a robo-advisor. Feel your money drop and rise for a month or two. Then, invest more and keep this up until you’re aggressively saving for retirement.

    One day, you’ll wake up with a net worth you’re proud of – confident about your retirement. You now know a few strategies you can use to invest in your retirement. Will you take action to retire happy?

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    Featured photo credit: Matthew Bennett via unsplash.com

    Reference

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