As we know, it’s usually not enough to simply save our money. We have to make sure it earns a good rate of return, since we need to keep up with inflation at the very least! Hopefully though, we’ll earn much more that that, and will help us build wealth.
To earn that increased rate of return, it’s important to focus some of our personal finance efforts on investing. Sure, there is some risk involved. But that’s often the way it is, and over time the power of compounding can really work some magic and help us grow that nest egg.
Along those lines, here are 6 tips on investing:
Invest as Early as Possible
By this, I don’t mean as early in morning as possible 🙂 Rather, get involved in investing as early as you can in your grown up life. For example, investing $10,000 and holding it until an age 60 retirement while earning 8% annually can result in vastly different amounts depending on when you start investing:
- Starting at age 50: 10 years until retirement, final amount = nearly $22,000
- Starting at age 40: 20 years until retirement, final amount = nearly $47,000
- Starting at age 30: 30 years until retirement, final amount = nearly $101,000
Clearly the earlier we start, the more we could end up with later in life. I used age 30 as an example, but naturally it would help if we started earlier in our 20’s when starting work in the case of most of us.
Every Percentage Point Matters
Don’t lose sight of how every percentage point of returns can matter. For example, if someone gets a 10% rate of return, that can lead to much better things down the road that an 8% rate of return.
To illustrate, let’s take revisit hat example above with the importance of time. With a 30 year time horizon, that $10,000 would equal nearly $101,000 with the aforementioned 8% rate of return (annually). If you increase that rate of return just slightly, to 10%, there is a noticeable impact. The total is just short of $175,000 in that case, which is substantially higher than just over $100,000!
All this for simply 2% more in rate of return on an annual basis.
Putting all of our eggs in one basket can be tempting but dangerous. Where there is risk there can often be reward, but there is also a need to keep in mind the downside. Diversification can allow us to stay ahead of wild fluctuations by mitigating risks. This includes diversification not only within asset classes but among them as well.
Don’t be Too Reactionary
Markets seem to be quite volatile, especially stocks in recent years. One or two bad days don’t necessarily signify an imminent free fall. Think about how many people panic and sell when markets decline by 25%, only to realize later that it was actually a better time to buy.
This doesn’t mean that we should stay with dogs for a long time. If a stock has experienced protracted declines and shows no tangible signs of going back up (no real business reason), it could be time to give up. However, in many cases, it can be a great idea to simply stay the course in other cases. Buy and hold for the long term can work sometimes!
Watch Out for Bubbles
There was the Tulip bubble many centuries ago, many stock market bubbles, the real estate bubble…you get the idea. The great times and outsized returns simply don’t last forever. Knowing that there isn’t a magic bullet for quick riches can be a great start toward making the right decisions. We generally can’t get something for nothing, and shouldn’t expect the party to last forever!
Whether it’s your tax-deferred option such as a 401(k), or a taxable account, it’s important to regularly contribute funds to be invested. Making this a priority can only fuel our quest for growing wealth even further. Obviously if we invest more we can earn more, but the step of actually saving money in order to have money to invest is an important step in investing – even if it’s a pre-step.
My Questions for You
Do you think about these aspects of investing?
Any other tips to add?