Financial companies often portray investing as a complex, highly technical process, only to be attempted by trained experts. In reality, the basic principles of investing are rather simple. And if you follow these principles, you can do very well investing. So whether you are saving for retirement, college, or just working to make your money grow, here are the basics you need to know to maximize your gains.
Time is Your Ally
One of the most important investment principles is “invest early and often”. This allows your money to earn compound interest – the snowballing process where your money earns money. Given enough time, compounding can turn even a small amount into a fortune.
Consider Steve and Jim. Steve began investing at age 25 and contributed $2,000 per year for ten years. Jim waited until age 35, then invested $2,000 per year for 30 years. Assuming both men earned 10% on their investments, who has more money at age 65? Surprisingly, it’s Steve! He has over $612,000 while Jim has under $370,000. Why? Steve’s money started working for him earlier; compounding its value. If Steve had continued contributing $2,000 per year until age 65, he would’ve had almost $1 million. Make time work for you by investing early and often. The sooner you start investing, the better!
Maximize Your Return with Stocks
The return you earn on your investments is as vital as the amount of time you invest. Using the above example, reducing Steve’s return from 10% to 9% would produce only $440,000 instead of $612,000. An 11% return would earn almost $850,000. A single percentage point of return can make a huge difference over time.
To maximize your investment, use stocks. Stocks have historically outperformed all other investments. Over the last 75 years, they averaged 11.4% annual gains compared to only 5.1% for bonds. But since stocks are volatile, they carry more risk short-term. So use stocks for long-range goals, ten years or more, to reduce risk. Doing so will also allow you to take advantage of compounding.
If your time horizon is less than ten years, you’ll need to move more investments into bonds or CDs. A general rule: once within ten years, the sooner you’ll need your money, the more you need in non-stock investments.
Mutual Funds with Low Costs are the Best Way to Buy Stocks for Most Investors.
Mutual funds are groups of stocks or bonds chosen and managed by an expert. In exchange for an annual fee and other expenses, you get professional direction and instant diversification. The most predictable element about a fund’s future success is how much you’ll be charged to own it – because the more they charge, the less they have available to return to you. Do your homework and investigate all the fees involved before buying a fund. Avoid those that charge a sales fee (also called a load), tack on high operating expenses, and lose a substantial portion of your gains to taxes.
Index Funds are a Wise Choice
Index funds are mutual funds where the manager buys all the stocks in a market benchmark or index average (like the Dow Jones Industrial Average or Standard & Poor’s 500) rather than actively picking which stocks to purchase. Funds based on an index, by definition, will never outperform the market. But because they minimize trading, tax, and sales costs, they outperform the vast majority of actively managed funds over time.
Take Advantage of the Government
The government has numerous programs to help you invest. The main ones are IRA’s and 401k’s. With these investments, you pay no taxes until you withdraw funds, giving you a better total return on your money. Better yet, contributions to these can often be deducted from your annual earnings, reducing your annual taxable income. And some employers will match your 401k contributions, allowing you to earn even more. The drawback? There are severe penalties for early withdraw of these funds so don’t invest money you may need in the short-term.
These simple steps provide the recipe for you to manage your own investments. Take some cash, add this advice, and allow some time for it to grow. Before you know it, you’ll be well on your way to investing success!
investing for beginners was very informative. It gives me an insight how to start a small fortune and let the money grow tremendously. stocks are good option if you pick a good one. mutual funds are the best because the fund manager works for you to make money with their best as possible. small fee for the fund manager is worth at least they are the one maintaining the account.i learned that the 401k and IRA is one way to cut taxes. money going to 401k are pre tax money but be careful when taking out because of penalty taxes. also most employer match a portion of your contribution. either way you save money, uncle sam give some in your pot and your employer pitch in too. I would like to learn more about the index fund. in this case i would like to think about ATM. Attitude, Time and Money.
Posted by: Edith Milettta | October 02, 2007 at 08:56 PM