The following is a guest post from Marotta Asset Management.
There isn't a better time to invest than today. The way to build real wealth is by living well below your means and then saving and investing the difference. The poor buy things; their homes are cluttered with them. The middle class buys liabilities like second homes and boats, and then they are obliged to make payments and upkeep on them for years. In contrast, the rich buy investments that appreciate and pay them dividends and interest for decades.
Despite recent market turmoil, historic long-term returns still average 10% to 12%. At a 10% rate of return, your investments should double every seven years. So $100 invested today becomes $200 in 7 years, $400 in 14 years and $800 in 21 years. Even at a modest 7% rate of return, your investments should double every 10 years.
Getting started may seem as daunting as embarking on any new hobby, but on average this kind of hobby pays you money rather than costing you. Every hour you spend learning about investments is an hour of free entertainment. It is an hour you are not spending money at the mall or on a more expensive pastime. And ultimately investing will be your engine of income and appreciation. It will subsidize what might otherwise be a subsistence lifestyle based solely on Social Security checks during retirement.
The first step is getting some money together. In the beginning, the amount you save is most important. Later, after you have amassed a significant multiple of your annual spending, the amount you make on your investments becomes much more significant. At that point (at age 40 or when you have five times your annual spending to invest), it's time to seek a personal fee-only financial planner in your area. Visit the website of the National Association of Personal Financial Advisors at www.napfa.org. for information.
In step 2, open an account where you can do your investing. E*Trade (www.etrade.com) is a discount firm. Account minimums are $2,000 with less than $50,000 in combined assets, and stock trades cost $12.99. TD Ameritrade (www.tdameritrade.com) offers accounts with a $2,000 minimum and trades of $9.99 each. Scotttrade (www.scottrade.com) offers $7.00 per trade with a minimum of just $500. Charles Schwab (www.schwab.com) offers trades at $12.95 with a $1,000 minimum account size. Fidelity (www.fidelity.com) charges $19.95 per trade with a $2,500 minimum.
Competition continues to force brokerage companies to adjust their charges on a regular basis, so verify the fees before signing up. Be sure to ask about any monthly inactivity charges. Avoid any account with monthly or annual fees. You plan on investing in a balanced portfolio and then going fishing. You don't want to be charged for the 11 months between now and your annual rebalancing. Make sure you know what the account minimums are too. They should never be more than a few thousand dollars. Although you don't plan on transferring your account, ask what the charges are to do so, and make sure they are reasonable, typically about $75.
Each broker has special promotions that may offer free trades, cash or electronic goods. Taking the best promotion is tempting, but evaluate brokers without considering the promotion.
Setting up an account is easy, and you may be able to do it online. If you need to sign account agreements, read them carefully. Not only should you understand what you signing, but this is the first step in your financial education, and your goal is to gain wisdom and experience.
Half of any area of expertise is learning the vocabulary, which gives you both a shorthand for discussing finance and possibly a new a way of thinking about the world of investments. If you don't understand something, check it out at Investopedia (www.investopedia.com) or call your broker's toll-free number.
In step 3, get money into your investment account. Many brokers allow you to link your checking account to your investment account electronically so you can transfer money at any time. Better yet is setting up a monthly automatic transfer. A day or two after your paycheck is deposited into your checking account, an amount you have designated is automatically transferred into your brokerage account.
The principle is to pay yourself first. You deserve to build wealth, and wealth is what you save and invest, not what you spend. Think of a rich person simply as a poor person who has saved a lot of money. Save and invest as little as $100 a month for 46 years earning 10%, and you can retire with a million dollars. And $500 a month grows to an astounding $5 million.
Those 46 years of saving ideally take place between ages 20 and 66. If you are beginning later in life, you may have to invest more to save the same amount. In fact, for every seven years you delay saving and investing, you cut your retirement lifestyle in half.
Today is the day to decide if you want to be financially free. I can't emphasize enough that time in the markets is more crucial than timing the markets. Who among us doesn't wish we had invested as much as possible in the markets at the prices 46 years ago?
Push yourself to save as much as you can automatically each month. No one should save less than $100 a month in their taxable savings, and this taxable savings is in addition to any work-related retirement accounts.
After you have begun adding money into your taxable savings account, it's time for step 4, actual investing. Knowing the best mix of investments requires a great deal of research and analysis. Investment advisors can add significant value for large portfolios. But for small amounts when you are just getting going, how much you save each month is more critical than the asset allocation you select.
To pick a fund, go to www.maxfunds.com. This is an excellent laymen's site for fund analysis. In the drop-down box "Show me these funds" select the category you want to purchase. I will tell you which categories to purchase later, but for now assume you know. Next, in the drop-down box "That are sorted by," select "Highest MAXFunds Rating." Finally, click "Go."
The tool lists many investment choices, ranked from their highest score downward. If you can invest at least $2,000, buy an exchange-traded fund. These funds are purchased with a transaction fee ($8 to $20). The amount you are purchasing should be significant enough so the transaction costs to purchase the fund are well under 1% of your initial investment. For amounts less than $2,000, consider waiting and accumulating more to invest or else purchase a no-load mutual fund without any transaction fee.
The site puts a yellow star next to their favorite fund, which is a good place to begin. If you are evaluating funds on your own, look for a fund where the TYPE is ETF and the expense ratio (EXP) is as low as possible. That is often the best choice of a fund. The lower the costs, the more you will keep of the return.
Finally, let's talk about investment categories. Start with a fund that follows U.S. large-cap stocks, and then as you gather additional investment money add funds in the order in which they are least correlated with each other. Here is the order for your first five investments.
Launch your investment portfolio with a "Large Cap Value" fund or better yet a "Blend" fund such as Vanguard Total Stock Market ETF (VTI) or iShares Russell 1000 Index Fund (IWB). Make your first investment in this fund at least $3,000. This should cover all the stocks in the S&P 500 and more.
Second, add an "Intl. Diversified" fund like iShares MSCI EAFE (EFA) or Vanguard Europe Pacific ETF (VEA). Third, add a "Natural Resources" fund like iShares Natural Resources (IGE). Fourth, add a "Small-Cap Value" fund like iShares Russell 2000 Value Index Fund (IWN) or Vanguard Small Cap Value ETF (VBR). Fifth and finally, add an "Emerging Market" fund like iShares MSCI Emerging Markets Index (EEM) or Vanguard Emerging Markets ETF (VWO).
After investing in these five funds, you will probably know enough to evaluate your asset allocation with more sophistication than this simple allocation. If you want, go back and add another share to the "Blend" and "Intl. Diversified" allocations. By then you should have over $20,000 and be on your way to growing rich. Getting started can be intimidating, but these simple steps will help you through your first few years of investing.
I don't think this was a well researched article that you provided. For one, neither stocks or funds have averaged 10 - 12% per year. This is a number that has been thrown out of the air mostly by people who don't know. I'm surprised that I would have found an article on this site that would give such disinformation. When you want a real professional to write an article for you, let me know some time. I'll give you factual information that will be backed up. Investing is a bit more complicated than what the author suggested. If it were as easy as he's suggesting, the win vs lose ratio would be much better than what it is. Currently only 10% of all investors beat the market which leave 90% that lag behind and in most cases lose money. This article was terrible and incomplete. Better research needed.
Posted by: Jim | April 27, 2009 at 04:44 PM
I would much rather buy mutual funds directly through Vanguard than pay such high transaction fees! Vanguard mutual funds have expense ratios around 0.2% and no other fees on top of that! Why would I pay so much to invest?
Posted by: Independent Beginnings | April 27, 2009 at 05:12 PM
I agree with Jim. This article seems a bit overoptimistic. As if it was written years ago and is just being plugged in now, without considering the increased risk you're seeing for formerly low-risk investments. It's got some unrealistic idealism. It might light a fire under someone to invest, but it should paint a more realistic picture.
Posted by: Henry | April 27, 2009 at 06:40 PM
I agree with Independent Beginnings, you can't beat Vanguard.
I disagree with Jim. According to Standard & Poor's, the historical return of the S&P 500 before last year's meltdown was 12%, including last year it is 11%. Do you have a more reliable source than Standard & Poor's?
Jim is quite right about the futility of trying to beat the markets, and that the vast majority of investors underperform the market. This is the direct result of buying what's hot and selling what's not. Unfortunately, that's what feels comfortable. :.
2'
Posted by: /RW | April 28, 2009 at 12:10 AM
Mutual fund is my best choice for recent condition.
Posted by: Finance Tips | April 28, 2009 at 02:37 AM
According to:
http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
From 1950-2007 the real return of the S&P 500 with dividends is 7.6%. That doesn't include the approximately 50% drop after 2007 but is inflation-adjusted.
According to:
http://www.icmarc.org/xp/rc/marketview/chart/2008/20080502SP500HistoricalReturns.html
The S&P 500 averaged 10.6% return from 1926-2007. This is not "real" return, i.e. inflation-adjusted. It also doesn't include the drop after 2007.
Posted by: rwh | April 28, 2009 at 04:41 PM
@ RWH
The S&P 500 made its debut on March 4th, 1957 in which it closed at 44.06. Today (April 28th, 2009) the S&P 500 closed at 855.16. Since we want to be as precise as possible in our calculation while keeping it simple at the same time, I'm going to reference the March 4th, 2009 closing price of the S&P 500 so that we have an exact range to do our calculation. On March 4th, 2009 the S&P 500 closed at 712.87. The equation we use in determining the averaged annual return on an investment is called CAGR. The formula for CAGR is:
I = (FV/PV)^ (1/N) - 1
I won't go into detail showing you how the formula plays out because of the complexity and this isn't a math forum. Another way you can calculate CAGR is to purchase a "financial calculator".
From March 4th 1957 - March 4th 2009 is exactly 52 years. Our Present Value (PV) is the 1957 closing price of 44.06 and our Future Value (FV) is the 2009 closing price of 712.87.
Using these FACTUAL and easy to obtain historical numbers, the S&P 500 has had an Averaged Annual Return of EXACTLY 5.50%. That's a far cry from the numbers you are claiming the Standard and Poors has on their website where I don't seem to find. In any event, if they were advertising a 12% Averaged Annual Return, you may have skipped the fine print where I'm sure it would say something similar to "12% from 1980 - 1990". That would be very feasible since there was a 10 year period that I remember in which the S&P 500 produced a large return. But, certainly not for any great length of time and most definitely not since its inception back in 1957.
I've presented the FACTS and the EVIDENCE to back up my argument. Do your best to disprove it. I'll buy you lunch if you're able to.
Now then, the argument could justifiably me made that after discounted for inflation (3.5%), the S&P has done much worse. The only thing that is difficult to ascertain regarding the return of the S&P 500 is the dividends the companies paid out that were represented in the S&P 500. Unfortunately the S&P 500 changes and sometimes changes often so its nearly impossible to know this information. Knowing that, the return of the S&P 500 could be higher than 5.50% but I would hardly doubt it would have been by much.
@ /RW
Mutual Funds are a waste of money and rarely outperform a good Index Fund. An ETF Index Fund is even better.
Posted by: Jim | April 29, 2009 at 12:23 AM
@ RWH who wrote:
"According to:
http://www.icmarc.org/xp/rc/marketview/chart/2008/20080502SP500HistoricalReturns.html
The S&P 500 averaged 10.6% return from 1926-2007. This is not "real" return, i.e. inflation-adjusted. It also doesn't include the drop after 2007."
RWH, The S&P 500 wasn't in existence in 1926. You should seek out credible sources for your information such as Wall Street Journal, Financial Times, Forbes, etc. Certainly not the site you've referenced. I went to that site at its appalling to me that they would give such blatant disinformation. As I noted earlier, the S&P 500 debuted on March 4th, 1957. Standard & Poors introduced its first stock index in 1923 but it wasn't the S&P 500. It was called the S&P 90. The S&P 500 did exist in 1950 but it was much different that the final S&P 500 which we follow today. That one wasn't created, as I've stated, until March 4th, 1957 and that is the date you would have to start the measurement from in order to get an accurate and correct reading.
Posted by: Jim | April 29, 2009 at 12:36 AM
As a side note, If you were to measure the total performance of the Original Jan. 3rd, 1950 S&P 500 to Jan. 2nd, 2009; your Averaged Annual Return would be 6.78%. Still not even close to 12%. Of course you wouldn't measure the S&P 500 from 1950 because it isn't the same index as the 1957 index. The 1957 index is the same as what we use today.
Posted by: Jim | April 29, 2009 at 01:01 AM
The average investor approximately 35 years to invest. If that statement is true for you as it is historically for most then the S&P 500 should be measured in that regard. If we measure it from April 29th, 1974 (it was closed on April 28th, 1974) - April 28th, 2009: we measure from the two closing prices of 90.00 - 855.16 which produced an Averaged Annual Return of 6.64%. Still not relatively close to a 12% Return.
Posted by: Jim | April 29, 2009 at 01:16 AM
CORRECTION:
The average investor HAS approximately 35 years to invest. If that statement is true for you, as it is historically for most, then the S&P 500 should be measured in that regard. If we measure it from April 29th, 1974 (it was closed on April 28th, 1974) - April 28th, 2009: we measure from the two closing prices of 90.00 - 855.16 which produced an Averaged Annual Return of 6.64% over that 35 year period. Still not relatively close to a 12% Return.
Posted by: Jim | April 29, 2009 at 01:18 AM
Jim: You have me confused with /RW. I never made the claim the historical average of the market was 10-12% per year. I did provide two links that I thought were credible regarding the subject.
I do stand corrected on the 1926 error regarding the S&P 500. Thanks for pointing it out.
Posted by: rwh | April 29, 2009 at 09:01 AM
Anybody have an opinion on the following? I work for a bank (operations area, i'm no investment wiz) and I can only choose from the following companies for investing due to our corporate trading policy:
JPMorgan Securities Inc, Bear Stearns, Chase Investment Services Corp, Charles Schwab, E*Trade Financial, Fidelity Brokerage Services, Merrill Lynch, or Smith Barney.
Do any of these companies stand out as better than the other? I would like to begin investing in index funds which I often see recommended, but Vanguard is not a choice for me. I thought this article would help but with all the comments i'm only more confused. Is any of the information in the article worthwhile? Thanks.
Posted by: Christy | April 29, 2009 at 02:28 PM
Christy:
The only company I have any experience with is Schwab. I have been satisfied with their service, but do most of my business with Vanguard. The reason I chose Schwab was I inherited an IRA and my hope was it would grow to over 100k in a few years and I could then transfer it to Vanguard and receive some premium services they offer for a minimum of 100k new money.
Of course, I have lost money in the market since I opened with Schwab, and even though I chose index funds they still have higher fees than Vanguard.
I know that's not exactly a ringing endorsement.
Posted by: rwh | April 29, 2009 at 03:21 PM
Rwh - Thanks for your input. Looks like I have a lot of research to do!
Posted by: Christy | April 30, 2009 at 08:53 AM
Christy, I would suggest you find out what the fee's are for each broker. In my many years of investing both on a personal level as well as a professional level, I have never found a staggering difference in service between brokerage houses. They are all going to provide relatively similar services to you. What the important factor to weigh then is price. How much do they charge to place a purchase order? How much do they charge for a sell order? Is there an additional annual fee? Can I trade online? How much more does it cost me to buy and sell over the phone using one of their brokers? This is the basic information you need to know. Whoever is the least expensive is who you'll want to do business with. This is very easy information to obtain through the person that handles your investment program at work. If that person doesn't give you adequate information (i.e. doesn't know) then call each individual company and ask them this information and then go to your superiors and request that the person that handles your company's investment program be fired for incompetence. That person should absolutely know this kind of information otherwise he/she is not doing their job. Each one you've mentioned is very reputable so it all comes down to price. Pick the lowest price.
Good Luck.
Posted by: Jim | May 01, 2009 at 10:35 AM
Christy, By the way, a Index Fund is the perfect investment for you and now is the perfect time to get one. You'll get a very nice return over a long period of time and you won't have to constantly monitor it. It's for people with limited investment knowledge and limited time on their hands. But, it allows them to receive a very good return on their money and most often times better than what a standard mutual fund has ever/could ever return. It also beats out most stock picks. So, you're thinking is on the right track with an Index Fund. I would find one that models the S&P 500. Goodluck.
Posted by: Jim | May 01, 2009 at 10:39 AM
Christy, One more thing. An Index Fund ETF is even better. Symbol IVV or Symbol SPY would be two good recommendations for you. Either one would be a good choice for you. They both do the same. Only difference, they are from two different companies. Don't purchase both of them. Just one of them.
Posted by: Jim | May 01, 2009 at 10:48 AM