Investing for the first time may seem daunting. All of those terms seem so confusing. Here are some reminders and tips to ease the uncertainty.
The biggest incentive is that you could actually have that million dollars you want for your retirement if you started to invest early. But it’s never too late. The stock market might be a good way to invest because of compounding. It really does seem like magic – for your money to potentially earn money. The magic of compound interest is that it allows you to earn interest on your interest.
You work really hard to earn your money, but soon you can see how your money can work for you.
Miracle of Compounding at Work
Compounding is the process of earning money on the contributions you have made to your account, plus any growth. How much this benefits you, however, is dependent upon how long you give the money to compound, but generally, the longer the better. Let’s look at an example of how it might work. If you wanted to save $500,000 for retirement when you turn 67, you would need to save about $290 per month, and earn an average return of 5% per year – if you started at age 25 that is. But if you waited until age 40, the monthly savings number jumps to $728, and if you wait until age 50, it more than doubles again.
Hopefully this example has inspired you to consider investing if the timing is right for you. So, how do you start?
Tip #1: Slow & Steady
If you can do it, commit to a steady investing plan that is built into your budget every month. Some months will be easier to save than others. But it’s just like a diet. The hot fudge sundae may be a treat, but the next day you are back at the salad bar, because you are committed to your long-term health.
Tip #2: Brokerage Account
To purchase investments outside of a plan at work, you will need to set up what is called a brokerage account. There are in-person and online brokerage firms. They will ask for the following information, so it’s good to have it all on hand.
Tip #3: Decisions on the Type of Account
There are basically two types of accounts: a cash account and a margin account. A cash account requires you to pay for the securities you want to buy, and a margin account allows you to borrow from the brokerage firm to buy securities. There are costs associated with borrowing.
The broker will ask you (a) to outline your goals and timeline for investing, (b) how much risk you are comfortable taking with your money, and (c) to decide if this is just your account or if you want it to be a joint account with someone else.
You will also want to review the costs involved with the account and understand how they work. Some brokers have low costs, but not all do.
Tip #4: Keep It Simple
Many investors use mutual funds when they begin. A mutual fund is a portfolio of investments: typically stocks, bonds or a combination of the two. Professional management is one aspect that differentiates mutual funds from other types of investments. A fund manager may research, purchase and sell securities – according to the prospectus objective, on behalf of the people (investors) that buy shares.
A common type of mutual fund for beginning investors is an index fund. An index fund is a group of stocks or bonds that are put together in a mutual fund that will mirror the type of index selected. For instance, you hear about the Dow Jones index or the S&P index each day. They are composed of a group of stocks. So rather than try to guess what you want to invest in, an index fund will do that for you. Keep in mind, there’s risk with any type of investment, and there are no guarantees.
Tip #5: Invest in What You Know
Always be careful about “hot tips” from friends. Remember that the market reacts almost instantly and the hot tip you have just heard is probably old news for the professional traders. Investing to fund your goals is not about betting and winning. It’s about buying investments and holding them for a period of time. If you try to out-guess the market, you may be setting yourself up for loss.
Tip #6: Don’t Listen to the Blah, Blah, Blah
Try to stay away from the news that may scare you into selling or buying on a whim. Think about it. If you hear bad news that your stock or indexed fund has gone down and you sell your position, you may be selling on the way down. Conversely, if you buy when the stock is at a high, it could be just as precarious. Long term investors weather the ups and downs and remember that on average, if you leave your money alone, you will probably fare better over time.
Still have questions? We at MSA have professional Money Coaches who can provide further education and help you understand possible first steps to begin investing based on your goals. Happy investing!
Information provided in this article is for informational purposes only and is not intended to offer specific personalized investment, financial planning, tax, legal or accounting advice. We recommend that you consult an attorney, tax advisor or accountant regarding your unique circumstances.
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