When it comes to investing, many people have a sour taste in their mouths. They look back at the housing bubble crash of 2008 and remember seeing the values of their investments drop by close to 40%. This memory has haunted them ever since and as a result, they feel that the stock market is a game they can’t win. Well, I am here to tell you that you can win and doing so isn’t that difficult either. You just have to forget about everything you have heard (and will hear) about investing and follow these 5 steps to get the most out of your investments.
Forget About Timing, Just Invest….
Many investors see that the market is near an all-time high and get worried about putting money into some investments. They fear that we are at the top and that stocks are going to tumble, resulting with them losing money once again. I am here to tell you that this is all relative. Many of the same people that were worried about the all-time highs back in 2012 are kicking themselves because we’ve surpassed those numbers. The fact of the matter is that no one knows what the market is going to do today or tomorrow or next week. The more you sit on the sidelines worrying about when is the best time to start investing, the more you lose.
The stock market always moves up and down. But over the long-term, the trend is up. Just look at any chart. Today’s “all-time” high will most likely be nowhere near where the stocks market is at 20 or 30 years from now. The bottom line is the only perfect time to invest in the stock market is right now. Every day you put off investing, you are costing yourself more money in the long-term.
Then Keep Adding To It
Of course, you can’t just invest $1,000 and expect that in 10 years you’ll have $20 million. You have to keep investing more money into the market on a regular basis. Once you start investing, set up an automatic investment plan where you invest a little more money each month. Don’t make the mistake that others make thinking that a few dollars here and there won’t add up. They do.
When I started my first job, I was investing a cool $20 per paycheck into my 401k plan at work. After 6 months, I had $240 invested. That could have bought me a nice steak dinner somewhere. But I kept investing that $20 every paycheck, letting time and compounding work its magic. After a few short years I was sitting on close to $10,000. I began to increase the amount of money I was saving from each paycheck and watched my 401k grow faster and faster. I now look at the balance that stands well over six figures and laugh when I remember seeing just $20 taken from my paycheck. The key after starting to invest is to keep investing every month. It doesn’t have to be a large sum of money, any amount will allow time and compounding to work its magic.
Pick Low Cost Investments
When you do decide to begin investing, it is important that you pay attention to the fees you will be paying. The more you pay in fees hurts you in two ways. First, you lose that money you had invested in the first place, and secondly, you lose out to that money compounding for you over time. Let’s look at an example to make this clearer.
Let’s say you can invest $1,000 in a mutual fund that charges 1% per year in management fees and another $1,000 in a mutual fund that charges 0.25% in management fees. If both funds return 8% annually for 20 years, you would think that you would end up with the same balance after 20 years. But you wouldn’t. You wouldn’t because of the management fees. These fees are taken directly from your investments. The mutual fund with a 1% fee cost you $439 and you are left with an ending value of $3,812. The mutual fund that charged you a 0.25% fee cost you $120 and you are left with an ending value of $4,433.
What you don’t see is that the $439 of fees you paid on the first mutual fund cost you an additional $410 in opportunity cost. In other words, paying the fee cost you an additional $410 of earnings since you can’t take advantage of compounding because of the fee. While this might not seem like a lot of money, remember we are only talking $1,000 here. As you invest more money, you are paying more in fees along the way. The more you are paying over time means the more you are losing out to compounding.
There is no way to invest in mutual fund or ETFs without a fee, so you are left with finding investments that carry a low management fee. You should never be paying a management fee over 1%. Ever. And don’t make the mistake in thinking that the higher fee means a higher return. There is absolutely no relationship to higher fees and higher returns.
Diversify Your Investments
Now we get into the part of the discussion that trips many investors up, the short-term movements of the stock market. There is one easy thing you can do to take away some of the volatility in the stock market: diversify your investments. There is a lot about diversification out there, much of which makes investing sound overly-complicated. It really isn’t. In fact, regardless of how much you are investing, you can easily own just three mutual funds or exchange traded funds and be diversified.
All you need to own is a stock fund that invests in US companies (look for an investment that tracks the S&P 500 Index), a stock fund that invests in international companies (look for an investment that tracks the Wilshire 5000 Index), and a total market bond fund (easy to find, just look for total market in the name). That’s all there is to it. Some readers might be wondering where the investments in small cap stocks and commodities are. While you can easily diversify beyond the three fund set up I’ve listed here, you can just as easily be well diversified with just three funds. Remember, don’t make investing more complicated than it needs to be.
The Race Is Long, So Don’t Focus On Today
Finally, you need to remember that you are investing for the long-term. The market is going to swing wildly over the short-term. We’ve all seen this many times. But over the long-term, the general trend of the stock market is positive. Learn to ignore the hype and the “noise” the media makes when the stock market drops. They are trying to elicit an emotional response out of you. We all know that when we allow our emotions to get involved, we never make a wise decision. It’s not always easy to ignore the news when they are presenting the doom and gloom with the scary music and graphics along with the anguish on people’s faces. But you have to learn to do so. Remember, you aren’t investing for today or tomorrow, so whatever happens is just a bump in the road. You’re interested in what happens in the future, 20-30 years down the road.
Author Bio: Jon Dulin writes Money Smart Guides, a personal finance blog that helps his readers get out of debt and learn to begin investing for their future. He wrote an eBook, http://www.moneysmartguides.com/7-investing-steps-will-make-wealthy, which focuses on keeping investing simple so that you can reach your financial dreams.
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