If you witnessed the Great Recession you know how iffy the financial world can be. That kind of experience tends to stick with you just about forever as those who experienced the Great Depression spent their lives living frugally. But if you want to have a bright financial future and a happy retirement it’s important to put away any fears you might have about investing. The stock market doesn’t take a big plunge every other year but it can be volatile. This is the reason why experts always counsel you to make long-term investments and not short-term trades.
Long term stock market returns
A first good step is to understand average stock market returns. As an example of this between the years 1900 and the end of 2015, the stock market returned an average of 11.53%. This was a timeline included the Great Depression, World War I and II, the Korean War, the Vietnam War, oil embargoes and various terrorist attacks.
Even focusing on the years surrounding the Great Recession the stock market returned an average of 8.40% even with the 37% drop in equities in the year 2008.
As you can see from these numbers it’s easy to understand why the experts recommend long-term investments.
One of the biggest reasons why millennial’s and people with young families should begin investing as soon as possible is because of the power of compounding. If you’re not familiar with this term it’s when you earn gains on your principal the first year you invest and then begin to earn returns on your previous returns. As an example of this if you were to invest $1000 and earn 10% annually your investment after the first year would grow to $1100. At the end of the second year, you won’t have earned just another $100 but $110 for a total of $1210. Then at the third year, you will get $121 for a total of $1331. According to the data published on StockPickSystem.com, $1,000 invested in 1900s will now be worth $19.8 million by 1999. That is thanks to compounding.
This may not seem like a great deal on a small scale. But then consider what would happen if you invest $1000 a year for 30 years with a very conservative return of 8%. What you would have instead of $30,000 in a bank account is a little more than $132,000. As you can see, compounding returns are absolutely critical because they allow you to turn small contributions over a long period of time into a very large nest egg. This is why Albert Einstein once called compounding interest, “The most powerful force in the universe”.
Choosing a brokerage account
Now that you’ve made the big decision to begin investing you will need to decide on your investment strategy and how best to execute it. There are numerous brokerage houses – or investing platforms – available today.
Only a few years ago you were required to choose among fund managers such as Fidelity, Vanguard and Blackrock. Then came discount firms including TD Ameritrade, Scotttrade and E*TRADE. If you want to be a passive investor then using one of these firms and investing in an index fund or ETF could be your best option. Both of these use broad indexes and represent ways to mimic returns from the S&P 500, NASDAQ or the Dow Jones industrial average. On the other hand, if you think of yourself as a big risk taker you could try to become a stock picker. However, evidence confirms that this isn’t a good idea.
How to invest with no human being involved
There are now things called Robo-Advisors, which is technology’s answer to the high fees charged by financial planners and advisors. Wealthfront and Betterment are examples of this as they are online wealth managers that deliver automated portfolio management and investment advice without the intervention of a human being. The way they work is by first asking you a bunch of questions regarding your risk tolerance, financial goals, and your personal financial circumstances. These algorithm-based robo-advisors will then recommend a number of different investment options and allocations. The fees charged by these Roble-advisors tend to be much lower because they don’t rely on individual advisors.
Stock market do’s and don’ts
Once you have picked your investment platform and begin investing it’s important to have a basic investment philosophy. Here are a few tips to help you get there.
Have long-term goals
Consider your risk tolerance, time horizon, financial goals, and age and then establish your long-term goals. Investing should not be a get-rich-quick deal and if you take on too much risk you can end up in financial ruin.
Don’t let your emotions control you
According to an article published on PsychologyToday.com, your emotions actually drive your decisions – most of the time. Emotions such as fear, hope, passion and greed can cloud your judgment. Try to invest objectively. This will protect you from making expensive mistakes. If you are fearful for any debt that you may have, do not let that hinder your investment opportunities. Use a debt relief program like debt consolidation loan to lower your monthly payments and help you get the extra money to invest.
Don’t worry about your taxes
If you come to the point where you have a stock that has overshot its true value then sell it. It’s better to take your gains and pay taxes on it than to lose money because you held on to the stock too long.
Invest in best-in-class companies
If you’re buying individual stocks always buy those of companies that are the strongest and best in their industry. Companies like Emerson, Generac Power Systems, Huawei Technologies Co., Ltd and NaviNet, Inc are considered to be best-in-class companies and could be good choices.
Don’t buy into the hype
Don’t buy into all the Wall Street hype and be skeptical of financial analysts. The problem is that they have a vested interest in keeping you investing. This is especially true when they’re touting companies in which they have positions. You can also find numerous doom-and-gloom sayers forecasting calamities like a 60% drop in the stock market. They may have experience in the market but they don’t have any better a crystal ball than the rest of us.
Don’t believe that life insurance is an investment
There are unfortunately some less than scrupulous financial advisors that make huge commissions selling whole life insurance. They claim this is an investment vehicle with guaranteed returns. However, the truth is that the high premiums you are required to pay will outweigh any returns you may earn. Your best buy in life insurance is term insurance.
It can be intimidating to start anything new. But there’s no excuse to procrastinate and not start investing to secure your family’s financial future. If you want to become financially independent you need to begin investing early to take advantage of compounding returns and time. If you are skeptical about all of this start small. In the final analysis investing successfully is all about taking simple steps on a regular basis.