Wow! Cool and awesome! You are just fresh out of college or even the university and you somehow landed this amazingly huge family fortune that is almost getting you crazy. You need to get it away to a safe place and fast but you don’t know where. At least you are wise enough to know that if you let it stay in the bank, you will be getting little or nothing as interest on it; and funny enough, fear that the bank might fold up any minute has started welling up in your mind. You are confused and desperate; being the ambitious type, you know very well that you need this fortune to sit in a place where you will be getting at least half of its worth from it. “What am I gonna do?” you keep asking yourself… then you stumble upon this incredible offer… Has the thought of making an investment crossed your mind?
Whao! Whao! Whao! Why the rush? There’s absolutely no need to hurry. Be calm and patient; I am here to help you out of your misery. I will provide you with investment tips that will help make your decision easier. Mind you; I am not here to decide for you, what I am here to do is help you through the decision making as easy as possible. Okay? Alright, let’s do this.
Investment Isn’t Gold Digging
This is the first thing you have to bear in mind; that you don’t necessarily need a fortune to begin investing. Figures have it that out of the 2,266 equity mutual funds available in the United States stock market, just 180 of them have a minimum investment of $250 or even less. If you desire to be successful in the investment world, there are hundreds of options for you to choose from. Many funds will waive their regular minimum if you commit to an automatic investment plan that entails that money would be taken out of your bank account and put directly into the fund.
The Automatic Investment Plan
I must confess that this option could as well be regarded as one of the best for young business personalities. Like I said earlier, the plan certifies that fund fees be directly extracted from your bank account and by so doing, you get to be left out of the regular and usual minimum requirements demanded by the fund trustees. I have highlighted below, a couple of concrete reasons why this plan stands out;
- You pay yourself (save) first every month before you even pay bills and start spending.
- It turns you into a disciplined investor.
- It’s very affordable as you get to escape from other stringent requirements.
- It helps you avoid the errors of market timing.
- You will be a smart investor because you’ll be buying more shares when prices are low and vice versa.
The Stock-Broking Plan
There is a very common fact that stocks are riskier than bonds or bank savings, which makes it a possibility that at any given period, you could lose money. Nonetheless, the stock market doesn’t often lose money over periods longer than five years, because there are fewer losing years than winning ones. From the time back, returns in the stock market have averaged about 10% year, while bonds earn a little over 5%. Cash, such as bank accounts or money market funds, on the other hand, averages about 3% of the lot.
Although the stock market offers good Return On Investment (ROI) on the long run, many individual stocks lose more money and most possibly never recover; the reason being that you would need at least 20-30 different stocks to safely diversify your investment and reduce risk. To find these stocks you might have to read prospectuses, annual reports and news accounts on 200 to 300 different stocks. Besides, even if you eventually you achieve this and have enough knowledge about the stocks, it’s always a burdening enormousness of work; almost like a necessary evil.
Fortunately, there are mutual funds (investment pools run by professionals) to the rescue. Even if you have just a few thousand dollars to invest, with a single fund you can spread your cash among several different kinds of stocks, sometimes up to hundreds of them. And it hasn’t even gotten better, it just gets so because, for just a small fee, the fund manager does all the hard stock picking for you while you sit back and enjoy the dividends.
Discern By The Fees
An average stock mutual fund charges investors annual fees equal to about 1.3% of their assets (relatively about $1.30 for every $100 in your account fund). If your fund holds stocks that return 10%, this fee plan would cut your fund’s return to about 8.7%. Therefore, rather than making $10 for every $100 invested by you, you’d be making $8.70 – that is a 13% loss.
Just assume that you invested $1,000 in a fund that earns 8.7% today; you would relatively end up with about $28,000 after 40 years. Now suppose you can find a fund with the same stocks but charging only about 0.2%; you will find that your $1,000 investment would have grown to about $43,000.
Isn’t that a clear enough difference? This is the more reason why millions of investors opt for index-weighted funds that charge less by simply buying stocks in wider market indexes. Many studies have even shown that index funds actually beat most managed funds in the long run primarily because they tend to produce lower annual tax bills also because their investing strategy is essentially automated. You won’t have to worry if your fund manager is a human that can quit or be fired.
This strategy is also viable; the best options under this strategy are the retirement plans offered by some employers. This system works in a way that your contributions are subtracted from your taxable income. That is, if you invest $1,000, you get to save $150 in federal income tax up front, thereby accruing a 15% tax bracket. Additionally, there’s no annual tax on investment profits, which signifies that money, which otherwise would be used to pay taxes, can instead keep growing as an investment. Taxes are paid when money is withdrawn in retirement.
Stick With It
Investing in stocks is a long-term strategy, not something you do with next month’s rent money. If you can weather the downturns you should be pleased with the results.
But remember, when you hear that stocks have returned an average of 10 percent a year, it refers to investment that was left alone, with all dividends and other earnings reinvested. If you make 15 or 20 percent one year, leave it all in the account to continue growing. Don’t take out the “extra” earnings to spend, because they’re needed to offset the years when you make less than 10 percent.