By June Walbert, USAA Certified Financial Planner™ practitioner
Do you know you need to invest for your future, but don't know how to go about it? Don't feel like the Lone Ranger. Many Americans feel exactly the same way — especially considering the recent stock market meltdown. It can be a little complicated, but with these 10 tips, you'll be armed and ready to do battle.
1. Invest early and often.
Some of the best advice is to start investing with your first paycheck. Too late for that? Start now then. The earlier in life you begin investing, the less you'll ultimately have to save because of the power of tax-deferred compounding. A pretty smart guy named Albert Einstein said, "The most powerful force on earth is compounding interest." For example, if at 21 years old, you have the foresight to fully fund a Roth IRA at $417 per month and glean an average 8% return, you'll have over $1.3 million at age 60. If you wait 10 years — and invest just $50,000 less — you'll end up with almost $573,000. Still a nice nest egg, but I'd rather have a million bucks in retirement, wouldn't you?
2. Diversify, diversify and diversify some more.We've all heard the old adage, "Don't put all your eggs in one basket." It's an important element in investing. You should avoid betting that one stock will outpace everything else. A better idea is to have some large, small and international stock exposure, plus some bonds and cash. However, diversifying does not guarantee a profit or prevent a loss.
3. It's good to be cheap.
Rather than relying on our stock-picking skills — or the lack thereof — it's wise for most of us to look to mutual funds to help meet our investment needs. Mutual funds provide a way to pool your money with other investors while hiring a professional money manager to make stock and bond selections for you. A key point is that you may want to avoid paying sales charges. Big fees are not in vogue anymore. If you feel more comfy paying for advice from a pro, that's ok too. But remember, every dollar you pay a stockbroker for advice and to make trades is a dollar that's not working for you. And that adds up over a 30 to 40 year investment lifetime. Internal expenses are another fee to be mindful of. This pays for the money manager, and various overhead expenses, such as rent, utilities, computers, etc. The average fee is 1.25%. Pay more than this and you may not get your money's worth.
4. Get professional help.
Strategic investing is not a skill most of us come by naturally. It makes a lot of sense to ask a pro for some help. Several reputable firms offer free financial advice and no-load mutual funds (no sales charge). And that's a great combo.
5. Seek balance (annually).
Second to the proper mix of investments, annual rebalancing is critical to the potential long-term success of your portfolio. A simple example, let's say your risk profile calls for a half stock and half bond mix. Let's also assume that stocks did very well, and due to their growth, became 65% of your portfolio and bonds dropped to 35%. Suddenly, you're taking more risk than is comfortable for you. To rebalance, you'd sell that "extra" 15% of stock (thereby selling high) and invest that money in the bonds which lagged in performance (buying low). It may feel counterintuitive to sell something that is doing well, but this is how you can permanently capture gains (money you've made) without over thinking it, or buying and selling based on emotion.
6. Calculate and set a date.
Investing is a long-term proposition. It's appropriate to invest in stocks or stock mutual funds if your time horizon is seven years or longer (and, of course, if they are suitable to your risk tolerance). In other words, if you're investing for retirement and you have 20 years to go, it's fine to be aggressive. If on the other hand, you're saving and investing for a kid's education which is three years away, I'd steer clear of stocks and consider short-term bond funds instead. That way you potentially minimize the risk of losing money before your goal comes around while you maximize the return.
7. Put it on auto pilot.
Sitting down to write that investment check every month can be a chore. You may not get to it. Or feel you can't quite afford it that month? Consider putting your investments on automatic pilot. It's easy and you don't even miss the dough after a while.
8. Shortchange Uncle Sam.
Most employers offer some sort of retirement plan. The National Guard has the Thrift Savings Plan. Your civilian employer may have a 401(k) or 403(b). The smartest way to save on taxes today is to save for your future. While the TSP does not offer a matching contribution, many civilian employers do. That simply means if you contribute a certain percentage of your salary to the retirement account, they'll contribute that much or a portion of that amount, too, which is a very nice way for you to multiply your savings. I always say never leave free money on the table!
9. It's a marathon, not a sprint.
It's important to remember that you're in this for the long haul. Accordingly, you should not be upset, nervous or anxious about short-term volatility. Continuing automatic investment during volatile market times could mean you're purchasing high-quality investments at lower prices. It can be a winning strategy if done consistently.
10. But build a slush fund first.
We've heard a lot in the last two years about the importance of the rainy day fund (it's raining!) but in reality, most Americans don't have enough cash stashed. Guardsmen who depend primarily on income from a civilian job should have six to nine months of living expense monies set aside in a separate account. I know that sounds like a small fortune, but it can mean the difference between keeping your home and moving to the street.
And a bonus tip comes from one of my readers (drum roll, please): Don't try to make 10% when you are still paying 18% to service debt. Paying off debt yields a higher return.