You have made a decision and are going to start saving some of your income. Perhaps you have already chosen a number: twenty percent of your funds will be invested. You are determined to honor this personal commitment until you retire.
In generations past, people would just put their savings in a bank account, earn 5% interest, and forget about it all. Every 14.4 years, the value of an investment will double at an interest rate of 5%. Over a working life, this means you can expect doubling to happen almost three times.
Today, a savings account pays near zero interest and is not a good choice, except perhaps to park money safely for a rainy day or a future emergency. Investing has become more complicated. We’ll look at the most common and obvious choices to make for your personal investments.
When you buy a stock, you become part owner of a public company. As the owner, you are entitled to your share of the returns generated by the business.
Over a long period, stocks can bring investors generous gains, although the road is bumpy. Stocks go up for a while, and similarly they go down for periods of time. That’s why it’s important to stay the course, invest in stocks and continue to add to your stock portfolio.
After decades in this plan, your annual returns will likely be 5-10% of the amount of stock you purchased.
Open a free stock trading account from the almost too many to list. A new exchange called Robinhood won’t charge you commissions when you buy stocks.
If you work for a company that offers a 401(k) retirement savings option, a payroll deduction large enough to take advantage of the company’s matching amount is your best bet. The investment firm your company has chosen will offer you several investment options, varying in terms of risk and possible returns.
Depending on your risk comfort zone, you can opt for a choice that is unlikely to experience much volatility (highs and lows), and thus you will sleep well at night. It may be a fund made up of money market securities, commercial paper and other investments whose principal amounts remain intact, although the interest earned may be minimal, perhaps only a few percent.
However, the riskiest choices can offer the greatest rewards over a long period of time. Growth funds, sometimes referred to as “aggressive”, are usually offered alongside safer investment selections.
In a deferred income or retirement account, you won’t pay tax until you start withdrawing your savings. Until then, if you only withdraw what you need to live, you’ll be in a lower tax bracket, but don’t expect withdrawals until you reach age 59½ or penalties early withdrawal will be imposed on you.
Finally, you can buy individual stocks of public companies or global stocks in what are called exchange-traded funds or ETFs.
Low-commission ETFs, such as Vanguard, spread risk across a common denominator such as technology or even geography (US companies or emerging market companies, for example). ETFs are also called “passive” investments, because you can simply forget to look at the day-to-day changes in individual companies and their prospects.
Bonds are the debt of our government or a company, a promise to repay the bondholder the face value of the bond. Treasury bills issued by the US government are safe, but also pay a low interest rate, as low as two to three percent. Public company bonds pay more interest but also carry some risk if the company gets into financial difficulty and has difficulty repaying bond amounts or even accrued interest during the life of the bond .
Overall, however, bonds are considered somewhat safer than stocks, and many financial planners will suggest a portfolio of stocks and bonds.
Early in your working life, a heavy stock weighting is best because you have more time for volatility to smooth out. Later in life, increased reliance on bonds is the safest course. When you retire, your weekly paycheck is replaced by interest payments on the bonds in your investment portfolio.
For many Americans, the most important investment they will make is buying a home. Most homes are purchased with a down payment and the assumption of a debt, called a mortgage. Since there is a limit to the amount of land available, the value of real estate generally increases over time. This means that the increased value of your home will help fund your retirement, as you can borrow against this increased value if needed.
Beyond your main residence, you can buy a second home or a rental property, and benefit from the same added value. However, transaction costs can be high. The costs start with the purchase price, but can quickly add up with maintenance and renovations, property taxes, and expensive replacements like a roof.
Problems can arise with tenants unable to pay their rent or extended periods when looking for a new tenant. For most people, this extra attention and expense can feel like a hassle.
The value of gold, like stocks, can be volatile; but over time, gold retains its value. Gold can be a small part of your portfolio, maybe 5%, because it can retain its value even as our currency loses purchasing power.
Investment in gold can range from gold eexchange-traded funds (ETF) to the purchase of physical gold, such as bullion or bullion. But physical gold should be kept in a safe or vault. Ownership of gold is attractive because you can pass it on to future generations, knowing that it will always hold a high enough value to be considered valuable and worth keeping.
Since gold, unlike stocks, does not generate income or cash flow, it should only be a relatively small part of your overall investment strategy.
Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than a centralized authority. It offers the possibility of eventually replacing paper and coins as legal tender, and even eliminating banks and their fees as intermediaries.
However, the nature of this relatively new technology continues to evolve and as such it is not recommended as an investment you can look to for your future retirement and be assured that it will increase in value.
The entire cryptocurrency ecosystem remains mostly unregulated, and the value of Bitcoin or other digital currency can be much more volatile than stocks. In a sense, it is a speculation, like gold, which does not generate profits or cash flow, but which can appreciate in value. But the high level of uncertainty makes this investment choice one to avoid, at least for now, pending regulation and maturity.
A portfolio of stocks and bonds, along with a primary residence and perhaps a small investment in gold may well be the best optimal strategy for your future savings and retirement efforts.
Finding an investment advisor, a certified financial planner, can help you navigate these sometimes confusing choices; but once you have made the decision to create your wallet and save a certain amount of your earnings, you have already done the hardest part of the whole process.
No one who saves until “it hurts” has ever regretted or regretted saving too much money. Start today.
The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.