If you have access to a 401(k) or other employer-sponsored retirement plan, this is one of the best—and easiest—ways to start investing. No 401(k)? Consider opening an IRA.
Even choosing investments doesn't have to be complicated if you start with broad-based mutual funds or exchange-traded funds.
The most important thing is to start now, take a long-term approach and let time work for you.
In last week's column I made a case for why getting into the stock market still makes sense. Yes, it's volatile. Yes, there's uncertainty. But here's a stat that's worth repeating: In the time period between 1926 and 2017, equities have historically outperformed other asset classes and inflation. To me, that's a pretty strong argument for starting to invest even in volatile markets like today. And it's especially true if you're young and have plenty of time ahead of you to let your money ride out the inevitable market ups and downs.
Yet investing can seem overwhelming, and that can hold a lot of people back and keep them from even getting started. But it's my sincere belief that investing—particularly long-term investing—is one of the best ways to build financial security, so this week I want to show you how easy it can be.
Start with your 401(k)
If you have access to a 401(k) or another employer-sponsored retirement plan, this is one of the best and easiest ways to get your feet wet. And because a retirement plan by its very nature is about long-term investing, it's the ideal place to start—and keep—investing.
If you haven't been taking advantage of this crucial company perk, the first step is to find out what your company offers. Talk to your HR department to see what types of plans are available, and then sign up. You might have a choice between a Traditional and a Roth 401(k). The difference primarily comes down to when you pay taxes. If you think you'll be in a higher tax bracket in the future, the tax-free withdrawals of a Roth can be a big plus in retirement. Your benefits provider or tax advisor should be able to give you more detailed information.
If your company doesn't offer a 401(k) or if you're self-employed, you still have options. Open an IRA. Depending on your income and filing status, you may have a choice between a Traditional and a Roth. You can easily open an IRA at a bank or brokerage firm.
Once you've set up an account, you have just a couple more decisions to make and you're on your way.
Decide on a monthly contribution
For a beginning contribution to a 401(k), consider starting with 10 to 12 percent of your annual salary. While that may sound like a lot, on a monthly basis it will be more manageable. Plus, if you start in your 20s to put 10 to 12 percent of your salary toward retirement and continue to contribute that amount through your working years, your contributions will grow as your salary grows, and you’re setting up a great foundation for your future security.
Whether or not your company offers to match your contribution is another factor. If you can't deal with 10 percent initially, at least consider contributing enough to capture any company match. You don't want to miss out on what is essentially "free" money. Then you can increase your percentage a bit each year to meet your goal.
Choose broad-based mutual funds or ETFs for an easy way to begin
Here's another place where people get easily overwhelmed—there are so many investments to choose from. Chances are your 401(k) plan will narrow down your choices for you. But even if you’ve got a huge array of choices, broad-based mutual funds and exchange-traded funds (ETFs) give you a simple way to begin. Many funds are diversified so that you invest in a variety of stocks and bonds.
Put it on automatic
Whether your 401(k) contributions are automatically deducted from your paycheck, or you set up automatic monthly deposits to an IRA from your checking account, the less you have to think about it, the better. Automatic deposits help you move in the right direction without additional work on your part. It just happens—and that's a good thing.
Another plus of making automatic, regular investments is that you'll be taking advantage of what is known as "dollar-cost averaging." Because you're investing on a regular schedule, you'll be investing in both up and down markets, essentially buying more shares when the market is low and fewer when the market is high. This has the effect of smoothing out market volatility and lessening your risk without you having to take action.
Let time work for you
Once you have these things in place, much of what is left for you as an investor is a matter of time. A lot of new investors get nervous if the market hits a snag and may be tempted to get their money out. But if you’re out of the market and miss the next high, it could cost you. How much? Consider that the annualized total return for the S&P from 1998 to 2017 was 7.2 percent. However, if you got out of the market and missed the top ten days during that period of time, your return would be 3.5 percent—less than half. If you missed the top 20 days, your return would be 1.2 percent. Missing the top 30 days would put you in the negative at -0.9 percent; missing the top 40 would bring you down to -2.8 percent!
The reality is that you can't predict the highs and lows, so when it comes to investing, it's best to stay with your plan, think long-term and let time work in your favor. Slow and steady wins the race.
Don't invest and forget
Letting time work for you doesn't mean you just set it and forget it. Hopefully, once you've started to invest and see your money working for you, you'll get even more interested and want to learn more. There are lots of online resources available. You may eventually want to invest beyond your retirement account and open a brokerage account. At the very least, check your investments periodically (once a quarter or once a year should do it when it comes to retirement investing) to make sure your investments are balanced with your risk tolerance and time horizon.
Whatever you do, stay the course. Again, in my opinion, long-term investing is the surest way to build financial security and wealth over time. But don't do it for me—do it for yourself.
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