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Investing | Should I Become an Investor?

  • Writer: Adam Herod
    Adam Herod
  • Jan 3, 2019
  • 5 min read

Updated: Jan 4, 2019

Have you been hesitant to start investing? Here are some great reasons to get started even in a bad market! #investing #money #stockmarket #stocks #wallstreet #help


Believe You Will Waste It Otherwise


Recently, research has determined that the vast majority of Americans cannot cover a surprise $400 expense due to their lack of disciplined saving and investing.


This is a major concern, so here are some reasons to change your approach and get to it in regards to helping your money grow.


In America, we have a tendency to value the appearance of wealth as opposed to actual wealth.


We buy the latest and best brands at $60+ an item, and spend much more on status items such as vehicles and homes in compared to building tangible wealth or investing.


Wealth is the accumulation of financial assets outside of one's monthly income. It is often viewed as someone's net worth, including: investments, real estate and savings.

The problem with wealth is that it is often not visible, and those that try to make it visible don't actually have the net worth to back up their spending.


In turn, individuals earning over $100,000 can end up living paycheck to paycheck in order to fund the brands and lifestyles that project their supposed wealth.


Remember, having a high monthly income does not equate to a high net worth.

You have to be disciplined to take the higher salary you earn and stow away money in vehicles that generate returns, such as: ETFs, mutual funds and low-cost index funds that track the S&P 500.


Money Doesn't Grow in Savings


One of my online savings accounts is earning 0.3%.


This year, it earned 8 cents in my savings!


Arghh!!


Needless to say, I'm not stowing a lot of money in that account.


There's no doubt that savings accounts are safe, in terms of withholding the current value of your money, but if I were to keep $10,000 in that account for the next 25 years, it would only grow to $10,778.

Instead, if I kept it in a higher-earning, online savings account earning 2%, I would be able to grow it to $16,406.


That sounds great, at first, but it pales in comparison to how an investment would grow at a 7% rate. If left untouched in a low cost mutual fund, the $10,000 could grow to over $50,000. At 10% that same $10,000 would become $108,347.


If you cannot stomach investing your money now, then make sure you have your cash in a secure, FDIC insured, high interested savings account.


You want to think about your savings as a safe harbor for your emergency fund that can hold up to nine months of income should a negative turn impact your family.

Ideally, once you reach that nine month mark, you want to then put your extra money into an investment account in order to beat inflation.

Inflation Undermines the Value of Your Money


When it comes to inflation, I like to use the metaphor of ocean melting a glacier.


On the surface, we see the money we have; however, out of sight, and under the surface, our money is being worn away by ever-increasing costs for goods.


Some say $100 today will be $100 tomorrow, but the deeper you look you know that the cost of goods increases over time. And you know the power $100 has today cannot be as powerful even a few years from now.


If you stow away $100,000 in a savings account it will be $100,000 tomorrow, but it will not be as powerful as your $100,000 was the day before.


Compound inflation year after year and if your money isn't earning more than 2% then you will only keep relative pace with inflation - not grow its value.

We tend to love the idea of being able to reach out and touch our money, so we hear stories of people leaving money under mattresses and in safes.


If we realize that, once deposited, our money is not necessarily "kept" in a brick and mortar bank then maybe we can be more informed investors.


Compound Interest is Uber Powerful, Yet Misunderstood


Albert Einstein once said, "Compound interest is the eighth wonder of the world."


As explained on Investopedia, compound interest can be thought of as interest upon interest, which will make a sum of money grow faster.


For example, a $5,000 investment compounding at 5% annually will be $5,250 after year one.


Beginning year two you will start with $5,250, and for the purposes of compounding, the 5% will now apply to the second year balance of $5,250 and grow by $262.50 instead of just $250.


By year 12, your money will be increasing by nearly $450 without you having a touch a thing!


All you had to do was place your money in an investment vehicle like an ETF or low-cost mutual fund.


Then, each year after that your money will grow and grow by compounding as long as you have invested in good market conditions.

What Do I Invest in Now?


Few people can argue the benefits of investing, especially if you invest don't expect a get rich quick scheme and know there will be market swings that turn your stomach from time-to-time.


Before you go and earmark money for investing, remember these pillars:

  • Buy low, sell high.

  • Stocks in red are at a discount, while stocks in green are at a premium.

  • "Don't test the depth of the water with both feet." Warren Buffett. Essentially, never put all of your money into one single investment or sector.

  • "Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle, Founder of Vanguard. Basically, don't try to pick stocks but instead buy index funds like an S&P 500 fund in order to diversify your investment portfolio.

  • Use the power of dollar cost averaging, which has you buy small bits of investments across the upswings and downswings of the market and allows you to obtain the overall market average over a period of time.

  • Don't try to time the market. See previous bullet for more information.


Unbiased financial advisors recommend investors consider pooling their money in low-cost funds that track major indices.


In prior years, there was a wave of investors that gave their money to stock brokers who promised large returns, but statistics show even some of the best stock investors cannot beat the average returns of the S&P 500 and other major indices.

Consider that equity fund managers have returned 4.79% on average over the past 20 years, while the S&P 500 has averaged 7.68%.

It is important to consider the success of the S&P 500, especially when you desire to keep your costs of Assets Under Management (AUM) low.


Great, Low Cost ETFs from Vanguard*

Remember that ETFs trade like stocks, but offer access to wide swaths of the stock market for low costs. They are great vehicles for beginning investors.


Remember that prior returns do not guarantee future growth, and that you should talk to your financial advisor before investing.

These funds can be viewed as building block funds for your portfolio, and they can act as great, low-cost options for you to get your 'foot' in the water.


Once you start investing, it is key to hold a long-term view and try to ignore daily articles about the market.

If you can remove emotions from your investing strategy, it is possible to build a healthy portfolio. Hold steady and buy bits of index funds over a 30-year+ span and you'll be on track to your goals!

For more follow @thewealthmap on Instagram and Facebook.

You can message Adam at wealthmapblog@gmail.com.

*At the time of publication the author of this article held investments with Vanguard.

 
 
 

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