I recently spoke with a good friend who wondered whether investing was just for the wealthy. The answer is no. Investing is for everyone who has an interest in building wealth and managing the money they have, regardless of the size of your portfolio.
One factor people should consider when doing some planning is the purpose of the funds.
Say, for example, you’re a young person aged 25 years and want to save for retirement. If you can afford to set aside $100 per month for 40 years and you get an average return of 7 percent, that $100 per month will grow to more than $260,000 by the time you turn 65. In a 25-year period, that same investment would grow to more than $80,000.
That’s where the time and compounding factor really comes into play — at a savings rate of $100 a month, it takes 25 years to hit $80,000, and then you add another $180,000 in the next 15-year period without increasing your savings amount from the original $100.
Young people with access to a retirement plan at work should start as soon as possible and budget so they can make a consistent contribution.
Hopefully, your employer will offer some matching funds. If you don’t have access to an employer-sponsored plan, you can start your own retirement fund with an IRA or a Roth IRA.
In the scenario above, if your employer matched your contribution, you’d only need to budget for a personal contribution of $50 per month.
Adding a set amount of money to an investment account on a regular basis is known as dollar cost averaging. Dollar cost averaging is one area of investing where volatile markets work to the investor’s advantage. If you take two investment vehicles with the same average returns, the more volatile investment is likely to produce better returns over time with dollar cost averaging.
Always consider the purpose of the money and the timeframe. Say you’re about to become a grandparent for the first time and have $2,000 you can afford to invest now and plan to add $200 per year. Putting that money into a college savings plan for 18 years and averaging a 7 percent rate of return will see that investment grow to more than $14,000 by the time your grandkid is ready for college.
Relatively small amounts of money can be invested in stocks — just consider the purpose of the money and the timeframe.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.