Market Pulse: When should you invest for retirement? Early
In a recent study it was found that millennials invest a smaller percentage in stocks than older adults and have a higher percentage in cash. Ugh. They must not be reading my articles.
If you are under the age of 35 then your retirement savings should be all in stocks because time is on your side. Let the snowball power of compounding work for you.
Here’s why: Suppose you put $1,000 a month into stocks but stop after 10 years, and then just kept it invested in a market that gained an average of 7% annually. If you invested starting at the age of 25 the account would be about $1.5 million when you are 65.
If, however, you invested again for 10 years only at the age of 45 the account would only grow to $374,000 by the time you are 65. In each case the same amount of money ($120,000) was put in stocks each month, but the earlier you begin investing the greater the long-term growth.
That’s the power of compounding.
So if you are offered a 401(k) at work then take advantage of it by investing in a low cost equity fund, especially if you are young and even more so if the company matches the investment. Also consider funding a Roth IRA. You’ll invest after-tax dollars but the Roth will grow tax free.
Every stock market “correction” and bear market has been followed by a move to new highs. Yes, stocks are volatile. We are seeing that now. But, the longer the period the less volatile the market. The last 52 weeks is a good example.
If you stared at the market daily, you’d see (and feel) the market’s 20% collapse late last year followed by this year’s 14% advance. But if you simply looked at prices from a year ago compared to prices today you’d see a very modest 1% gain.
If you have a long-term time horizon and aren’t emotional about short-term swings, then investing is easy. Why? Because over the long run stocks go up. Most investors understand this. More than 5 million people have their 401(k) accounts at Vanguard and despite all the volatility of 2018, only 8% of them made a trade during the year. I bet they were worse off for it.
Invest early and let the power of compounding work for you.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.