If you have too much of your money in savings accounts instead of higher returning investments, you are not alone. In its effort to help us retire in comfort, the investment industry sometimes tries too hard and scares away investors. Time was when an investor would go cross-eyed deciding over hundreds of stock, bond and mutual fund options.
We humans do not like complexity, or what the psychologists call cognitive overload. When we have too many decisions to make, we will choose the easiest option – the savings account.
Thanks to online brokerages, it has never been easier to start investing. You can even access the app on your smartphone and design an investment portfolio on your way to work. The automated investment platform’s aim is to provide investment advice once too costly for the average person to the taxi driver, homeowner and student.
Today, roboadvisors in Asia are growing in popularity. This means that you can develop an entire investment plan within a few minutes. An automated investment advisor will ask you to answer as few as 10 questions on your age, risk profile and time horizon, and presto! Your personal investment portfolio will pop up.
- Learn How to Invest
You no longer need to feel intimidated by investment choices, but do not become too dependent on technology. Most online platforms produce suggested portfolios of diversified funds, such as an exchange traded fund (ETF) invested in stocks, bonds and cash. The returns on these portfolios can vary widely.
The point is, even among low risk, diversified portfolios performance varies. More and more investors are seeking a hybrid investment solution, combining online investment platforms and live investment advisors.
Investors who learn how to start investing well themselves will do the best. Understanding how the investment markets work will allow you to ride the market ups and downs without getting stressed out. Getting started as an investor involves forming good investing habits early. Let’s take a look at the basic strategies of successful investors and the investment returns of some hypothetical investors who followed them, and some less fortunate ones who were less disciplined.
- Reinvest Earnings
To maximise your investment returns, you need to understand the concept of compound interest. If you invest $10,000 today at an interest rate of 3%, in one year’s time you will have $10,300. Let’s say Betty, a 25-year-old nurse, reinvests that $300, and so the next year she makes 3% interest on $10,300, for a total sum of $10,609. Betty continues to reinvest her interest for 40 years.
At age retirement 65, the $10,000 has grown to $32,620.38. Jay, unlike Betty, likes to spend his money on the newest gadgets. He withdraws the $300 each year to buy new toys. In 40 years, Jay will have the principal of $10,000. The next time you want to withdraw money from your retirement savings, calculate the opportunity cost with a Compound Interest Calculator.
Here’s why compounding is the 8th wonder of the world.
- Reinvest Dividends
Here is why successful investors love dividends. Famed value investor Warren Buffet buys stock with high dividends and reinvests the dividends. He chooses companies with a healthy dividend and operating track records such as Coca-Cola, Wal-Mart, Wells Fargo and American Express.
Investing for Beginners author Joshua Kennon took a look at the performance of the Coca-Cola stock of two hypothetical investors – James With Dividend Reinvestment and Thomas Without Dividend Reinvestment. Both investors made an initial $10k investment in 1962. Fifty years later, James’ earnings of $1,750,000 were 3 1/2 times higher than Thomas’ of $503,103. James also enjoys annual dividend income of $22,000.
- Allocate Money Monthly to Retirement Savings
The best retirement savers are those who allocate a portion of their income each month to retirement savings. Some advisors have been promoting a new retirement savings model – invest your raises. Under this scenario, you would live off of your base salary and plunge any extra money you receive from raises into your retirement accounts. For each year that passes without a raise, though, you are losing compounded interest on your savings. The steady monthly saver still comes out ahead. Form good savings habits early!
- Invest When Stocks Are Undervalued
Many investors saw their 401k plans drop in value in August when the Dow Jones Industrial Average (DJI) plunged 1,000 points. An astute investor would have seen the August 24th market drop as an investment opportunity. Buy good stocks that are priced cheaply compared to their intrinsic value. When the price reaches its intrinsic value, consider selling before it becomes an overvalued stock. Value Invest Asia is one of many online resources for value stock research.
- Hold Onto Winners
Every great stock trader learned this important lesson from the traders before him: know when to cut your losses. Instead, investors tend to hold onto losing stocks, crossing their fingers and toes and hoping that the stock price will rise. Sell your losers. While you were praying, you could have reinvested the money in an undervalued stock that is now appreciating. Hold onto your winners, but let those laggards go.
- Choose Passive Over Active Investing
Each year, investment magazines run a list of the All Star stock pickers of the year. While these active stock investors are truly special, the fact is, the majority of active investors underperform passive investment strategies. This realisation has led to the popularity of index funds. Many mutual funds and ETFs are based on indexed funds. An index fund tracks a leading market index such as the Standard & Poor’s 500 or the DJI.
These passive funds typically outperform active investing owing to broad diversification, low portfolio turnover and low fees. You can invest in indexed funds directly with Fidelity, Vanguard or other mutual fund companies. Or you may choose to pay a small fee to have an online investment advisor assemble a model portfolio for you and invest your funds. Some online advisors are free under a certain amount, say $10,000.
All of the above investment strategies require discipline – the golden virtue of successful investors. Start investing with these consistent strategies early, and you are more likely to enjoy steady growth in your retirement savings. Giving into peer pressure and following the crowd, media or short-term market fluctuations can lead to poorer investment portfolio returns
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