Investing: The Odds are in Your Favor
by Pam Krueger for www.wowOwow.com
For many people, investing seems to be a lot like gambling – you place your bets, roll the dice, and cross your fingers that you don’t throw snake eyes. And while Las Vegas will probably never be hurting for tourists, I’m here to tell you that there’s a smarter way to approach investing, and it doesn’t involve a slot machine.
As the creator and co-host of the national public television series Money Track, I’ve drawn on my years of experience as a stockbroker, the real-life stories of everyday investors across the country, and my conversations with leading investment gurus to bring common sense financial advice direct to your door. There are easy and inexpensive ways to reap the rewards of investing – whether you’re starting with $500 or $500,000.
What if I only have $500?
Even the longest journey starts with just a few steps, and investing is no different. If I had to pick a single investment that can maximize long-term returns for everyday investors, I would cozy up to a low-cost, well-diversified index fund. An index fund provides instant diversification, allowing you to own dozens or even hundreds of stocks all at once. There aren’t a lot of sure bets in the investment world, but keeping your investments diversified is one of the easiest ways to protect yourself from market meltdowns.
Of course, when you pony up your money to buy your index fund, make sure you’re making the purchase in a qualified retirement plan, such as a 401(k) or an IRA, so you can take advantage of all the tax benefits these vehicles offer. It’s not often Uncle Sam gives you a break on taxes, so don’t miss this opportunity to beef up your savings!
I’ve got $5,000 to invest. What now?
Fantastic! Now your options are opening up even more. At this level, you can consider branching out into multiple index funds that cover different segments of the market. So while you may start out with a fund that tracks the S&P 500 Index , you may want to add another index that invests in small-cap stocks. Now you’ve got coverage of practically all of the domestic stock market!
If you’ve already contributed the maximum annual amount to your 401(k) and/or IRA, consider opening an account with a discount brokerage and investing some excess cash there. It’s very important to stick to inexpensive funds when investing – for index funds, never pay more than 0.50% in annual fees. Every penny that you pay a fund company is one less penny that is working for you in the stock market.
So what do I do with a $50,000 windfall?
As your portfolio grows and you end up dealing with larger amounts of money, don’t make things more complicated than they need to be. Continue to invest using the same, low-cost, broadly diversified fund options that you would if you were investing that first $500. At this level, you should start thinking about broadening your asset allocation, and moving out beyond domestic equities. If this were my money, at this point I’d consider diversifying into foreign equities and snapping up a cheap index fund that invests in stocks outside of the U.S.
If picking individual stocks gets your heart racing, you can set aside a small amount of your portfolio to play with here – just keep it to less than 5% of assets. Also, if you haven’t already done so, now is the time to consider adding real estate into the mix. Owning a home as a residential property is an excellent way to further diversify your portfolio.
Jackpot! I’ve got $500,000 in my portfolio. I’m on Easy Street now, right?
Not so fast! Just because you’ve managed to amass a hefty nest egg doesn’t mean you can put your investment plan on autopilot. If you’re like most Americans, you’ve likely held multiple jobs throughout your life, which may mean you’re carrying baggage from multiple 401(k) or other retirement plans. There could be a lot of duplication hiding in those various plans, so take the time to sort out exactly what you own and consolidate, if needed. Also, with a greater asset base to work from, you can think about branching out even further and owning other asset classes, like a high-quality short- or intermediate-term bond fund.
If you’ve managed to get to the half-million dollar mark, you might want to think about getting a helping hand on your investing journey. A good fee-only financial advisor can help provide some objective advice on your portfolio to help keep you on track. But don’t you dare relinquish the reins of your investment portfolio! Your advisor should serve as a guide and a teacher, not as a money manager. Know how you are invested at all times. Remember, a portfolio is a lot like a three-year-old child – if you leave it alone to grow and come back when it is a teenager, you may not like what you find!
So while it may not be quite as much fun as playing the roulette wheel at your local casino, investing can ultimately yield greater rewards, whether you’ve got a few dollars or a few hundred thousand dollars. And those are odds I’ll take any day of the week!
