While you are accumulating your funds in the stock market, any number of things could affect it negatively. It is incumbent on you to take specific steps to ensure that you can preserve and accumulate your wealth for the future.
It is a very good question that I am often asked. I will not waste your time proposing dumb answers, although I have heard many. And when I hear someone give one of them, I like to ask another question, namely “how much commission do you earn if I follow that advice?” There are in fact four four correct answers to the title question. Now that is getting your money’s worth!
With the Power of Compounding (another future article), the answer is: the sooner the better. Just like the answer to “when is the best time to plant a tree?” (the correct answer is 20 years ago), we can settle for now as being next best. Sir John Templeton says compounding is simply the interest, dividends, or gains you earn on the earnings from prior years. A simple example: if you earn 12% per year (realistic) on an investment of 100, your total after ten years is not 220 (100 + (10 x 12% x 100)), it is 310.6. And that same 100, earning 12% after 50 years, will be worth 28,900. Try the calculations! Each year you earn 12% on not just the principal (original amount) but also the earnings accumulated over the prior years.
If your employer offers a 401k option, then you should sign up and start contributing now. This money is taken from your check prior to taxes being taken out and deposited into your 401k account. Most employers match up to a certain percentage. There is no reason not to participate in this type of plan. The other most popular types of preparation to retire are IRAs. You will need to research deposing on your needs. Or you can take the advice of your IRA custodian and decide which one or how many of different types that you should invest in. IRAs also give you the chance to play with real estate properties as a form of residual and large pay out amounts. You can generate enough income to pay bills, debts, and contribute to retirement plan savings if done right.
You should not invest your entire retirement fund in one asset class, nor should you be too conservative or take unnecessary risks. Portfolio diversification ensures that you are neither too conservative nor too adventurous. Investment risks can handicap or cripple your wealth accumulation for retirement. Portfolio diversification prevents you from risking the partial or total loss of the real or nominal value of your retirement fund. There is nothing worse than building your future – only to see it collapse. Your retirement fund is your investment in the future. You should do all that you can, while it is accumulating, to protect it in the present.
The big lesson from all this? Stop telling yourself that you do not have money to save or invest now, and you will invest a large amount in the future when you are earning more. That is like getting some shade from a tree you plant ten years from now. The Power of Compounding is why I am glad I started investing 35 years ago. When Sir John Templeton was asked this same question many years ago, I recall when he paused and reflected (as he often did) and answered “when you have money.” So, whether you decide to wait for a lower price level, invest regularly, start immediately (20 years ago would be better), or wait until you have more money – Happy Investing, and you will be glad you did!
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