Easter weekend is officially behind us, but that doesn’t mean we’re finished talking about eggs and baskets, and which eggs to put in which baskets when it comes to investing. Matt Allgeyer, Financial Planner at Wamhoff Financial Planning & Accounting Services, highlights three ways to approach this and increase your odds of finding success when investing for the long-term.
Tip 1: Diversify Your Risk
- Diversification means not putting all of your eggs into one basket. You can reduce your risk by allocating your money into various investments
- Find investments that do not always correlate, or move in concert, with each other.
- This allows your money and investments to move in various directions depending on the market.
- Overall, the goal is to work towards outpacing inflation with your money. Investing in stocks may be one way to accomplish that.
- Be sure to diversify your 401(k). I find that many people spend very little time and get very little advice on the breakdown. Because your 401(k) will most likely be one of your largest assets at retirement, you need to treat it with the same care that it will provide you through retirement.
- In terms of timing, the further away from retirement you are, the more aggressive you tend to invest; while conversely, the closer you are to retirement the less aggressively you would normally invest.
Tip 2: Be Aware of Inflation and Loss of Purchasing Power
- Inflation is the price of goods and services increasing over time. The true risk with concern to inflation is that your money will not purchase as many things in the future as it does now.
- When thinking of inflation, think of your return on investment based upon the average growth in the cost of goods and services. If the average increase in cost per year is 2% and you are in an investment that is making ½%, then technically you have lost 1-1/2% in purchasing power in that year.
Tip 3: Know the Power of Compounding
- The earlier you begin investing, the longer you have for your money to grow.
- If you set aside $40,000 when you were 18 years old and your money earned 7% per year with no future investment, you would have over $1 million at age 66.
- If you set aside $40,000 when you were 48 years old and your money earned 7% per year with no future investment, you would have $135,000 at age 66.
- This example tells you two main things: 1) time in the market with the same amount of money seems to grow much faster the more years you have to grow the money; and 2) if you wanted to have more than $1 million at the same rate of return and waited until age 48, you would need a lump sum of nearly $300,000 to achieve the same result.
- The key is to start saving early in life and let it grow.
- Be diligent, choose the appropriate group of diversified investments for your risk tolerance, and you have a better chance of outpacing inflation and also may have much larger eggs at retirement.