Do you often wonder if you should invest or not? The markets are uncertain, and many millennials are steering clear, whether due to uncertainty, lack of knowledge, or simply not having the money to invest. In this post, I’m going to talk about why you should invest for the long term, and how far investing even $5 a day will go over a period of time.
Advantages Of Long-Term Investing
Investing for the long-term is quite powerful. When you invest long-term, your money compounds on itself. That is, the original money you invest grows, and then that money grows on itself, and so on, and so forth.
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It’d be easier to use an example, so consider this.
Assume you have $1,000 invested in an S&P 500 index fund. If the term “S&P 500 index fund” scares you, worry not. An S&P 500 index fund is simply an investment vehicle that closely follows the S&P 500. By buying an S&P 500 index fund, you will own fractions of shares of the entire S&P 500.
So back to that $1,000. If you invested $1,000 and received an average growth of 9% annualized return, which is considered standard, it would take just a hair over 8 years to reach $2,000.
In 8 years, you’ve doubled your money and made a profit of $1,000. Now, how long do you think it would take for your $2,000 balance to obtain another $1,000? It’s definitely not 8 years.
In fact, your $2,000 would reach $3,000 in approximately 4 years 9 months due to how compounding works. That’s much quicker!
And just for completeness, how long do you think it would take to gain yet another $1,000? Well, the math shows that to go from $3,000 to $4,000, at the same average return, it would take 3 years 4 months.
What’s the lesson? One of the benefits of long term investing is that in the early years of investing, your money grows slower and accelerates the longer its invested. That’s why long-term investing is amazing.
Long Term Investment Strategies
A quick disclaimer that I am not a certified financial planner. In the next few sections, I’m going to talk about some basic investing strategies. Everyone’s financial situation and risk tolerance is different. While you’re welcome to try out my strategy, I highly urge you to invest only as you see fit and to consult with a financial advisor or certified financial planner if you need direction with investing.
When investing for the long term, it’s important to diversify your money. That means spreading your money across multiple platforms. I’ll use my investments as an example.
My target allocation by the end of 2020 is:
- 30% index funds
- 20% dividend stocks
- 20% real estate crowdfunding
- 10% P2P lending
- 10% bonds
- 10% cash
At the age of 38, I have a high risk tolerance and place most of my money (50%) into the stock market. I anticipate that my index funds will grow the most while my dividend stocks will provide passive income.
Real estate, at times, outperforms the market and is an area I’m heavily investigating.
I’ve been investing in Lending Club, a P2P lending platform, for over a year now, and have seen approximately 9% return on investment.
I do not currently own any bonds, however, as I approach age 40, I’m beginning to consider having a small portion of my portfolio for them.
I like to have cash-on-hand at all times in case opportunity strikes. I will also note that this 10% cash-on-hand is not inclusive of my emergency fund, which contains six months of living expenses.
I’ll also note that I have some of my money a Roth IRA for tax reasons. Let’s go over Roth IRAs below.
Long Term Investing In A Tax-deferred Account
Roth IRAs are my favorite type of IRA because, as long as I qualify, I can contribute after-tax dollars to it and have my money grow tax-free until I’m old enough to withdraw (59 ½). Then, once I begin withdrawing, I can withdraw my gains tax-free as well.
Here’s an example as to why I use a Roth IRA for tax-free growth and disbursements.
Assume I invest $5,000 per year into a Roth IRA, and my Roth IRA grows at 9% for 30 years. Now assume I invest $5,000 per year into another account, and I gain a 9% return on investment each year, but I have to pay 24% in annual taxes. Let’s look at the difference over 30 years.
It’s amazing how much money is paid out towards taxes each year in the taxable column! As the years go on, I’m losing more and more of my money if I only invest in a taxable account. This is a key factor as to why I invest in my Roth IRA first.
That said, I still feel it’s important to invest in the short-term as well. You never know when you’ll need your cash, and there are penalties for withdrawing from a Roth IRA if you’re under 59 ½, unless you meet a qualifying situation.
Life Expectancy Is Increasing
With life expectancy increasing, it’s very possible that we will run out of money before we pass away. Because we’re living longer, many older folks are choosing, out of necessity, to work longer. Not long ago, retiring in your early 60s was quite common. Nowadays, there are folks in their early 70s who still work.
If you’re in your 20s or 30s and you’re reading this article, and you haven’t considered investing for your retirement, this is your wakeup call. You can’t rely on social security and working forever. You may encounter a health issue or an emergency that will take you out of the workforce prematurely.
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Invest now and stay invested, even if you can only afford $20 per month. If you don’t know what to invest in, consider index funds. Your bank or brokerage firm will help you pick one or more out.
I highly recommend Charles Schwab Bank if you don’t know what bank or brokerage firm to go with. Their customer service alone is outstanding, and they will walk you through the process of investing your money into an IRA or account of your choice.
Most Boomers Are Afraid Of Outliving Their Assets
This might surprise you, but most baby boomers are afraid of outliving their assets. I suspect this is occurring because 1) the life expectancy is increasing and 2) the rising cost of living expenses, including that of medical.
A lack of a financial education and opportunity also may play into this, as older folks may have simply worked for decades and contributed blindly to a 401(k) if they were offered such.
For the younger Gen X’ers, millennials, and upcoming Gen Zs, there’s so much time to grow your money, and to not take advantage of the power of compounding simply doesn't make sense.
Most Millennials Don’t Know How Much They’ll Need For Retirement
Perhaps another frightening reality is that most millennials have no idea how much they’ll need to retire. How can one reach a financial retirement goal if one has no idea how much to save?
When we’re young, we don’t think about what’s going to happen in 40 years from now. Some of us are sold on the YOLO mindset (is that even still a thing?). But nevertheless, it’s crucial to plan for retirement when you’re young, lest you reach your late 50s and suddenly realize you have nowhere near enough money to dream of retiring.
When I was 25, I mapped out goals for every 5th year of my life. How much I wanted my net worth to be, how I would get to each step, and what might be some challenges faced. None of it worked out the way I intended by the way but setting the goals powered up my mindset.
Now in my late 30s, I’m a bit behind where I wanted to be, but life events can’t always be planned for, right?
That’s okay because I still have over 20 years until I’m 60, giving me plenty of time to save up for retirement. Knowing me, I’ll never truly retire, but to have the choice to stop working is where true financial freedom comes in.
You don’t have to be like me and map out your net worth goals. That said, having financial goals will keep you on target for retirement and keep you invested in your future, versus spending money on things you don’t need.
By investing for the long-term, you’ll be able to watch your money grow and keep yourself out of debt. By planning ahead for significant events, such as a wedding, buying a house, or having a child, there will be less financial surprises and more financial freedom.
Take into considering paying down debt. If you have a mortgage, ask yourself – Do you want to pay down your mortgage or invest your money first?
Wrapping It Up
Setting goals now to invest for the long term will help you reach your future financial needs more easily. The sooner you start, the greater your money will grow.
If you’re looking for a place to open a brokerage account, consider Charles Schwab bank. If you use my Charles Schwab bank referral link, you can get up to $500 added to your account based on how much you deposit initially.
Until next time!