To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future.In finance, the expected future benefit from investment is called a return (to investment). The return may consist of capital gain and/or investment income, including dividends, interest, rental income etc. The economic return to an investment is the appropriately discounted value of the future returns to the investment.Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income, or to appreciate in value, so that it can be sold at a higher price (or both).Following points should keep in mind before investing money in the market:-• Ensure investing is right for you- Investing in the stock market involves risk, and this includes the risk of permanently losing money. Before investing, always ensure you have your basic financial needs taken care of in the event of a job loss or catastrophic event.• Make sure you have 3 to 6 months of your income readily available in a savings account. This ensures that if you quickly need money, you will not need to rely on selling your stocks. Even relatively “safe” stocks can fluctuate dramatically over time, and there is always a probability your stock could be below what you bought it for when you need cash.• Choose the appropriate type of account. Depending on your investment needs, there are several different types of accounts you may want to consider opening. Each of these accounts represents a vehicle in which to hold your investments.• Implement dollar cost averaging. While this may sound complex, dollar cost averaging simply refers to the fact that — by investing the same amount each month — your average purchase price will reflect the average share price over time. Dollar cost averaging reduces risk due to the fact that by investing small sums on regular intervals, you reduce your odds of accidentally investing before a large downturn.• Explore compounding. Compounding is an essential concept in investing, and refers to a stock (or any asset) generating earnings based on its reinvested earnings.• Avoid concentration in a few stocks. The concept of not having all your eggs in one basket is key in investing. To start, your focus should be on getting broad diversification, or having your money spread out over many different stocks.• Explore investment options. There are many different types of investment options. However, since this article focuses on the stock market, there are three primary ways to gain stock market exposure.• Find a broker or mutual fund company that meets your needs. Utilize a brokerage or mutual fund firm that will make investments on your behalf. You will want to focus on both cost and value of the services the broker will provide you.• Open an account. You fill out a form containing personal information that will be used in placing your orders and paying your taxes. In addition, you will transfer the money into the account you will use to make your first investments.• Be patient. The number-one obstacle that prevents investors from seeing the huge effects of compounding mentioned earlier is lack of patience. Indeed, it is difficult to watch a small balance grow slowly and, in some instances, lose money in the short term.• Keep up the pace. Concentrate on the pace of your contributions. Stick to the amount and frequency you decided upon earlier, and let your investment build up slowly.• Stay informed and look ahead. In this day and age, with technology that can provide you with the information you seek in an instant, it is tough to look several years to the future while monitoring your investment balances.• Stay the course. The second biggest obstacle to achieving compounding is the temptation to change your strategy by chasing fast returns from investments with recent big gains or selling investments with recent losses. That’s actually the opposite of what most really successful investors do.
Having worked in the financial services industry, there was one word we were forbidden to use. Now that I’m an investor coach, I’m still very conscious of the implications, consequences and effect this one word conveys in my conversations, blogs, articles, webinars and seminars. However, times change and I’m ready to put this one word back into my vocabulary. What is this one word? Guarantee.To understand why this word is forbidden in the financial services industry and why I’m cautious as to how and when I use it, we must first look at the definition: Guarantee; Provide a formal assurance or promise that certain conditions shall be fulfilled relating to a product, service, or transaction. ‘Providing a formal promise that certain conditions shall be fulfilled’ leads some to interpret the word as legally binding. That thought of legally binding scares the financial services industry in a big way as it provides investors potential legal recourse and that is exactly what the industry does not want investors to have. Hence why the word guarantee is never to be used in the course of conversation with investors.I’m cautious in using this word for a different reason. As an educator, it’s my responsibility to set a proper level of expectation for those person(s) learning to invest on their own based on my guidance. I know with 100% certainty that I can not guarantee future market directions, returns on investments and which stocks, mutual fund and/or fund managers will be winners/losers tomorrow.I’ve come to the conclusion that it’s time I put the word ‘guarantee’ back into my vocabulary and start using it due to the following two reasons:
The regulations that will have to be implemented due to Dodd-Frank Financial Reform Act on the financial services industry.
The annual deficits that will raise our national debt to approximately $25 Trillion by 2020.
Based on the above pending regulations and projected national debt, I’m confident in making the following two investment guarantees:
Investment Fees will increase; to cover additional expenses incurred by the financial service industry and financial firms due to the Dodd-Frank Act. These additional expenses will be passed directly on to investors in the form of more and higher investment fees at all levels.
Taxes will increase; to minimize our annual deficits, to pay down our national debt and to cover mandatory entitlement programs. These tax increases might be in the form of personal income, business, capital gains, estate, 401k withdraws, etc.
So what do these guarantees mean to investors?
Because investment fees have a direct negative correlation to investor returns, investors will realize a lesser return percentage on their investments. Today on average, investors pay a total of approximately 2.5% – 4.0% of the value of their investments on an annual basis in fees. What’s truly sad about this fact is most investors are totally unaware of it as these fees are skimmed directly off the top of an investor’s earned returns before reported on an investor’s statement. The new regulations are estimated to push these fees to 3.5% – 5.0%. To get a better understanding of the impact of these fees, consider the following; On an investment of $10,000, fees will confiscate up to $500 per year regardless if the investments make or lose money!. On a $100,000 investment, those fees will confiscate up to $5,000 per year and if your fortunate enough to have saved $1,000,000 these fees will confiscate up to $ 50,000 per year! Multiply these annual costs by 10, 20 or 30 years and include losing the power of compounding over these years and it’s easy to understand why investors loss approximately 70% of their lifetime wealth potential due to investment fees…70%!
Tax increases are painful as they too confiscate money from employees, employers, consumers, investors, savers and retirees. Investors investing with an advisor in short-term speculative investment strategies generate short-term capital gains that are taxed as personal income which will be subject to higher tax rates. In the case of retirees, withdraws from their 401k plans will be exposed to higher personal income tax rates thus reducing purchasing power and exposing retirees to the possibility of running out of money.
My intent is not to instill fear with investors but to help them recognize the very real possibility we’re facing and what ‘seeds of change’ can be planted today to protect investments from future fees and taxes.Here are several ‘seeds of change’ investors should plant today to ensure an abundant harvest later in their life:
Learn to become your own most-trusted financial advisor by enriching your knowledge so you’re in complete control of your investments and understand what you’re invested in
Invest in a strategy based on simplicity and with clearly defined entry and exit triggers.
Invest in low-cost funds and eliminate advisor fees immediately. Reducing fees have a direct positive correlation to investment returns. For every 1% of fees reduced, returns are directly increased by the same amount.
Invest in passively managed funds to eliminate capital gain tax consequences,
Leverage the power of compounding over the long-term to build wealth for yourself.
Choose the Roth or Roth/401k option if you’re starting out in an employer-sponsored retirement plan,. These plans require taxes to be paid now while you’re in a lower tax bracket and provide distributions that are totally tax-free when you retire.
Investors that choose to plant the above ‘seeds of change’ today will have a distinct competitive advantage in building, protecting and preserving their wealth for their future.