Investing Is For You: Investment Series Part One
| July 5, 2007 | Posted by Roshawn Watson under Uncategorized |
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Investing money is quintessential to wealth-building for most people, for it is very rare to get a check for $5-25 million dollars at once. Over the course of your life, you will likely earn hundreds of thousands if not several million dollars; sadly, many will squander fortunes. Consider that the 2002 median family income in America is $42,409 according to the census bureau. Now if invested properly, this median family income could generate millions of dollars for retirement. For example, if one started working at 22 years old and made the median income and invested 10%, he or she would have $2,638,914 when he or she retired at 65 years old. This calculation assumes an annualized return of 11% and a $250 monthly investment. Now consider if you and your spouse are above the median income but start a little later. Let’s say together you earn $120,000 annually but don’t start investing until you are 30 years old. You would have $4,512,398 when you retire at 65 years old, assuming that you invest $1,000 monthly and have a 11% annualized return. Interestingly, if this same high-income couple didn’t start investing until they were 35 years old, they would have $2,629,066, which isn’t much different than if they earned 66% less (i.e. $42,409) and invested 75% less (i.e. $250 instead of $1000 monthly) but started at 22 rather than 35. This underscores the importance of starting early. In case you were wondering where I got 11% annualized return from, the historical average of the S&P; 500 is 11%, and the S and P 500 is a good gauge of United States stocks.
Investment Length: Make no mistake, I define investments differently than some. By investing, I am referring to long-term investments not savings, money market accounts, short-term trading, flipping house, etc. I typically do not believe in investing for shorter than 5-7 years because of too much risk (volatility). Some may do just fine with shorter intervals, but the risks that they assume in many cases are ridiculously high. It is usually unwise to speculate with your family’s financial well-being. The buy and hold strategy may be simplistic, but typically yields superior results to timing the market and other speculative strategies.
It Is Not Just About You: Sure there is much merit to retiring with some dignity and not depending of social insecurity. However, I am repeatedly baffled that some people dismiss the importance of wealth because they think it is greedy to be wealthy. They feel that as long as they have enough for their families, they don’t need anything else. Ironically, they often think that their piousness is noble, not realizing how selfish this thought process really is. Before you send me your hate mail, consider how many lives YOU could positively influence if you would had some REAL WEALTH. Think of how many children you can feed and cloth and the charities you can generously support.
When Oprah opened that $40 million S. African school, think of how many lives she changed!
Contrast these tangible benefits of wealth with the inordinately selfish worldview that all you need is enough money to take care of your family. Do not deceive yourself into believing money is not important. Money merely amplifies what is already there: if you are selfish without money, you will be selfish with money. Likewise, if you are destructive without money, you will be destructive with money. Let me be clear: do not blame money for greed.
Risky Business: Another big barrier to investment is that many feel that it is too risky. If you are one of these people, let me help you friend. Investing is not very risky; poor investing is risky, and so is not investing. Good investing in diversified index funds has proven to be a solid wealth building tool. Do not settle for meager returns (0.2-5.5%) while others are making 2-3 times that. Manage and minimize risk by investing smartly; don’t eliminate risk by just saving because savers lose in the long run. Note that inflation is essentially devaluing of the dollar, making a dollar 5 years ago worth less than a dollar today. Protect your spending power by making your dollars grow.
Debt: High debt loads are another reason people do not invest. Paying off debt obviously frees up your cash flow to invest, save, and give. Due to space limitations, I will refer you to this review until next week, when we will further discuss debt & investing.
© Copyright 2007, Roshawn Watson, Pharm.D.
Next week we will cover: when one should and should not invest and the role of debt in investing. We will also contrast several investments and saving vehicles.
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