Anyone can invest in the Stock Market. Actually, everyone should invest in the Stock Market. Why? Investing could be much more profitable than saving your money in a plain, old bank. If you do it right, of course. Let’s see how smart investing can help you earn a great retirement.
Investing can be complicated. Not necessary hard; just complicated. There are many things to consider when investing. If we break it down into five easy to follow steps, you’ll see that it’s not as hard as you think to profit from the Stock Market.
5. Set up an IRA
Be it a Traditional IRA or a Roth IRA, the Individual Retirement Account is one of the best ways to grow your money. Whichever you choose, you’ll have special tax advantages: When you file taxes, you’ll be able to deduct some of the contributions you made to your Traditional IRA, (the catch is you will be taxed when you withdraw money from it); or if you contribute to a Roth IRA, you’ll be able to make tax-free withdrawls (but you can’t claim deductions during tax time). Be sure to follow the links to read more and see which is right for you.
In short, however, it will, most likely, be most beneficial for you if you save your money in an IRA instead of a bank. As of this writing, banks have very, very low interest rates, meaning your money will grow quite slowly (if at all! Don’t forget about inflation). If you contribute to an IRA, and super-charge it with sound investments in stocks and bonds, you’ll be amazed how your money grows. And it’ll be tax-free.
You can set up an IRA just about anywhere: your local bank or credit union; an online bank; an online broker. We are partial to TD Ameritrade and have an offer to share with you: send us an email to get a referral from TDA that is worth up to $600 or free trades.
4. Set up a DRIP
A DRIP is a Dividend Reinvestment Program. In short: your money will grow faster because it will be used to automatically buy more shares in stocks/bonds. As you accumulate more shares, the IRA will be worth more; you will earn more dividends; those dividends will be reinvested; you will accumulate more shares; and on and on. It’s a virtuous cycle. This is related to the miracle of compound interest, in that it takes money to make money. But once you get the ball rolling, there will be no stopping your wealth growth.
Again, the DRIP is set up through your brokerage or financial institute. To maximize your investment, be sure the program is free. You don’t want to be nickel-and-dimed to death. Every commission fee you’re charged is money taken out of your pocket.
3. Set up commission-free ETFs
Speaking of being nickel-and-dimed, with most brokers, every time you buy or sell shares of a stock you are charged a commission fee. They range from $4.95 to $9.95. If your financial institute offers comission-free ETFs, take them up on their offer and never look back. An ETF is an Exchange-Traded Fund. This is like buying a basket of stocks and bonds; they are diversified and affordable. You shouldn’t invest all your savings in one or two companies; and it’s often hard to figure out which companies to invest in. The information is nebulous. An ETF makes it easier because the best ones are intelligently crafted for maximum return. At a brokerage like TD Ameritrade, you can invest in many of the best ETFs out there; and with zero commission there is no reason not to invest.
2. A Suggestion: BND and VYM
So how do you know which ETFs to invest in? We are partial to the Vanguard Group’s funds. Vanguard has been at the forefront in helping regular people invest their money wisely. Watch legendary investor Jack Bogle freely share his words of wisdom in a webcast replay (and look out for this author’s question be answered by Mr. Bogle himself!).
Every person is different, and so are their goals. So a good mixture of Stocks and Bonds is essential. Perhaps 25% Bonds to 75% Stocks. This would, hypothetically, mean we would invest 25% of the funds in our IRA in the BND ETF, and 75% of the funds in the VYM ETF.
In short, BND is the Vanguard Total Bond Market ETF and is composed of great Bonds that earn a steady income. This income will then be reinvested (if you have DRIP set up), and you’ll own more shares of BND, which pay even more, which… you get the idea!
As for VYM, it is the Vanguard High Dividend Yield ETF which is composed of big, healthy, profitable companies that pay their investors a nice, regular dividend. As the company’s fortunes grow, your fortune grows, too. And with DRIP, it grows even more effectively.
The final tip is the most simple, and yet, the most difficult.
Simply: Invest your money and don’t worry about it until you retire.
The hard part: Don’t touch that money until retirement.
For some people, “retirement” is a word that doesn’t fit in their vocabulary. The time is incredibly far away. Some don’t believe they’ll reach that time. But they will; it does exist: who wants to work all their lives, after all?
For others, living paycheck-to-paycheck, it’s maddening to see money that you own, sitting, untouched. But if you resist the temptation to spend that money, it will pay you back more than you’d think.
Waiting is also valuable if you’re young. If you’re in your 20s or 30s, you have 30 to 40 years until you retire. You have 30 to 40 years where your money could grow to fantastical levels. The older you are and the closer you are to retirement age, the more “catch-up” you have to play.
No one knows what the future will hold. No one knows if their investments will be profitable or not. What everyone should know, however, is that you will retire. Either because you chose to, or you had to. So why not prepare as early as possible for that eventuality?
You’ll thank yourself later.
Don’t forget to read our Investing Tips for Millennials article, if you’re so inclined. ?
The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.