Investors Have Been Brave During this Pandemic
That pesky COVID-19 virus has caused many folks, young and old, to take a second look at their investment plans.
That pesky COVID-19 virus has caused many folks, young and old, to take a second look at their investment plans. The resultant volatile, free-wheeling, bear market can create a lot of doubt in people’s minds about what to do or what not to do. But, by and large, people kept the faith.
In the first four month of 2020, less than 1% of Vanguard’s five million 401(k) and other retirement plan investors moved their money out of stocks. And almost 95% of those same patient investors didn’t make a single trade. T. Rowe Price revealed similar investor experiences from late February through March. Less than 3% of their 2.2 million retirement plan participants made any changes to their portfolios. So far, people have hung tough despite the pandemic, but it never hurts to review the basics of personal finance. And as usual, we’ll take dead aim at the youngsters among us.
Start saving early. The Amazing Power of Compounding is one of the most powerful long-term tools an investor has… a function of time and patience, given a reliable stream of investment dollars to deal with. The earlier an individual starts to save and invest, the easier it is to reach, say, a million-dollar goal. Start saving $500 per month at age 25. Invest for 42 years in assets yielding 6% per annum, compounded annually. Using a Bankrate investment calculator, after 42 years, your balance will be roughly $1,084,000 (before inflation and taxes). Change the starting age of investing to 35. All other things being equal, and your balance after 32 years would be approximately one-half…about $560,200…due to this unfortunate 10-year procrastination. Time is the key!
If possible, invest 15% of your paycheck (including any employer match) monthly to optimize your compound growth in later years.
Always… always… invest the amount necessary to snare the maximum employer match. Why? This FREE MONEY will greatly enhance the yield on your investment in a 401(k).
While young, be bold, invest for growth. Though riskier, equities (stocks and stock funds) traditionally outperform bonds or cash. Manage that higher risk by investing in highly diversified, low-cost index funds.
As retirement approaches, rebalance periodically. During those younger years, with a higher allocation in equities, an investor’s portfolio has more time to recover from an untimely market correction. As retirement approaches, rebalancing – perhaps annually – ensures a reallocation of stocks, bonds and cash that is in keeping with one’s more conservative investment plan.
Then Give Up Control
It’s not uncommon for even the most conscientious among us to shy away from making our own investment decisions. This shyness includes what kinds of securities to buy and when and how often to rebalance portfolios. Consequently, more and more folks are shifting to index fund investing, and more specifically, to target-date “fund of funds” investing. The latter simply involves allowing a team of professionals decide for you what diversified array of securities to buy and when. Specifically, the fund managers select your overall mix of stocks, bonds, and cash – a mixture that increasingly shifts to bonds (i.e., becomes more conservative… less volatile) in retirement or as retirement nears.