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Investing is a marathon

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Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial

Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.

Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:

  • Individuals prefer current consumption over future consumption: delayed gratification is hard for most people and, all things being equal, we would rather have things now than wait for them.
  • Inflation: When the money supply increases, prices also often increase. Consequently, the purchasing power of fiat currency decreases over time.
  • Risk: The future is uncertain, and there is always a chance that future cash delivery may not occur.

To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.

The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.

Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.

“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.

Invest in stocks.

Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.

Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.

Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.

The power of compounding

Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

Purchasing power protection

Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.

In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.

Invest for the long term.

Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.

Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.

References:

  1. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html
  2. https://smartasset.com/investing/long-term-investment
  3. https://www.bankrate.com/investing/steps-to-building-wealth/
  4. https://www.cnbc.com/2021/02/04/how-we-increased-our-net-worth-by-1-million-in-6-years-and-retired-early.html

Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc. 

Omega-3 EPA and DHA

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When it comes to the benefits of omega-3 fish oil supplementation, the evidence shows that it benefits both the mind and heart.  Our brains, hearts, and bodies appear to suffer when we don’t get enough of these healthy and essential fats. In terms of brain and heart health, omega-3s derived from wild cold water fish oil (or grass-fed animal fat and other kinds of seafood) are best because they are loaded with two particular brain- and heart-healthy essential fatty acids (EFAs) called eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA).

A Harvard School of Public Health study published in 2011 found that omega-3 deficiency is likely the sixth biggest killer of Americans, and maybe the underlying factor of roughly 96,000 premature deaths each year!

What Are the Benefits of Omega-3 Supplements?

Scientific Benefits of Omega-3 Supplements | BrainMD

First, the most important fact to remember about omega-3 essential fatty acids (EFAs) is that they are indeed essential, meaning that your body needs to get them from your diet. Unfortunately, with today’s modern diet, which is light on omega-3-rich foods (fish, grass-fed meats, nuts, seed and dark leafy greens) and heavy on foods with saturated fats and oils (corn, safflower, soybean, sunflower, cottonseed, peanut, etc.) that are rich in omega-6 EFAs.

The American Heart Association recommend at least two oily fish meals per week (which equates to roughly 500 mg per day of EPA and DHA), a full gram per day for those with coronary heart disease—and even more for those with high triglyceride levels—there’s good reason.

  • Inflammation. Studies indicate that DHA and EPA from fish oil may support healthy inflammation levels in the body.10 Keeping inflammation levels in check supports a healthy vascular system.
  • Blood pressure and heart function. Research has also correlated adequate amounts of DHA and EPA with healthy blood pressure levels.11 And while still inconclusive, some studies have shown that EPA and DHA may play a role in healthy heart rhythm.12
  • Triglycerides. Having a high level of triglycerides, a type of fat (lipid) in your blood, can increase your risk of heart disease. A very strong body of research suggests that DHA and EPA help to maintain healthy triglyceride levels.13

Our brains, hearts, and bodies appear to suffer when we don’t get enough of these healthy fats. In terms of brain and heart health, omega-3s derived from wild cold water fish oil are best because they are loaded with two particular brain- and heart-healthy EFAs called eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA). Literally, thousands of scientific studies have been conducted using fish oil rich in these two nutritional dynamos—with mostly promising results.

Major Benefits of EPA and DHA For Your Health

It has been scientifically demonstrated that your brain needs the omega-3 fatty acids EPA and DHA to function optimally. Though not technically classed as essential, these fatty acids are called essential for a reason – our bodies need them, and the only sure way to get enough of them is through foods or supplements. Let’s take a closer look at these two most important omega-3 fatty acids.

Power Team: EPA + DHA

Humans need a variety of fatty acids for our cell membranes to function. EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid) are essential to the functioning of all our 30 trillion cells. They’re building blocks for the membrane systems that do most of the heavy lifting for our cells.

We require premade EPA+DHA from our diet. Unfortunately, the modern diet has an unhealthy balance of fatty acids: we get an abundance of saturated and omega-6 fatty acids and not nearly enough omega-3s. Also, most of the omega-3s we do get must be converted to EPA+DHA, which the body doesn’t do effectively.

Numerous surveys indicate populations that don’t consume a lot of seafood (such as the U.S.) don’t get sufficient supplies of EPA and DHA from their diet. Since plant foods don’t supply them, the main dietary sources of EPA and DHA are cold-water fish and dietary supplements. Considering the widespread contamination of seafood by mercury and other toxins, many experts advise that taking a purified fish oil supplement could be a smart choice.

 1. Promotes Healthy Mood

EPA+DHA have been tested on adults with mood problems in at least 26 randomized, controlled clinical trials. Two meta-analyses, which analyze the data pooled from all the best trials, have concluded that these omega-3s are consistently beneficial for mood. These meta-analyses also suggest that fish oils with more EPA than DHA work better, with the best ratio being around 1.5 to 1 EPA to DHA.

Children and adolescents with mood difficulties commonly have problems with academic performance, self-esteem, and socialization. In two clinical trials with youth aged 7-14 years, EPA+DHA 1600 mg per day (1400 mg EPA, 200 mg DHA) for 12 weeks substantially improved coping with distraction and stress – as well as mood, irritability, and self-esteem – compared with placebo.

 2. Improves Attention and Behavior

Children and adolescents with attention and learning challenges often have low Omega-3 Index values (about 3% on average, compared to a healthy 8% or higher). A 2018 meta-analysis concluded that supplementation with EPA+DHA improved parental reports of attention and behavior, as well as mental focus on cognitive tests. The researchers concluded that to ensure the most benefit, the EPA dose should be at least 500 mg per day.

 3. Essential for the Heart and Circulation

Numerous health agencies worldwide recommend EPA and DHA for promoting and enhancing cardiovascular health. Meta-analyses clearly indicate that supplementation with EPA+DHA at doses of 2-3 grams per day can promote healthy triglyceride status and blood pressure regulation. Additionally, EPA+DHA supplementation can improve blood vessel function, especially their capacities for relaxation and flexibility.

 4. Supports Healthy Immunity

The immune system is the body’s security force. When the body is invaded, it goes on full alert to eliminate the threat. EPA and DHA support healthy immune responsiveness.

Having sufficient EPA+DHA in our tissues gives the immune system the option to generate messengers from them to coordinate its activities. Healthy immunity is held in delicate balance by EPA and DHA. No other omega-3s can substitute for EPA and DHA in this crucial role.

 5. Vital for Healthy Pregnancy

Babies of mothers who have good EPA+DHA status through pregnancy have a lower risk for problems with mood, cognition, and behavior in their early childhood. DHA, the predominant omega-3 in our cell membranes, is essential to the developing fetal heart, brain, and retina.

A meta-analysis of 38 trials concluded that children born to mothers with higher prenatal EPA+DHA intakes show better motor, vision, and cognitive development in their first two years of life. Yet U.S. women on average have considerably lower EPA+DHA intakes than recommended by the U.S. National Institute of Medicine.

 6. Total Brain and Body Protection

EPA and DHA have been shown to protect brain circulatory function and preserve memory and other cognitive capacities. EPA and DHA support many other organs and body systems including the liver (by preventing triglyceride buildup), the joints (promoting joint comfort), eyes (essential for retinal function), and muscles (protecting against mobility loss as we age).

With strong evidence supporting the positive effects of omega-3s EPA and DHA on the brain, heart, and entire body, taking a fish oil supplement daily can have a significant impact on individual wellness. BrainMD is proud to recommend its new, high EPA and DHA premium liquid fish oil…

https://twitter.com/yourwellbeing88/status/1278666518390165505?s=20

References:

  1. https://brainmd.com/blog/omega-3s-the-supplement-your-mind-and-heart-can-get-behind/
  2. https://brainmd.com/blog/benefits-of-epa-and-dha-fish-oil-supplements/

Stay Invested – Time in the Markets

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“Time in the markets, not timing the markets.”

A common mantra in investing circles is ‘it’s about time in the markets, not timing the markets’. In other words, the best way to make money is to stay invested for the long term, rather than worrying about short term volatility or whether now is the best time to invest.

Value investing guru Benjamin Graham once quipped that “in the short term the stock market is a voting machine” that measures the popularity of companies and the sentiment of investors, whereas in “the long term it is a weighing machine” that measures each company’s fundamentals and intrinsic value.

Time in the market works because it takes this ‘guess the market bottom’ element out of the equation. By focusing on the long term, it’s easier to ignore the volatility of markets. Sure, it’s still scary watching the value of your share portfolio fall from time to time.

Time in the market is really about harnessing the power of compound interest. Compounding is the best thing about investing. Albert Einstein once said “Compound interest is the most powerful force in the universe. Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”

With compounding, your money accumulates a lot faster because the interest is calculated in regular intervals and you earn interest on top of interest. Compounding is usually what makes investors like billionaire investor Warren Buffett wealthy. If you are able to achieve a consistently high annual rate of return over the long term, building wealth is almost inevitable. And Buffett has never tried to time a market in his life.

But pushing and pulling your money in and out of the market stymies the compounding process. And all it takes is one massive mistime to end up back at square one given the fact that market can never be timed. Investor Peter Lynch said it best: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Compounding plays a pivotal role in growing your wealth. When using compounding, the results will be small at the start but over time, your wealth will accumulate fast. Warren Buffet is known to make the majority of his wealth later in his adult life and this is due to the compounding interest effect on his assets and invested capital.

Missing the best days

Timing the markets involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high. This can be lucrative if you get it right consistently, but this is very difficult to do and getting it wrong means locking in losses and missing out on gains.

Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility.

Instead of trying to time the market, spending time in the market is more likely to give you better returns over the long term. It is best to base your investment decisions on the long-term fundamentals rather than short-term market noise and volatility.

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

This chart uses a series of bars to show that from the end of 1979 until July 1, 2020, a $10,000 investment would have been worth $860,900 if invested the entire period. Missing just the 10 best days during that period would reduce the value by more than half, to $383,400.

Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  2. https://www.fa-mag.com/news/retirees-are-leading-precarious-financial-lives-42426.html
  3. https://www.tilney.co.uk/news/it-s-about-time-in-the-markets-not-timing-the-markets
  4. https://www.fool.com.au/2020/10/06/does-time-in-the-market-really-beat-timing-the-market/
  5. https://www.fool.com.au/definitions/compounding/

Tax on the Sale of a House (Primary Residence)

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If you sell your home for a profit, some of the capital gain could be taxable. Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income.

The IRS and many states assess capital gains taxes on the difference (profit) between what you pay for an asset — your cost basis — and what you sell it for. Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets like cars, boats and real estate.

To minimize your tax burden, the IRS typically allows you to exclude up to:

  • $250,000 of capital gains on your primary residence if you’re single.
  • $500,000 of capital gains on real estate if you’re married and filing jointly.

You will have to meet certain criteria in order to qualify for this exclusion, so be sure to review them before you sell. You might qualify for an exception, and adding the value of home improvements you’ve made could help.

For example, if you bought a home 10 years ago for $200,000 and sold it today for $800,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be), according to NerdWallet.com. What rate you pay on the other $100,000 would depend in part on your income and your tax-filing status.

The bad news about capital gains on real estate is that your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

  • The house wasn’t your principal residence.
  • You owned the property for less than two years in the five-year period before you sold it.
  • You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)
  • You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
  • You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.
  • You are subject to expatriate tax.

If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.

  • Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket.
  • Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.

References:

  1. https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax

Personal Debt in America

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“Debt means enslavement to the past, no matter how much you want to plan well for the future and live according to your own standards today. Unless you’re free from the bondage of paying for your past, you can’t responsibly live in the present and plan for the future.” Tsh Oxenreider, Organized Simplicity: The Clutter-Free Approach to Intentional Living

Debt stands stubbornly in the way of Americans’ financial goals and life dreams.  Moreover, debt is the biggest barrier to wealth creation and is the great destroyer of wealth. Debt and financial freedom are polar opposites – they never meet. Where there is debt, there cannot be wealth and financial freedom.

In the U.S., adults aged 18+ report having an average of $29,800 in personal debt, exclusive of mortgages, according to the latest findings from Northwestern Mutual’s 2019 Planning & Progress Study. The research also revealed that 15% of Americans believe they’ll be in debt for the rest of their lives.

While those numbers are staggering, they represent an improvement over last year when U.S. adults reported an average of $38,000 in personal debt. Still, the debt problem in America continues to run deep with wide-spread implications. The study found:

  • On average, over one-third (34%) of people’s monthly income goes toward paying off debt
  • 45% of Americans say debt makes them feel anxiety on at least a monthly basis
  • 35% report feeling guilt at least monthly as a result of the debt they’re carrying
  • One in five (20%) report that debt makes them feel physically ill at least once a month
  • One-fifth (20%) of U.S. adults are not sure how much debt they have
  • Over one in three Americans (34%) are unsure how much of their monthly income goes toward paying off their debt

Among the generations, Gen X reported the highest levels of personal debt with $36,000 on average. They’re followed by Baby Boomers at $28,600; Millennials at $27,900; and Gen Z at $14,700.

This is the latest round of findings from the 2019 Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors towards money, financial decision-making, and factors impacting long-term financial security. This year marks the 10-year anniversary of the study.

The Credit Card Crisis

The leading sources of debt for most Americans is a tie between mortgages and credit cards, according to the study. An equal 22% of U.S. adults listed each as their main source of debt, more than double the next two highest sources — car loans (9%) and personal education loans (8%).

Millennials cite credit card bills as their main source of debt (25%), while Gen Z notes personal education loans as theirs (20%). Both Gen Xers (30%) and Baby Boomers (28%) note mortgages as their leading source of debt, followed by credit card bills (at 24% and 18% respectively).

Digging deeper into the numbers around credit card debt, the study found:

  • Nearly one-third of Americans (31%) are paying interest rates on their credit cards greater than 15%
  • Over 1 in 10 (12%) say they “always” pay only the minimum required payment, just covering the interest without paying down any principal
  • Close to one-fifth (19%) don’t know what their interest rate is, with Millennials being the most likely to report not knowing (22%)
  • 18% report having four or more credit cards, with Baby Boomers being more likely than other generations to have four or more (23%)

According to the Federal Reserve Bank of New York, credit card debt has reached $868 billion in the United States, and delinquencies are on the rise.

“Before you spend, earn. Before you invest, investigate. … Before you retire, save.” William A. Ward

When you are in debt the clock works against you. Every morning when you wake—weekends, holidays, sick days, birthdays and work days—you are already behind. The mortgage, credit card, car loan, et cetera, all tacked on interest the second after midnight. Long before you rolled out of bed and poured your first cup of coffee you need to work to pay the interest before you have money for food, clothing, shelter or entertainment.

In debt you are a slave; without debt you’re free.  Every day in debt you owe your master. Every day! He is a cruel, heartless master. When the clock ticks past midnight the interest for the day ahead is due.  Only those without debt and in possession of investment assets are free to live each day as they choose.

Without debt you are free; without debt and with possessing of assets and wealth, each day is yours to use as you chose.

References:

  1. https://news.northwesternmutual.com/planning-and-progress-2019
  2. https://wealthyaccountant.com/2018/04/12/the-greatest-secret-between-debt-and-wealth/

Investing for the Long Term

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“For investment success and above average returns, investors should invest and grow their money over the long term.”

Long-term investing is the best way to build wealth and is a strategy that has for decades withstood the test of time. It’s instrumental in planning for retirement and building wealth and a legacy. Long-term investing require patience and has the potential to pay off with a much higher returns.

Long-term investing is the practice of buying and holding investments like stocks for many years and decades. The exact definition of how many years or decades you must hold an investment for it to qualify as a long-term investment varies. Generally, it is between ten and twenty years, though it can be much longer.

“Investors would be better off…to just keep their investments long-term and not worry about what happens in the short-term. It’s the hardest thing to do, but sitting on your hands and staying long-term focused pays the highest dividends.”  Mark Matson

Common sense says that long-term investing is more conservative. Sometimes that’s true, but not always. You can invest in the stock market, generally considered one of the riskier investment assets, with the intention of holding the stocks for the long term. There is still a good amount of risk involved even though it’s technically a long-term investment if you hold the stocks for a longer period of time.

Patience

Long-term investments require patience. That patience is a trade-off for potentially lower risk and/or a higher possible return. You aren’t going to see the quick increases in portfolio value and it isn’t always going to be the most exciting type of investing.

It’s important to keep your eyes on long-term goals (or prize) like retiring, paying for your education and passing on some of your wealth to your family.  “Investors need to stay focused on the next 10 to 20 years, not the next 10 to 20 minutes,” says Mark Matson, veteran market strategist of Matson Money.

Investors hold long-term investments for a period of several decades. Long-term investing is about buying and holding securities rather than selling at the first sign of profit.

Long-term investing is about patience and waiting out volatility, corrections and bear cycles. You have to focus on how an investment will appreciate down the road. There are a number of possible long-term investments you can make. Just think about your own financial situation before deciding which of them is right for you.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

As the chart below illustrates, no one can accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility. Staying invested with a strategy that aligns with your financial goals is essential.

Missing the best days

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

Successful long term investing equates to decades and is extremely boring.

The path to build wealth required you to take the laziest, simplest approach to stock investing imaginable, and have a little patience. Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees.

Investors who committed to large-cap stocks of the S&P 500 index for 35 years saw returns equal to or higher than the long-term return (94 years) of 10.2% in 87% of the rolling 35-year periods between 1926 to 2019 (there were 60 of them), according to Barron’s.

If only investing for 30 years, returns were 10.2% or higher in only 74% of the rolling 30-year periods. It falls to 60% when the time frame is 25 years.

The historical success rate of achieving the long-term return also increased for investors willing to stay in the saddle for at least 35 years. In general, if an investment portfolio has at least a 60% equity allocation, the needed investment period is at least 25 years to have a 70% or higher chance of achieving the long-term return.

Long-term investing means holding stock in a portfolio for a period of at least 10 to 35 years.  Long term investing represents some of the best investing advice investor should heed.  Investors need to stay focused and base their investment decisions on the next 10 to 30 years, not the next 10 to 30 days.

The power of compounding

Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

“Good investing isn’t necessarily about earning the highest returns…It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time”, according to Warren Buffett. “That’s when compounding runs wild.”

Tax control advantages

Investing is a terrific way to build wealth and financial security, but it’s also a way to create a hefty tax bill if you don’t understand how and when the IRS and state tax departments impose taxes on investments.

  • Tax on capital gains – Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. Essentially, the money you make on the sale of any of these items is your capital gain.
  • Tax on dividends – Dividends usually are taxable income in the year they’re received. Even if you didn’t receive a dividend in cash — if you automatically reinvested your dividend to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it. And, there are generally two kinds of dividends: nonqualified and qualified. The tax rate on – nonqualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower.
  • Taxes on investments in a 401(k) – Generally, you don’t pay taxes on money you put into a traditional 401(k), and while the money is in the account you pay no taxes on investment gains, interest or dividends. Taxes hit only when you make a withdrawal. With a Roth 401(k), you pay the taxes upfront, but then your qualified distributions in retirement are not taxable. For traditional 401(k)s, the money you withdraw is taxable as regular income — like income from a job — in the year you take the distribution.
  • Tax on mutual funds – Mutual fund taxes typically include taxes on dividends and capital gains while you own the fund shares, as well as capital gains taxes when you sell the fund shares. Your mutual fund may generate and distribute dividends, interest or capital gains from the investments inside the fund. Accordingly, you may owe taxes on these investments — even if you haven’t sold any of the shares or received any cash from them. The tax rate you pay depends on the type of distribution you get from the mutual fund, as well as other factors. If you sell your mutual fund shares for a profit, you might incur capital gains tax.

With stocks, you control when to buy and sell, and can reduce your tax burden and are very cost efficient.

You can reduce capital gains taxes on investments by using losses to offset gains. Tax-Loss Harvesting is a tool that can significantly lessen the tax burden and the pain of corrections or down markets. The primary benefit of tax-loss harvesting is you can capture current losses in your portfolio without changing the risk and return characteristics of your portfolio. These recognized losses can be used to reduce your taxes. They can be applied to up to $3,000 of ordinary income and an unlimited amount of capital gains each year. Unused losses may even be carried forward indefinitely.

Very few investors realize their true account value is the aggregate value of their securities plus the aggregate tax savings from their harvested losses (i.e. their harvested losses * their marginal federal + state ordinary tax rate). For example, if you invested $10,000 and harvested losses of $2,000, and your marginal tax rate is 40% and your account has traded down to $9,500 then you are actually above water despite appearing to have lost 5%. That’s because you should add the $800 of tax savings ($2,000 * 40%) to your securities value of $9,500 to get a total tax adjusted value of $10,300 – greater than the $10,000 you invested. This is why tax-loss harvesting provides an opportunity for an offsetting economic benefit.

References:

  1. https://smartasset.com/investing/long-term-investment
  2. https://www.barrons.com/articles/financial-advisors-tell-clients-to-invest-for-the-long-term-but-how-many-years-is-that-51604003385?mod=article_signInButton
  3. https://finance.yahoo.com/news/a-president-trump-or-biden-doesnt-matter-to-the-stock-market-just-invest-for-the-next-20-years-strategist-161541443.html
  4. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  5. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  6. https://www.nerdwallet.com/article/taxes/investment-taxes-basics-investors
  7. https://www.nytimes.com/2021/02/04/upshot/stock-market-winning-strategy.html

Investing Involves Managing Your Behavior and Emotions

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“90% of investing involves managing yourself, not your money.” Nick Murray

Investing in stocks won’t make you wealthy. Your behavior around investing in stocks makes you wealthy, according to Nick Murray, a behavioral financial services professional and author of eight books for financial services professionals. Stocks need your help. The only thing you control – your behavior – is the biggest factor in your investing success.

This is a recurring theme repeated by all great investors – 90% of investing involves managing your emotions and yourself, not your money. A simple investment plan helps manage that 90% so the other 10% can be left alone to grow your money. As Nick Murray said about investors not following a plan, “human nature is a failed investor”.

“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” Morgan Housel, author of The Psychology of Money

In other words, behavior trumps other considerations in the pursuit of financial success. “Doing well with money has a little to do with how smart you are and a lot to do with how you behave”, Morgan Housel explains in his book The Psychology of Money. “Engage in the right behaviors and you are likely to succeed. Similarly, no amount of intelligence, savvy, or inside information will save you from the wrong set of behaviors.”

Margin of Safety

Warren Buffett said, “The three most important words in investing are ‘margin of safety’.” That means that you buy stuff like stocks while they’re on sale. That also means paying less than what it’s worth. That means to buy $10 dollar bills for $5 dollars. In a nutshell, that’s the secret to great investing.

“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger the margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.” Warren Buffett

The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true intrinsic value of the company. You need to be able to determine the intrinsic value of a company and from that value determine a “buy price”. The difference between the intrinsic value and the buy price is the margin of safety.

Margin of Safety is a value investing principle strategy. If the total value of all shares of a company is 30% less than the intrinsic value of that company, then the margin of safety would be 30%. In other words, if the stock price of a company is below the actual value of the cash flow and assets of a company, the percentage difference is the Margin of Safety.  This is the discounted price at which you are buying a share in the company.

The Margin of Safety is the percentage difference between a company’s Fair Value per share and its actual stock price. If a company has profits and assets that outweigh a company’s stock market valuation, this represents a Margin of Safety for the investor. The higher the margin of safety, the better.

Margin of safety is only an estimate of a stock’s risk and profit potential. Most value investors believe that the higher the margin of safety, the better.  And, the larger the margin of safety, the more irrational the market has become. 

One of the keys to getting a great margin of safety is to understand that price and value is not the same thing. Price is what you pay for something, but the value is what you get.

The stock market rises about four out of every five years or about 80% of the time, according to Murray. Said another way, the market only falls 20% of the time. You can fear that 20% or cheer for it.

No one ever got wealthy paying full price or top dollar for assets. Most successful investors got that way buying assets that were distressed, out of favor, and therefore on sale. Unfortunately, few people see it that way. You need to take advantage of the sale during market selloffs and corrections when it occurs. Your money literally goes further because you can buy more share at lower prices that lead to market-beating returns later on.

Managing your emotions and financial planning

It’s paramount to insulate yourself against uncertainty, greed and fear – so that you can prosper by continuously implementing your financial plan, and managing your behavior by not reacting to random circumstances and volatility of the markets.

Failing to financially plan is planning to fail financially. For people in the accumulation phase of life, that means a written, date-specific, dollar-specific retirement accumulation plan, premised on long-term historical returns, according to Murray. Once in retirement, it has to become a retirement income plan which, at historic returns, defends and even accretes purchasing power.

Financial planning is essential to managing your behavior and ensuring your financial success.

References:

  1. https://novelinvestor.com/10-lessons-learned-nick-murray/
  2. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/how-to-invest-margin-of-safety-the-growth-rate/
  4. https://www.liberatedstocktrader.com/margin-of-safety/
  5. https://www.fa-mag.com/news/a-talk-with-nick-murray-20921.html

Wealth Mindset

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“Developing the right frame of mind is critical to successfully investing for the long term and achieving your financial goals.”

Many people do not obtain financial freedom because they do not have the one thing that matters most: the Right Mindset. Everything about attaining financial freedom starts with how you think about managing your money (budgeting), saving for the future, investing for the long term, and accumulating wealth.

Your mindset is a big part of what’s gotten you to where you are right now financially. It’s largely responsible for the financial success (or lack of it) that you already have. So, if you want your financial life to change, your mindset will also need to change or adjust.

Altering your perspective and mindset can help you overcome the majority of financial, health or emotional challenges you may face. An individual’s perspective, how we face challenges, and how we choose to live is a choice. That mindset shapes how we deal with life’s hardships, whatever storms come our way.

What is Wealth Mindset?

“Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage. Making critical decisions about your career, business, investments and other resources conjures up fear, fear that is part of the process of becoming a financial success.” Thomas J. Stanley

Your mindset is the sum of the attitudes and ideas you bring to a situation related to your personal finances. It’s the mental habits you have for thinking about and responding to any financial circumstance; they’re usually created by your previous financial experiences.

A mindset, according to psychologist Carol Dweck, Ph.D, and popularized in her book, Mindset: The New Psychology of Success, “is a self-perception or “self-theory” that people hold about themselves. Believing that you are either “intelligent” or “unintelligent” is a simple example of a mindset”, according to Dweck. “People may also have a mindset related their personal or professional lives—“I’m a good teacher” or “I’m a bad parent,” for example. People can be aware or unaware of their mindsets”, Dweck wrote, “but they [mindset] can have profound effect on learning achievement, skill acquisition, personal relationships, professional success, and many other dimensions of life” including financial.

Mindset is one of the primary reasons more Americans don’t become wealthy and don’t reach their financial goals. They’re afraid – not of being wealthy and financially free, but of the changes in their lives they’ll have to make to get there.

There’s a saying: “We don’t see the world as it is. We only see the world as we are.” The money results you’re experiencing are a reflection of your internal framework or mindset. When you change your mental blueprint and financial self-image (a.k.a. your mindset), you transform external results. As John Maxwell says “You’ll never change your life until you change something you do daily. The secret of our success is found in your daily routine.”

If you keep telling yourself that you aren’t smart enough or good enough, or that you don’t know enough, it’s not going to be easy to turn on the steady stream of cash flow. And with a fixed, low-earning mindset and constant negative self-talk, you won’t be likely to achieve financial freedom.

So instead of all that unproductive thinking, implement a “wealth mindset” and put a high value on yourself. When you value yourself first and foremost, you increase your deserving level through a self-worth vibration and resonance.

Change Your Mindset

“Decide You Want It More than You Are Afraid Of It” Bill Cosby

The first thing we must do is change our beliefs. When we drop the mindset that says that in order to make money, we have to trade our time for it, our minds open up to the possibilities. There’s no rule that says that to make X dollars, we have to work X hours. In fact, it’s more important to spend time “un-learning” the old limiting or “fixed” mindset than “learning” the new positive mindset.

So, think about trading value for money, not time. 

  • Think about what value you can create for other people, and how you can deliver that value. 
  • Think about what assets, skills, knowledge, connections or ideas do you have that people value.
  • Recognize your strengths and competency, then go all-in. Bet on and invest in yourself.

Additionally, those who have accumulated wealth tend to develop the habit of “accumulating wealth slow” rather than “getting rich quick.” To assure this, they follow two of billionaire investor Warren Buffett’s rules with regard to their capital and assets. “Rule number one: Don’t lose money. Rule number two: If ever you feel tempted, refer back to rule number one, “don’t lose money.””

Climbing the economic ladder, even when the odds seem stacked against you is doable. But in order to become financially free, you have to have a serious heart-to-heart talk with yourself, according to Forbes. You want to get a few things clear in your head, including:

  • A definition of exactly what financial freedom means to you – following someone else’s definition won’t get you there
  • A realistic and accurate picture of your current financial situation
  • A realistic idea as to what you’ll have to give up to get where you want to go A realistic assessment of the obstacles in your path
  • A series of goals that will help you to become financially independent
  • The path to wealth and financial freedom depends on your financial mindset, what you learned about money management early in life, and what your willingness to delay gratification and exercise discipline to get to realize your goals.

    • Living life on your terms means being free to do the things that are most important to you.

    Make small changes over time

    No matter what changes you want to make, it’s better to make small ones over time than to try to make a huge one right away, according to leading personal finance author Laura D. Adams. Those who succeed the most make small incremental changes and build on that foundation.

    You might start with a financial goal to automatically save a certain amount of your monthly pay or to invest a few dollars in a low cost index fund. Small changes that become habits create momentum for additional improvements. Decide to implement one small change this month, like tracking spending each week, setting up a retirement or brokerage account, or figuring your net worth.

    Once you have success accomplishing a small financial change or goal then add more, such as creating a spending plan, cutting unnecessary expenses, and building credit.

    And, it is imperative to get started now since it’s human nature to procrastinate—especially when the deadline for getting something done like saving for retirement is decades away. But procrastination never works in the case of saving money for retirement, because building wealth is inherently a long-term process.

    In other words, accumulating wealth is difficult or virtually impossible without upfront thought, planning and discipline. The earlier you get started, the more time your investments have to exponentially grow and benefit from the magic of compounding. The key to building wealth for the future is to start early and to slowly but surely increase your net worth over the long term.

    You cannot realize your wildest dreams or reach your most audacious goals with a negative mindset.

    References:

    1. https://www.edglossary.org/growth-mindset
    2. https://lauradadams.com/money-mindset-tips-tools-for-financial-success
    3. https://www.forbes.com/sites/jrose/2016/03/25/financial-independence/?sh=1e589742984b
    4. https://www.entrepreneur.com/article/244745
    5. https://www.ruleoneinvesting.com/blog/personal-development/4-valuable-tips-for-a-healthy-money-mindset/
    6. https://www.amazon.com/Wealth-Choice-Success-Secrets-Millionaires/dp/1137279141/ref=nodl_
    7. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

    Beginner’s Guide to Investing

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    “Successful investors had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.” Phil Town

    Getting started investing can be intimidating. The learning curve combined with the fact that you are putting your own money at risk is often enough to scare many people away from one of the safest ways to put ‘your money to work for you’ and financial freedom.

    However, the most successful investors like Peter Lynch and Warren Buffett had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.

    This beginner’s guide to investing, according to investment advisor and NY Times Best-Selling author Phil Town, covers everything you need to know to start investing on your own and make smart investing decisions.

    Step 1: Pay Off Bad Debt and Avoid Money Traps

    Don’t even think about making any major investments before you have paid off unnecessary debt.

    These things shouldn’t hold you back from starting to invest, but if you have “bad” debt from credit cards and high interest personal loans that will get you in trouble with interest payments, pay that off before you put money in the stock market.

    Additionally, don’t fall into the common money traps. People of all ages trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house.

    “Money traps are things that will take all your money so you have nothing left to invest.” Phil Town

    These are money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.

    Step 2: Create an Emergency Fund

    If you have figured out how to spend your money wisely, you have probably figured out how to save it. An emergency fund is part of your savings that you set aside in case of an emergency.

    It’s a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen a pandemic!

    If your car breaks down, you get laid off, or you have unforeseen medical expenses, you will have the funds you need. An emergency fund will also come in handy in case of a recession.

    Even if you don’t have to tap it, you will have peace of mind knowing there is a cushion available if you need it.

    Step 3: Learn the Investing Basics

    You wouldn’t start driving a truck without knowing the basics driving, so you shouldn’t jump in the stock market without knowing the basics of investing.

    Before you begin building wealth, it’s important to understand the basic goal of investing as well as the basic process that you will use to reach that goal.

    Step 4: Embrace a Positive Investing Mindset

    Your investing psychology (mindset and behavior) and how it affects your investing are important aspects to understand and appreciate. It will dictate how you as an investor will actually behave, the reasons and causes of that behavior, why the behavior can hurt your wealth and what you can do about it.

    Understanding the psychological aspects and how psychology affects investing are an important and critical aspect of investing. Knowing that you belong in the market and that your capable of investing in the market are important first steps.

    Successful investing has much to do with you needing to be a pretty good amateur psychologist of both your own biases and the market’s, according to Nick Murray. Virtually all market tops and bottoms occur at emotional extremes:

    • Bottoms coincide with widespread panic while
    • Tops tend to be associated with some unjustified level of overconfidence or greed.

    The theory behind sentiment analysis is quite simple. Market peaks occur when buying power has become exhausted. This happens because those buyers have become either complacent, overconfident or just plain greedy. Once they’ve all bought in, who’s left to buy?

    Step 5: Create an Investment Plan

    Once you have a positive investing mindset and know you know how investing works, you can move on to the next steps, but don’t get your wallet ready just yet.

    Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.

    The best investment plan is one that is customized to your lifestyle, so it’s necessary to create an individualized strategy that will set you on the path to success.

    • Evaluate your current financial standing to understand how much risk you can take.
    • Determine your goals and how long it will take you to realistically achieve them.
    • Figure out which types of investments and strategies are the best way to get you to where you want to be.

    Having a clear investment plan will give you a ton of clarity as you begin investing.

    Step 6: Decide What Type of Investment to Make

    Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish. There are several different types of investments that you should be aware of before you start investing your money.

    Step 7: Establish Your Investing Strategy

    Investing is more than picking a few stocks and hoping for the best. If you’re doing it right, there’s a real strategy involved. Now, you can choose from a plethora of investment strategies for investing beginners. These investment strategies include:

    • Impact Investing: Investing in companies with a measurable environmental or charitable impact
    • Growth Investing: Investing in companies that exhibit signs of above-average growth
    • Income Investing: Investing in securities that pay dividends
    • Small-Cap Investing: Investing in small companies that are new and potentially grow faster
    • Value Investing: Investing in great companies when they are on sale for prices lower than they are worth

    There is one investment strategy that is recommended which follows the principles of value investing.  When you value invest, you buy growth companies, small-cap companies, and impactful companies, but you buy them when they are on sale.

    This investing strategy will give you the highest rates of return with the lowest amount of risk.  When you buy wonderful high-value companies for half or even a quarter of their value, you can ensure big returns.

    Step 8: Determine Where To Invest

    Once you decide that you are ready to start buying and selling stocks, you need to choose what platform or service you will use to make your investments.

    For most investors, an online broker will be the best option because online brokers allow you to place trades for a relatively small fee while still offering all of the resources and information you need to make wise investments.

    There are many online brokers available to choose from and most are fairly competitive in regards to the fees they charge and the services that they offer. And, you really can’t go wrong with any of the major online brokers.

    Step 9: Build a Stock Watchlist

    It’s time to start investing. If you decided stocks are the right type of investment, you can start picking stocks…carefully. A stock watchlist is your own personal list of companies that you have researched and found to be worthy of your investment. Once you build your watchlist, you watch and wait for the companies on it to go on sale.

    To build a watchlist, you need to do your research

    The best companies to invest in for beginners are companies that have been around for at least ten years, companies that you understand, companies that exhibit past growth and the potential for future growth, companies that are run by trustworthy management, and companies that have been placed on-sale relative to their value.

    You can break down these qualifications into what we call the Four Ms of Investing. It will take a bit of research to discover the Four Ms for each company, but the payoff will be worth it.

    If you find a company that meets these qualifications, you will have found an ideal investment for any investor, beginners included.

    If you find a company that meets all of these qualifications, you will likely have found an ideal investment opportunity.

    Practice Patience and Wait

    Once you have found a company that meets your qualifications, it still may not be prudent to invest in it right away. Instead, you’ll want to put the company on your watchlist and wait until the stock market places it on sale.

    The good news is that the market puts wonderful companies on sale all the time. If you’re patient, the companies on your watchlist will eventually dip to a price that allows you to buy them up for a bargain rate and profit once the price of those companies goes back up to their true value.

    Investing Tip: Check Your Emotions

    By far, the most important investing tip for beginners to follow is this: keep your emotions in check.

    If you invest in wonderful companies at a point when the market has placed them on sale relative to their value, it’s hard not to make money; that is, if you don’t let your emotions get the better of you.

    Even great companies can experience dips in price over the short-term, and these dips often cause inexperienced investors to become afraid and sell off their shares.

    By the same token, greed causes many investors to buy into a company at times when the company is overpriced. This leads to lower returns or even losses.

    If you want to succeed as an investor, you have to avoid letting fear or greed drive your decision-making process.

    Remain patient and logical as you invest and you’ll be able to avoid many of the pitfalls that beginner investors often fall prey to.

    Step 10: Know When to Buy Your Stocks

    Succeeding at investing in stocks is all about choosing the right companies as well as the right time to invest, but the right time won’t last forever. Once a company on your watchlist goes on sale, it’s time to buy.

    Making money requires some degree of timing. Investment legends like Warren Buffett may condemn market timing, however, they would not disagree that there are far better times to enter a stock position and exit a stock position than others.

    Entering a new position when there is panic is a far better bet than when the stock price has increase to levels far above its intrinsic value due to fear of missing out.

    At this point, all you need to do is place your money in the company and keep it there for the long-term. If you made a wise investment, your money will grow in value for many years after you invest it in the company.

    References:

    1. https://www.ruleoneinvesting.com/blog/how-to-invest/get-started-investing-with-these-10-steps/
    2. https://www.markonomics101.com/2018/10/08/the-psychology-of-investing/

    7 investing myths and realities about stocks | Fidelity

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    Investing is less complicated than you think.

    Key takeaways

    • You don’t always have to take on a lot of risk to hit your financial goals.
    • You don’t have to be an expert to invest in the stock market—you don’t even have to manage your own investments. You can get low-cost investment management in several ways.
    • Investing is for everyone—no matter how much or how little money you start with.

    Would you rather have $100 today or $125 in one year? Rationally, earning $25 in one year on a $100 investment represents a 25% annual rate of return, not typical for the stock market. But research has found that a lot of people would take the $100 today when you frame the question this way.

    “The future is nebulous,” says Andy Reed, vice president of behavioral economics at Fidelity. “But we know what our needs are today. So some people feel more comfortable sitting on a pile of cash because they know exactly what it can buy them today versus jumping into the market and who knows what it’ll turn into,” he says.

    But to reach your goals it may be necessary to invest for growth. Could your financial beliefs be holding you back? See if you believe any of these commonly held myths.

    Myth #1: Investing in the stock market is too risky

    Investors react much more strongly to losses than to gains. The fear that putting money into the stock market could lead to financial ruin keeps many people out of the market and that may keep them from reaching their goals.

    The good news is there are things you can do to help manage the amount of risk when investing. For instance, some types of risk can be mitigated with diversification. If all your money was in one stock and the company went out of business, you would have lost your entire investment. But if you own many different stocks, one company likely represents only a small portion of your portfolio. Similarly, adding different types of investments, like bonds and short-term investments, can also reduce the amount of risk in your mix.

    When it comes to investments, stock picking is not necessary—or even encouraged. Investing through mutual funds or exchange-traded funds lets you invest in many companies at once—getting professional management and diversification. Keep in mind that diversification and asset allocation do not ensure a profit or guarantee against loss. That’s why it’s important to build a mix of investments that you can live with—with the potential to hit your goals.

    To find out more, read Viewpoints on Fidelity.com: The guide to diversification

    The amount of time you plan to allow your investments to stay in the market makes a difference too. With a very long time in the market, history suggests that your chance of permanently losing money in a diversified mix of investments goes down. That’s because stocks have tended to rise over time. And as long as you don’t sell your investments, they may recover from market downturns.

    Myth #2: It’s safer to keep money in a savings account

    Many people believe cash is safe. But having too much of your money in cash or a low-yielding savings account can mean your purchasing power shrinks due to inflation. Some people may be more likely to have a lot of cash in savings or checking accounts than others. For instance, Fidelity’s research on women and money has found that 56% of women who have significant savings outside of their retirement accounts and emergency funds do not invest those savings in the market.2

    Since 1985, the average annual inflation rate has been 2.7%, according to the Bureau of Labor Statistics. Right now, inflation is less than 2% but it could rise in the future, given rising government deficits and stronger economic growth.

    Prices on things like housing, food, and education tend to go up over time. If you have $100 today, it may buy less in 5 years than it does now. If prices increased by the annual average inflation rate each year, an item that cost $100 today would cost $114.25 after 5 years. Investing $100 at a .5% rate of return yields just $3 after 5 years.3 By investing in assets that offer the potential to earn a return above the rate of inflation, you have the chance to keep up with price increases.

    So the potential boost from investing part of your savings in riskier investments like stocks could help. You don’t have to bet the farm looking for double- and triple-digit returns—slow and steady may really win the race.

    The key is to find a mix of investments, blending stable investments with those that are more risky, that you are comfortable with and could stick with over time.

    Saver Investor
    Annual contribution $15,000 $15,000
    Years contributing 40 40
    Average annual rate of return 2% 7%
    Accumulated balance after 40 years $924,150 $3,204,144

    This hypothetical illustration assumes that the saver and the investor each make one annual contribution of $15,000 at the beginning of the year. Taxes and fees are not considered. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 7% annual rate of return also come with risk of loss.

    Myth #3: Investing is too complicated and time consuming

    Investing can be really complicated. But it’s only as complicated as you want to make it. You can build and maintain a diversified investment mix made up of mutual funds or ETFs—or for many investors it may be easier to turn to a target date fund for retirement goals or an asset allocation fund to handle the investment decisions.

    Both types of funds offer a professionally managed, diversified mix of investments based on your goals and financial situation but target date funds gradually shift to a more conservative mix over time. Asset allocation funds maintain a consistent level of stock investments.

    To learn more, read: Diversification through a single fund

    Managed accounts are another way to get professional investment management. Some types of managed accounts offer ongoing advice to help you stay on track with your finances. Read Viewpoints on Fidelity.com: 4 benefits of financial advice

    Robo advisors are a type of managed account—they generally only manage the investment piece for you without advice. The benefit is low-cost, hands-off investing. Generally you can get an investment mix that fits your goals and financial situation with rebalancing done for you at regular intervals.

    Myth #4: You need a lot of money to start investing

    This used to be true. Back when it cost $50 to place a trade and you had to call a stockbroker, investing was out of reach for many people.

    But these days, competition has driven the cost to invest way down. Investment minimums are nonexistent for many mutual funds, and exchange-traded funds (ETFs) offer another way to invest with no minimum fees.

    At many financial institutions, it’s possible to start investing with just a few dollars—even with professional investment management if you choose a robo advisor.

    Myth #5: I can wait for the best time to get in the market

    Timing the market is difficult or even impossible. Rather than waiting for the best time to invest, it can often be a better idea to just get invested. Waiting for the best time can lead to a lot of missed opportunities.

    If you’re extremely nervous about investing a lump sum of money, consider dollar cost averaging, or investing a set amount at regular intervals over time. Studies have found that, most of the time, investing a lump sum results in higher returns. But if you need to ease into the market, other research has found that dollar cost averaging may mitigate some risk.4 It’s important to understand though that periodic investment plans—like dollar cost averaging—do not guarantee a profit or protect against loss in a declining market.

    At the end of the day, whatever helps you get invested and stay invested may be the best strategy for you. That’s because missing just a couple of the best days in the market can have significant impact on long-term returns.

    Myth #6: Investment advisors are just trying to sell products

    Some people feel comfortable managing their investments, others are happy to choose diversified, professionally managed funds, while another group may prefer the services offered by financial professionals. But many people don’t know who they can trust in the financial services world and that could keep them from investing.

    The good news is that there are several different models for the way financial professionals are paid and the services they provide. Some are paid a commission when they sell certain products or do trades, others may charge an hourly fee or a flat fee, while still others charge a percentage of the money you invest with them. There are even more ways they can be paid as well.

    There isn’t one model that is best for everyone and their financial situation. The Securities and Exchange Commission (SEC) has a thorough series on how to evaluate investment professionals and questions to ask .

    The important thing to understand is that you can and should ask how they are compensated, how much you pay directly, and what it means for their recommendations to you.

    Read Viewpoints on Fidelity.com: 4 tips for your first meeting with a new advisor

    Myth #7: Men make better investors

    Men and women grow up with constant messages about what men are good at and what women are good at. Those messages can be damaging—to your self-esteem and net worth. But while women have historically taken a backseat to the men in their lives when it comes to finances—research shows that as a group, they are better investors.6

    That may be because women investors, on average, tend to trade less frequently and invest in more age-based allocation of investments than their male counterparts.

    Because women, on average, live longer than men it’s really important to understand how to manage money. Luckily women are investing nearly as much men: 58% of men say they own stocks vs. 52% of women.7

    The bottom line

    Investing is for everyone and it can help you reach your financial goals. When investing, you don’t have to have tons of money, trade a lot, or employ sophisticated strategies. Just doing the “boring” thing of determining an appropriate asset mix, owning well-diversified, professionally managed investments, avoiding the tendency to “tinker,” and sticking with that asset mix over time may help you reach your goals. Whether that’s through a managed account, a target date fund, or your own hand-picked mix of mutual funds, using this tried-and-true approach has the potential to lead to excellent results.

    Reference:

    1. https://www.fidelity.com/learning-center/personal-finance/myths-realities-stocks?ccsource=email_weekly