A wise man once said, "The most powerful force in the universe is compound interest."
You might be tempted to think those words came from someone who’s made billions selling stocks, bonds, and real estate. The truth is, it was Albert Einstein who made the observation.
For young couples who are at the early stage of their careers or who may be thinking about a family, now is the time to also be thinking about saving for retirement and college tuition.
“It is important to make investing a high priority, so that you can enjoy long-term benefits,” Samantha Fraelich said, a certified financial planner.
“There are things that every person needs to know, in order to be successful in their investments. But the most important thing to know is that, even in this current economy, you can still be successful. If you make your investment decisions correctly, it will be worth it in the long run.”
Here are five tips from a parent, for parents beginning their investing journey:
1) Start investing when you’re young - Although these are rocky times it’s important to remember that retirement (and college tuition payments) will be here sooner than you think. Take advantage of the current market and view it as a buying opportunity. Keep investing consistently and don’t worry about the day-to-day market fluctuations.
2) Keep your portfolio age appropriate – Keep your portfolio diversified to protect against market fluctuations. Investors with 35-45 years before retirement can afford to take more risks now because they have time to ride out the ups and downs of high growth investments. For those who are 15-20 years from retirement or who have children who are about to go off to college should consider reducing their investment risks by re-balancing their portfolio. They should place more emphasis on low-to-medium growth opportunties. Those who are at, or near, retirement age should re-balance their portfolio and move to a more conservative investment strategy.
3) The power of compound interest – The golden rule to accumulating wealth is to start early. Time is an investor’s biggest ally. Let’s say that at age 24 you start saving $5,000 a year at an annualized return of 10 percent. By the time you reach 55 you’ll have $1 million. If you wait until you are 34 to start saving, you'll only earn $357,000. And if you want until age 44, you'll have just $107,000.
4) Dollar cost averaging - There are times when it seems scary to invest. An investment strategy that is used when the market is particularly volatile is called “dollar cost averaging.” This strategy calls for a person to invest a specific amount at set periods of time. An example would be to invest $100 monthly for 10 months regardless of market conditions. By doing so, some shares (if you’re buying stocks or mutual funds) will be purchased when prices are low and some shares will be purchased when prices are high. By employing the dollar cost averaging method investors lower the total average cost per share thus giving the investor a lower overall cost for the shares purchased over time.
5) Don’t be afraid to ask for help - Seek out a certified financial planner who can explain your options in more detail and provide you with information about an investment strategy that you’re comfortable with. Although the economy may be shaky, it is important to keep investing and to do so wisely.
This article was written by Kevin Woo, a father to three girls.
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