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Six Simple Rules Of Investing (back)

5/27/2010

1. Invest Early. The sooner you begin investing for your future, the greater the rewards may be. If you begin investing at age 25 and save $200 a month in a tax-deferred retirement plan, the potential for retirement savings at age 65 could be more than $698,000, assuming an 8% annual rate of return. Wait until age 35, and that same monthly investment and rate of return may result in about $298,000 at age 65. Wait until your 45, and the amount may dwindle to about $118,000.
2. Let It Ride. The potential for compound interest can work wonders for a portfolio, as long as you avoid withdrawing dividends or capital gains from the investment accounts. Let retirement savings keep earning and watch the earnings on that retirement savings earn even more. The Rule of 72 is a well-known formula that provides a ballpark figure on how long it may take savings to double due to compound interest. To find out how long it may take savings to double at an assumed interest rate of eight percent, divide the number 72 by the eight percent interest rate, and it will take approximately 9 years. So $1,000 in nine years will become $2,000 and $10,000 will become $20,000, both at an 8% annual return. Whatever you do, try not to raid a retirement plan for cash. In addition to losing retirement savings, you might be subject to taxes and penalties.
3. Be Patient. Decades of experience reminds us that the broad stock market can be volatile in the short run but historically has outpaced inflation and the return on bond investment options in the long run. It’s tempting to chase the next hot investment option when returns are low, but high fliers usually crash sooner or later. Buying the latest trendy stock your friend recommends or constantly trading or switching investment options in the hope of a better return can undermine your financial goals. Patience and persistence usually win out in the end.
4. Don’t Jump In & Out of the Market. The typical retirement plan takes advantage of one of the basic principles of successful investing: dollar-cost averaging. Through automatic payroll deductions in an employer sponsored retirement plan, contributions are invested at regular intervals. Fear, greed, and other emotions aren’t involved. Studies have shown that people who try to “time the market” usually fare worse than those who invest at regular intervals.
5. Reduce Taxes. Successful investors keep their money working for them. That means taking full advantage of tax breaks for savers and investors. An employer-sponsored retirement plan is one great place to start. Contributions invested in a retirement plan may reduce your current income tax bill. That means if you’re in the 28 percent income tax bracket, each $1,000 saved in a retirement plan held for your benefit may reduce your take-home pay by $720. And those contributions, along with any investment gains, can grow tax deferred until withdrawn in retirement, when you may be in a lower tax bracket. A Roth Individual Retirement Account (IRA) is another favorite of savvy investors. Although contributions in a Roth IRA do not reduce your current tax bill, they can grow tax free in the account. Many great savers also reap tax rewards outside of their retirement savings. The tax rate is capped at just 15% on long-term capital gains on investment options held for more than a year. It’s also capped at just 15% on dividends on stocks held for more than 60 days before of after the dividend eligibility date.
6. Diversify, Diversify, Diversify. Most great investors don’t gamble. Owning too much of a single company’s stock - even if it’s your own employer’s - can be risky. A broad-based mix of stock and bond options, tailored to your life stage, can help ensure long-term growth and smooth out short-term market fluctuations. The beauty of diversifications is that when - one investment option is down, another may be up, and you’re not as likely to see a serious slump

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