Too many young adults put off investing for their retirement, and feel the sting of this later. Sure, 40 or so years may seem like a long time, but if you don’t take a proactive approach to supplementing your retirement money now, there’s a good chance that you’ll live to regret it. Although a lot of young adults recognize the value of investing, trying to get started and understanding the various factors that influence it can be one big headache. Here, we’ll go over some of the best ways to make starting and maintaining a portfolio so much easier.
As mentioned in the intro, one of the best things you can do for your financial future is starting to save as soon as you go to work. If your employer offers a 401(k) retirement plan, then it’s a good idea to get on it immediately. If this isn’t available at your work, then make plans to set up an individual retirement account, or IRA, and then carve off a percentage of your wages for a regular contribution to this account. When you set these up as recurring, monthly payments, you’ll find it much easier to stay disciplined and work towards those overarching targets. Bear in mind that your interest on this kind of account will compound without any tax, provided that you don’t withdraw the money you put in. You should also start looking into more active investment vehicles early in life. Later, when you have a partner, children, and more personal responsibilities, it will become much harder to free up your capital and make it work for you. Start reading some financial journals, and looking into sites like Gold Signals which will help you make sense of the markets you’re interested in. By setting wheels in motion when you’re fairly young, you’ll get a great head start before more financial obligations start piling on, and limiting your options.
When you’re choosing assets to invest in, it’s essential to choose ones across a wide spectrum of different market categories. You should try investing in a few conservative assets with regular dividends, stocks with potential for long-term growth, and a small number of assets with higher returns, but higher potential risk. If you’ve decided you’ll stick to the stock market, we’d recommend that you avoid putting more than 4% of your total portfolio into a single stock. This way, if one or two assets see a major nosedive, you’ll be able to avoid damaging the strength of your entire portfolio. Certain AAA-rated bonds can make good long-term investments, whether they’re corporate or government-based. Some US Treasury Bonds, for instance, are fairly stable, and give much better returns compared to short and mid-term bonds.
Be Smart About Tax
Obviously, any investment portfolio with holdings in a tax-deferred account, for example a 401(k), will generate wealth faster than one with a lot of tax liability. However, there are various other considerations you should take to ensure you’re being as smart as possible about tax. You’ll have to pay tax on the amount of money you take out of a tax-deferred retirement account. On the other hand, a Roth IRA will also build up tax-free savings, but you won’t have to pay any tax on the amount you withdraw. This is an attractive perk, but these accounts aren’t as accessible as your typical 401(k). In order to qualify for a Roth IRA, your modified adjusted gross income has to meet various IRS regulations, and other parameters. The earnings will be free from federal tax if you’ve had the IRA for at least 5 years, and you’re older than 59. You can still avoid federal tax on your Roth IRA if you’re younger than this, and the withdrawal is for your first home.
Re-Balancing and Asset Allocation
Smart asset allocation and periodical rebalancing is also very important to maintaining a healthy portfolio. You should assign at least some of your portfolio to dividend-paying assets, growth stocks, index funds and stocks with high risk and high returns. While it’s good to make predictions, set out a plan and stick to it, even the most successful investors in the world will have points where they change the allocation of their assets. When market fluctuations tweak the percentages of your portfolio allocated to each kind of asset, you should re-balance your portfolio, by adjusting your overall stake in each category to reflect the percentage you originally set out for yourself. You can read more about good asset allocation at Investopedia.
Even though you’ll ultimately be getting more money from it, it’s still very important to manage the cost of investing in the first place. One of the major expenses you’ll have to keep tabs on is broker’s fees. Take your time shopping around, and consider signing up with a discount brokerage company. Some of these firms will have sub-par services, but doing your research and sourcing some impartial, trustworthy reviews will point you towards a service that’s both affordable and effective. One of the major attractions of index funds is that they have very low fees compared to the alternatives, and a lot of young investors could benefit from starting with some of these. Aside from these smart moves, you can also keep investment costs to a minimum by playing the long game. Because you’re investing for returns in the long-term, avoid buying and selling on a regular basis according to every little market fluctuation you hear about. By looking far ahead, you’ll be able to dodge management fees and commission expenses, and may prevent some major losses if and when the price of a stock takes a turn for the worst.
If the whole subject of investing for your future has been making you scratch your head, I hope the advice in this post has helped you towards a solid plan for the future. Thorough research, getting an early start, and having the discipline to stick to your targets are the main staples of a bright financial future.