The stock market is one of the best ways for everyone to amass wealth. Here are five myths about investing in the stock market and how you can overcome them. Let’s debunk these myths and start you on your road to becoming wealthy, perhaps even reaching millionaire status.
I’ll Start Investing Later, I’ve Got Time
The later you start, the more you will have to invest. If you are looking for a financially satisfying retirement, you are going to need to have a tidy little nest egg. The earlier you start, the less you need to set invest. Someone who starts when they are just 25 is going to have a lot more money than someone who waits until they are older.
Let’s assume you have $4,000 to invest every year, and that your money will grow at an annualized rate of 8 percent. This is just a hypothetical example, your money will not grow at a steady 8 percent each year, but over the long run, this is likely attainable. (Disclaimer: past performance is no guarantee, this is just an illustrative example.)
The following chart shows the impact of various start dates:
|Start Age||Ending Balance|
Amazingly, simply by waiting 10 years — starting investing at 35 instead of 25 has an enormous impact on the amount of money that you would amass when you reached your 65th birthday. By starting at 25 instead of 35 you would have more than doubled the amount of money that you would have when you reached your 65th birthday.
One million dollars is a big number, a nice goal for many. There may be more millionaires than you might imagine. Today in the US, there are over 10 million households worth over $1 million. If you’re curious, there almost 125 million households in the US, so if you happen to be a millionaire, give yourself a pat on the back, you aren’t quite one-in-a-million, more like one-in-80,000.
Getting to $1 million is a nice goal, but the later you wait before you start investing, the more you are going to need to invest. The table below illustrates how much money you would have to invest each year, again assuming an 8 percent annual growth rate, to reach the coveted million dollar plateau.
|Start Age||Ending Balance|
Again, incredibly, if you start when you are 25, you only need to invest about $3,500 a year, but someone who says, “I’ll start investing later, I have time,” may be mistaken. A 45-year old would need to invest over $20K to reach $1 M by their 65th birthday and a 55-year old would only have 10 years to get there. They would need to invest nearly $64,000 a year. This should be incentive enough to start investing early.
I Don’t Need to Invest Any More Than My 401(k)
The 401(k) plan is great, it allows you to invest for your future. You can invest your money with pretax dollars (via the traditional 401(k) plan) or if your employer offers a Roth 401(k) option — and 1,900 plans on Vanguard now do — you can invest your money with after-tax dollars and pay no tax years later when you withdraw the money. Your employer will likely match a portion of your investment as well; truly, given that the traditional pension plan is going the way of the dinosaur for many in the private sector, the 401(k) is an excellent option. I like to think of it as a forced savings plan. But will it be enough for you to retire on. There really is no simple answer; in summary, it al depends.
Ideally, you are investing at least 15 percent of your pay. You’re employer’s corporate match would count towards that 15 percent. If you are invest 15 percent all-in, great, However, have you been investing that much since you were in your 20s? As you saw in the above example. Getting to $1 million means starting early or investing a lot of money. Now $1 million is just a milestone. For many that will be enough; likely more than enough, but for others, that might not cut it.
Here’s an overly simplistic way to determine if you have enough money to retire. Thank about your current expenses… all of them. How much do spend each year. Include everything, your rent or mortgage, insurance payments, car payments, groceries, restaurants, everything. Got it? Okay, now multiply that by 25. That’s probably how much money you will need to retire comfortably.
If you spend $50,000 a year, you will need $1.25 million
If you spend $100,000 a year, you will need twice that amount; $2.5 million.
How much do you have in your 401(k) account. Is that enough to get you to your retirement number? If you are nowhere near retirement age now, you can project how much money you will have when you retire. There are numerous calculators on the Internet that can do this for you. One of my favorites is from MoneyChimp.
Below is an example of the results that you can quickly and easily get using this calculator.
In the Current Principal field, enter the amount of money that you has today. This would include everything you have in your 401(k) plus any other investments that you might have elsewhere.
The next line, Annual Addition, you would enter the amount of money that you expect to contribute ever year going forward. So the first line is the past, how much you already have, the next line is the future, how much will you invest each year. In this example, I am assuming that you will be investing $10,000 a year. Remember to include the amount of money that you will receive as a match from your employer as well.
Years to grow: Enter the number of years until you plan to retire.
Interest rate: this is an estimate; you will have to guess how much money your invests will earn on average each year. A simple portfolio of an S&P 500 and a bond fund might enable you to have an 8 percent annual return.
If you leave the rest as it is, and press the Calculate button, you will see how much money you will have when you retire. In this instance, after 22 years of investing $10,000 each year with an existing balance of $50,000 and an estimate 8 percent annual return on our money, we can expect to have about $870K.
Would that be enough money for you to retire on? Again, think about all of yuour expenses, multiply them by 25. If you answer is about your Future Value, you are well on your way. If it isn’t, then perhaps your 401(k) contributions aren’t going to be enough. Perhaps you need to increase your contributions or add a regular brokerage account and contribute money into that account.
This is a very high-level overview, you may have additional sources of revenue, namely your Social Security retirement benefits which will help augment your income which will mitigate some of the cash that you will need to live on.
If you would like to run your own scenarios, click on this link to take you to this calculator on MoneyChimp’s website.
Investing is So Complicated
Investing can be intimidating to a lot of people. Wall Street likes to add a lot of jargon making everything sound and seem much more complicated than it is. If you are going to invest in stocks, you should closely monitor your investments. Warren Buffett say that when he (or anyone else) buys share in a company they should think of it as though they are buying the entire company. If you owned a company, would buy it and then never pay any attention to it, just let it function without you periodically checking in to see how things are doing? That wouldn’t make much sense, the company could be heading in a direction which you wouldn’t approve of. If you wouldn’t check on the financials periodically, you might not notice a downward trend in earnings or an increase in expenses. What if the company decided to stop paying a dividend; a dividend that it had previously been paying out for decades. If you suddenly stopped receiving that quarterly payment, you surely would notice that. Essentially, if you aren’t monitoring your investments, things could be happening which could be detrimental and you might not have the opportunity to change your investment until it was too late. If you are going to own individual stocks, you should closely monitor your investment.
Most of us lack the time, the energy, the skills, or even the interest to closely monitor our portfolios. We know that we need to invest, but we would rather just be a passenger and let someone else manage our investments for us. Unfortunately, most money managers underperform the overall stock market. Approximately 80 percent of all professional money mangers underperform their associated industry average. For that reason, most people should be invested in index funds. These funds mimic a portion of the stock market. For instance, the S&P 500 index fund tracks the performance of 500 of the largest US based companies. Over the past 89 years, this index has averaged 9.58 percent per year. From 1926 through 2014, through the Great Depression, Black Monday in 1987, the Great Recession in 2008-09, through good times and bad, the US stock market and the economy have had a eventual, albeit sometimes rocky, upward climb.
Some years, the market loses money. Some of those losses — upwards of 35 percent — can really sting, but for the most part, the market and the economy climb.
The US economy has been strong during this near 100 year period. If you had invested $1,000 in the S&P 500 in 1926 — that’s before the crash in 1929 — and held on, never looking at your investment for decades on end, by the end of 2014, your original $1,000 investment would have been worth over $5 million, $5,226,612 to be exact. Granted, $1,000 in 1926 is not the same as $1,000 is today. The $1K nearly a century ago is the equivalent of more than $13K today.
Investing in the stock market does not have to be complicated. You can just invest your money in an S&P 500 index fund and keep a portion in cash or in bonds. Your allocation between these asset classes is up for debate. We can discuss that another day. You can invest. It doesn’t have to be complicated. You could simply put your money in an index fund or a few index funds. You could manage that yourself or use a Target Date fund and have someone else take care of the allocation for you.
I Don’t Need to Invest, My Social Security Will Be Enough
WRONG! Your Social Security benefits will only take you so far. Some will argue that those retirement benefits will run out and there won’t be any money left to be paid out. I don’t think that will happen. While today, Social Security is only projected to last through 2035, after that, provided that nothing changes, retirees could expect to receive 75 percent of their benefits. I fully expect the government will make adjusts to withholding to allow Social Security benefits to continue, uninterrupted. Social Security is too important for millions of American workers to risk losing. If small changes to the Social Security system are made now, they’ll go a long way toward ensuring that drastic measures don’t become necessary in the future.
Whether you expect to receive your benefits or not, you should not expect the money that you receive to provide you with an adequate retirement. The benefits that you receive from Social Security were only ever intended to cover 40 percent of your gross wages. Could you live on less than half of your salary> Few of us can, unfortunately few have planned for retirement and those folks are forced to live on this substandard cash-flow. If you want to have a reasonable retirement, you need to put money aside now for your future.
I Only Have A Little Money To Invest, It’ll Never Amount to Anything
It is amazing how time and compounding can help your portfolio grow. As we saw above, if you invest just $3,575 for 40 years, you can become a millionaire. While roughly $3,500 may sound like a lot of money, if you save every day you can easily amass that much money. After all, $3,575 is less than $10 a day. If you started each day by brown bagging your lunch instead of going out to lunch — something that many people do every day — you can easily come up with that much money. A little bit every day can ultimately go a very long way.