Hey, I’m 18 years old right now and I have ,000. I know that if I invest it correctly it could be all I need for retirement. I plan on contributing 10% of my monthly wages into the fund. Right now that won’t be much, around a month, but hopefully when I get out of college and get a full time job (economy willing), I’ll be able to put more in. Eventually I plan to stop contributing and let the compound interest take it from there. I used a financial calculate and at 8% interest it would be around ,000,000 in 2059. My question is how should I invest to get the maximum amount of interest possible without taking a HUGE risk? Mutual funds, money markets? I know historically the average annual return rate of the stock market is around 12%, but look at it right now, it isn’t always reliable. Anyway what would you all suggest?
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Investing for Retirement Question?
Christian Brown 7:10 pm on October 22, 2009
Yes you are absolutely right. The stock market isn’t always reliable over the short term. However it will perform far better over the long term than anything else. Start with all of your money in the stock market up until about 10 years before you retire. Then things will get trickier. You will want to start switching to bonds and investments that provide a more reliable income at that point.
Mutual funds are an excellent choice. The mutual fund manager will take care of selecting appropriate stocks for the long term. However they typically do worse than a stock index because of the fees they charge.
To avoid fees simply purchase an index fund. SPY is an example. An index fund is a stock that takes your money and invests it equally into all of the stocks in an index. SPY invests in the S&P 500. So if the 500 stocks in the S&P 500 do well, so will your investment. 500 different companies is plenty of diversity, so your risk/reward is evened out. More importantly SPY does not have anyone selecting stocks, it just buys an index, so there are very little fees.
To purchase an index fund open an online brokerage account (such as TD ameritrade, Tradeking, scottrade, etc) and purchase $15,000 worth of SPY.
You might want to consider opening a ROTH IRA (Individual retirement account) as well. A ROTH IRA allows you to not pay taxes on any of the money that you pull out as long as you are older than 59 1/2 when you pull it out. You will still have to pay taxes on the money when you put it in, however if you plan to have this for your retirement, then you will be very thankful later on when you don’t have to pay any taxes on your millions of dollars. Call the IRS for more details (irs.gov).
Good for you on starting young. You will retire comfortably.
jeff410 7:10 pm on October 22, 2009
You should invest in mutual funds. As a rule of thumb you should keep the same percentage as your age in bonds and fixed income investments and rebalance every 2-5 years, or whenever your circumstances change, your income goes up or down, marriage, divorce, children, or something that changes your goals or risk tolerance. Over the long term the market returns 11 percent or so in nominal terms, and that includes the ups and downs in the market like this one After inflation the market returns about 7 percent. So a million dollars today isnt going to be the same million dollars in 2059.
Vish 7:10 pm on October 22, 2009
I don’t agree with the above poster about mutual funds. Fact: Most mutual funds never beat the average return of the market. Unless you really believe they can beat it, and you did the diligence about what kind of fees and commissions they charge and are comfortable with it, then go for it. Some funds do beat the s&p 500 but charge you so much, you will not get as much of a return as you thought. So look into it carefully.
In my opinion, if you have absolutely no idea how to evaluate or analyze stocks, you are better off buying a "no load, no fee" index that mimicks the s&p500 like the Vanguard 500 (VFINX). That way, you know you will always get the average return without the fees associated in a mutual fund.
on the other hand, since your still young, I suggest you learn how to analyze and evaluate individual companies for potential investment. It will be one of the best things you’ve ever learned how to do. I also believe learning how to do this will allow you to achieve the maximum amount of "interest." Also, learning how to evaluate companies through diligence and analyzing them will lower your risk in a stock significantly. It’s a win win situation to learn how to do this. Of course, it won’t eliminate risk, but it will help you understand it so much more and how to avoid it.
In the end, you’re doing all this for yourself. So you should also invest in yourself. Don’t just let a mutual fund manager tell you what is good and what’s not and nod your head because you don’t know any better. I think there is too much risk in that alone.