In the words of American financier J.P. Morgan, “it will fluctuate.” Stock prices fluctuate but the benefits of investing in stocks remain the same. What has changed—or needs to change—is the public’s perception of the stock market and its associated risks. In addition to a savings account, consider the reasons why stocks continue to be attractive investments. Here are 6 reasons to start investing sooner rather than later.
Passive Income
As said by personal finance genius, Robert Kiyosaki, “make money work for you.” People can work countless hours at their job, but how often do people develop a way to make money without actually “working”? Investing can generate income simply by accumulating interest. Most people are taught to perfect a skill or piece of knowledge and become an expert in a certain industry. Unfortunately, the modern school system fails to adequately teach people the components of personal finance. Anyone can invest which can provide a secondary income source without the physical output of manual labor. To quote the infamous Gordon Gekko from Wall Street (1987), “money never sleeps.” Theoretically, that is true. Money is always “awake” because people from all parts of the globe are trading securities, depositing checks, or getting paid in every time zone, 24/7. This is why passive income is a possibility through investing.
Retirement
Whether we realize it or not, each day we work to achieve financial freedom, i.e., the ability to make decisions without the added stress of financial obligations. We all want to retire worry-free with zero concerns about retirement income. Investing could be your path to financial freedom. Financing your retirement is incredibly difficult if you do not invest. Social security began in 1935 under the Roosevelt Administration. It has served retirees quite well but recently has started to see diminishing returns. Retirees are withdrawing benefits faster than workers are making contributions. Consequently, it is very realistic that social security could run out or be reduced by the time you retire. You are the main person that truly cares AND can significantly impact your retirement. Other people have their own expenses and retirement to finance. The point being, do not rely on others, invest now to take control of your retirement.
Tax Benefits
One valuable aspect of investing that many fail to realize, or were never taught, is the tax benefits. Individual Retirement Accounts (IRAs) allow investors to defer taxes or grow their assets tax-free depending upon the type, traditional or Roth. Additionally, many employers offer to match 401(k) contributions to a certain extent: usually between 3-6%. For example, an annual salary of $100,000 would reap $6,000 (at 6%) annually. This is essentially free money from your employer contributed directly into your 401(k) retirement account. A third strategy to reduce taxes is reporting capital losses to claim a deduction. If assets are liquidated at a loss, they can be reported as capital losses and can offset the taxes an investor pays on capital gains.
Inflation Hedge
The time value of money states that a dollar is worth more now than in the future, i.e., the buying power of a dollar is higher today than tomorrow. For most developed nations, the target rate of inflation is 2% to help support steady economic growth. Federal monetary policy changes to keep the rate as close as possible to the 2% benchmark. Therefore, inflation is almost always present and reducing the buying power of the dollar each day. Historically, the stock market (measured by the S&P 500) has provided an inflation-adjusted return of about 6.75% per year since 1900 proving its value as a hedge against inflation. Many common reasons—excuses—as to why people are “waiting” to invest include, thinking they don’t know enough or don’t have enough money. The beauty of investing is that there is no education or income requirement. Anyone can do it at any time. The longer your money stagnates, the more value it loses due to inflation.
Compounding Interest
Perhaps the most attractive quality of investing is compounding returns. The money you put in, makes money, which makes more money, and so on. For example, if you deposit $1,000 into an ETF tracking the S&P 500 which has historically returned about 10% in the past 30 years, you will earn $100 after year one. The new $1,100 will earn $110 for a total of $1,210 after year two. Let’s say you deposit $5,000 into this ETF out of college at age 22. Assuming the same 10% average annual return, that original $5,000 investment will have compounded into over $187,000 (without making any additional deposits) by the time you are 60 years old and getting ready to withdraw money for retirement. Notice the exponential curve due to the compounding effect in the chart below.*
*This is a visual representation of the average returns over the given period. There is no guarantee that the market will increase in any given year.
Earlier vs. Later
Time is money…. literally. It’s up to the individual to use their time wisely and invest their money aptly. We can neither predict the future nor change the past. However, we can act upon the present, so start investing now. As Benjamin Franklin once said, “there is no time like the present.” When we’re younger, we have more toleration for risk, but more importantly, more energy. Be fearless and work your tail off, but don’t let that hard work go to waste. Put that hard-earned money to good use and make it work for you by investing it. As we age, we have less time and physical energy to exert making our younger years even more important: physically, mentally, and financially. Everyone will eventually have to stop working at some point and will need cash flows in retirement. Investments can generate those necessary cash flows and can become the primary source of income in your later years—if you start early. It is never too late to start, but you sure can start late. The chart below depicts hypothetical returns for investors that start at three distinct ages: Aaron (18 – post-high school), Connor (22 – post-college), Thomas (30 – married, starting a family). Each scenario assumes the investor deposits $6,000 yearly into a Roth IRA account and achieves a 10% average annual market return until eligibility for withdrawal at 59.5 years (60 is shown for simplicity).
This figure magnifies the impact of starting early. Even though Aaron started just four years before Connor, he ended with roughly 1.1 million in additional cash and over 3 times the amount of Thomas’ ending balance.
How to Start
You may be asking yourself, where do I begin? It is common for people to have the desire to invest their money but not know where to start. Experienced investors often trade online at their own leisure as this approach is more self-guided. This can be extremely risky, as you are completely on your own for every investment decision you make. More hands-off investors may look to consult with a traditional financial advisor who will tend to their every need, call, and handle every aspect of their finances. Unfortunately, these advisors generally charge a high fee, and most advisors only look for accounts upwards of a million dollars. For those who are somewhere in the middle, Demand Wealth is a hybrid robo-advisor and offers investment products and solutions tailored to the individual’s values. This means we create a portfolio tailored specifically to your values, investment goals, and risk tolerance. We offer over a dozen risk-based portfolios for people of varying values and interests, e.g., Cruelty Free, Christian, and Blockchain. Schedule a Zoom consultation with one of our experienced advisors to kickstart your investment journey and pave the road to financial freedom!