By | McKenzie Jones
The power of investing is that you turn your dollars into your employee. By putting money into funds that have shown historic growth, you can usually expect future growth. However, it can be easy to over-manage your investments or to miss out on opportunities for slow growth.
Minimize Fees per Transaction
Investing in the markets is a game of base hits. There are few home runs in the stock market. One quick way to strike out is to pay too much in fees.
When you buy and sell stocks and bonds, there will always be someone who gets a bit of your money that you will never see again. These fees are necessary, but if you get in the habit of buying and holding instead of buying and selling, you reduce the fees you have to pay. You also allow your investments to grow slowly.
Buy Into Bigger Investment Pools
Cheap stocks tend to be more volatile. Volatility means that the value of the stock you bought bounces around a lot. Trying to buy low and sell high when you can only afford volatile stocks is usually an exercise in frustration.
When setting up your investment account, look for a brokerage that offers fractional shares. Fractional shares are slices of bigger stocks that tend to be more stable. Additionally, do your best to buy index funds, which offer you the chance to earn gains when a whole exchange, such as the Dow Jones, or the S&P 500 goes up over time.
If you have real estate and are considering selling in this market, you can reduce your tax burden by setting up a 1031 exchange. Consider the Delaware statutory trust pros and cons, which may include your investment time window and your need for financial flexibility.
Celebrate Free Money
If you have a job that offers a 401(k), sign up as soon as you are allowed and strive to contribute at least 7%. If you can go higher, make sure you contribute enough to get the full match from your employer. You might also consider a traditional IRA, which will offer you a tax break now.
With a 401(k) made up of your money and deposits from your employer, you have some flexibility. You can
- put your contributions into index funds
- use your employer match to buy individual stocks or look at riskier options
- borrow against your retirement for a qualified expense
Be aware that your retirement tax shelters cannot be accessed directly until you are 59 and a half. Make sure you have readily accessible savings for emergencies.
Reduce Tax Hit Over Time
You can also consider a Roth IRA. While the traditional IRA gives you a deduction in your highest-earning years, the Roth is funded from post-tax dollars, but your withdrawals are tax-free. You can also set up these IRAs on behalf of a non-earning spouse if you meet qualifications.
Discuss these options with a financial planner. Depending on your current source of income and your expected income in retirement, a Roth IRA can be a terrific vehicle. If you expect to make less in retirement, a traditional IRA may be best for you and your family.
Do Not Panic
A contraction of the markets is not a collapse. As you set up your investment accounts, consider pulling some money back to cash accounts. While these make little money, they do offer security. In the event of a contraction, be ready to pull out of this cash account and buy more stock as it goes on sale. If you bail out after the market drops, you will never regain those losses. If you buy in after a contraction, you may see your money expand rapidly.
After a market contraction, consider avoiding stocks that suffer when consumer confidence drops. Everyone will still need laundry soap and groceries during a recession, but they generally do not spend much on travel or high-end home goods.
The act of investing in the stock market is always a risk. Check out the history of index funds, as well as stock pools, to get a decent idea of future returns. Avoid extremely volatile investments unless you have time to recoup those dollars.