Thank you DS for your comment. I am sorry that you are so pessimistic about the financial markets, but I can't say that I blame you. However I do believe that your view is a bit off. Prior to 2008 the average historical annual return of the S&P 500 was 10.36%, and even after 2008 the average historical annual return was 9.57%. In fact, the S&P 500 returned 23.5% in 2009 and 12.8% in 2010. So there is definitely opportunity to return 9%, especially over a long period of time. Now, you might argue what about 2001, 2002, 2008 which returned -11.9%, -22.1% and -39.3% respectively? There are certainly times of below mean performance and above mean performance such as 1996, 1997, and 1998 which returned 23%, 33.7%, and 28.6% respectively. However the tendency of the market is to mean revert, displayed by the average annual return only ranging from 8.85% to 11.35% over the last 30 yearsS&P 500 Historical Returns. Therefore one may argue that if you have a long investment horizon, you are very likely to return right around 9%.
Now there are a few problems with my argument, the first being timing. The timing of when you have above mean returns and below mean returns in portfolio can have a very significant impact on your worth. The second problem with my argument is that the returns mentioned above are not adjusted for inflation. The third problem is that historical performance is no indication of future performance, but it is the best thing we have.
There are a lot of other asset classes that have had much better returns in the past few years than the stock market. Let's consider commodities; gold has returned over 40% since the beginning of 2010, cotton has returned over 132% since the beginning of 2010 and coal is up over 37% since the beginning of 2010. Even emerging markets have returned over 22% since the beginning 2010. My point is that there are plenty of opportunities to find fantastic returns in today's market. In fact, even in today's environment of extremely low interest rates, treasuries are returning more than 2% (today the 10- yr Treasury is returning 2.94%).
Today's young investor have a right to be fearful of the stock market and the returns they may receive. Why wouldn't we? However don't be so fearful that you give up opportunities to grow your wealth.
Cheers,
Breana
*Please note none of the assets discussed are a recommendation for investing. Please consult an investment professional before making an investment decision.
Thursday, June 16, 2011
Wednesday, June 15, 2011
How to Start Saving
Hello. I am a co-worker of Bre's, and she asked me to share my opinion about saving for retirement as a 20-something (or 30-something!). Your greatest asset in your 20s and 30s is time (see Bre's past discussion on compounding interest). However, it is also the number one reason young professionals put off saving for retirement. You are barely scraping by with the paycheck from your first job and paying down student loan debt, why worry about saving for retirement now when you can save later?
Again, compounding interest. Let's say you want to make sure you have over $1 million at retirement, and you are starting at 0. If you begin at 22 to put away $2400 a year, only $200 per month, until age 65, you will have approximately $1.06 million at retirement (at 9% growth). If you wait ten years until you are 32 to start saving, you will have to save $5,885 a year (almost $500 per month) until age 65 to retire with the SAME amount of money, and you will have put in an additional $90,000. See why time is such an asset?
Where do you find $200 per month to save? Let's spend a minute discussing savings. You should save at least 20% of your income. Always. If your monthly expenses are over 80% of your monthly income, you need to cut your expenses or find a way to make additional income. The saying "pay yourself first" refers to the inclusion of your savings as a line item in your budget that gets paid every month. And happy hour with the ladies or a game with the guys does not constitute an expense, so if you don't have enough money for that and savings, the spending gets the boot. So pay yourself first and put 20% of each paycheck into savings.
The 20% into savings typically goes into one of four savings buckets when you are a recent graduate- pay down debt, build an emergency fund, retirement savings, and specific savings (house, wedding, car). Priorities? Credit card debt and emergency fund should be your first priorities. If your employer offers a 401(k) match, this is free money which is always a priority. Initially you want to pay down credit card debt (in the order of the highest interest rate), save a minimum of 3 months of living expenses in a liquid account, and contribute to your 401(k) at least to the match. Once you have paid off your credit cards and funded your emergency account, increase your retirement funding above your employers match limit by contributing to a Roth IRA. As Bre has mentioned previously, one of the beauties of the Roth IRA is the ability to pull your contributions penalty-free if absolutely necessary and it can also double as your house savings. Once you are contributing to your Roth IRA in addition to contributing to your 401(k) to the max, you can begin to put extra savings amounts towards your student loan principal payments. Note that student loan interest is tax-deductible, however, if your student loan interest is greater than 8% your should make paying down your loans the same priority as credit card debt.
Sound like a lot? It all goes back to time. This is not a short-term plan, but rather a life-long plan. Make a plan and stick with it. Each time you get a raise, your 20% savings amount increases. Everyone's situation is different, so you may find that your savings priorities look different. Most important is to make saving a regular part of your budgeting and to start saving early.
Jaye Weiland
Again, compounding interest. Let's say you want to make sure you have over $1 million at retirement, and you are starting at 0. If you begin at 22 to put away $2400 a year, only $200 per month, until age 65, you will have approximately $1.06 million at retirement (at 9% growth). If you wait ten years until you are 32 to start saving, you will have to save $5,885 a year (almost $500 per month) until age 65 to retire with the SAME amount of money, and you will have put in an additional $90,000. See why time is such an asset?
Where do you find $200 per month to save? Let's spend a minute discussing savings. You should save at least 20% of your income. Always. If your monthly expenses are over 80% of your monthly income, you need to cut your expenses or find a way to make additional income. The saying "pay yourself first" refers to the inclusion of your savings as a line item in your budget that gets paid every month. And happy hour with the ladies or a game with the guys does not constitute an expense, so if you don't have enough money for that and savings, the spending gets the boot. So pay yourself first and put 20% of each paycheck into savings.
The 20% into savings typically goes into one of four savings buckets when you are a recent graduate- pay down debt, build an emergency fund, retirement savings, and specific savings (house, wedding, car). Priorities? Credit card debt and emergency fund should be your first priorities. If your employer offers a 401(k) match, this is free money which is always a priority. Initially you want to pay down credit card debt (in the order of the highest interest rate), save a minimum of 3 months of living expenses in a liquid account, and contribute to your 401(k) at least to the match. Once you have paid off your credit cards and funded your emergency account, increase your retirement funding above your employers match limit by contributing to a Roth IRA. As Bre has mentioned previously, one of the beauties of the Roth IRA is the ability to pull your contributions penalty-free if absolutely necessary and it can also double as your house savings. Once you are contributing to your Roth IRA in addition to contributing to your 401(k) to the max, you can begin to put extra savings amounts towards your student loan principal payments. Note that student loan interest is tax-deductible, however, if your student loan interest is greater than 8% your should make paying down your loans the same priority as credit card debt.
Sound like a lot? It all goes back to time. This is not a short-term plan, but rather a life-long plan. Make a plan and stick with it. Each time you get a raise, your 20% savings amount increases. Everyone's situation is different, so you may find that your savings priorities look different. Most important is to make saving a regular part of your budgeting and to start saving early.
Jaye Weiland
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