Investing for the Future

Blogs earlier this year pointed out the benefits of spending less money than one earns in order to pay off debt and to build an emergency fund covering several months of expenses. It is also sensible to continue saving as much as one can manage over a lifetime, because income from Social Security and a pension (for those lucky enough to have one) is very unlikely to be enough to feel secure and live comfortably.

Simply saving money in a bank account (or under a mattress!) is not enough, either, both because very few of us earn enough to allow saving large amounts, and because inflation means money saved this year does not buy as much next year. However, savings invested wisely grow faster than inflation over time.

There are many books claiming to explain how to invest wisely, and many others claiming to show how to invest to grow savings faster than anyone else. My advice is to ignore most of these unless you enjoy gambling and wasting money on lotteries. Money managers might pick the best investments for a short time, but none of them beats the average for long (and most do much worse) – they generally earn lots of money because they charge investors lots of fees.

If you want to understand the basics of investing, you can find books in the library such as Eric Tyson’s Investing for Dummies and Mutual Funds for Dummies. However, it is not necessary to understand many details of investing to invest wisely. It also is not necessary to spend much time investing, as the title of Alexander Green’s The Gone Fishin’ Portfolio implies.

There is a risk to investing, because the day one purchases an investment may be the day that investment starts losing value. Investing is best done over the long term, and best done regularly (preferably automatically) so that purchases are also made on the days the investment starts to gain value, and so that savings have time to grow.

How does one decide what to invest in? Over time, stocks grow faster than other investments. But it is risky to invest in only one thing. The single company one invests in might go bankrupt. Investing in many stocks is safer – but the stock market might crash, so invest in bonds as well, for example. The easiest way to invest is to create an account with a mutual fund company with low fees (such as Vanguard or Fidelity) and buy a couple of index funds which do not try to guess what will do well, but just match an index of many stocks or bonds. The books mentioned above list such companies and funds.

The goal of long-term investing is to save and grow money during a career so that it is available for spending after the paychecks stop. Investing is more effective when money can be invested without paying taxes. Read The Truth about Retirement Plans and IRAs by Ric Edelman. Even if expenses seem overwhelming, anyone working for a company which provides a 401(k) retirement plan should contribute the maximum to such a plan, or at least enough to maximize the company match, where there is one. In addition, investments in an IRA or a Roth IRA grow tax-free. It is important to understand the rules about when money can or must be withdrawn from retirement plans, but contributing a percentage of paychecks to a 401(k) and an IRA is wise for anyone, and essential for those with no pension plan.