No matter how much or how little money you make, it is important to start saving and investing for the future. With company-sponsored pension plans largely a thing of the past, it has never been more important for workers to plan for their own financial futures. Investors can use a number of strategies to maximize the return on their investments, including automating their savings and using a dollar cost averaging approach to buy more shares when the market tumbles and fewer when it is riding high.
Determine how much of your portfolio you want to devote to stocks vs. fixed income investments. A good rule of thumb is to never invest money in the stock market unless you are sure you will not need it for at least five years. Investing short term money in stocks is risky, since you could be forced to sell when prices are low.
Look for a quality low-cost index fund to form the basis of your stock market portfolio. Vanguard and TIAA-CREF both offer excellent index funds with very low expense ratios. Those low expenses keep more money in the market and can boost returns over the long term.
Review the prospectus for each fund carefully and choose the one with the best performance and lowest expenses. The performance of an index fund should be very close to the benchmark on which it is based, i.e. S&P 500, Total Stock Market index. Be wary of any index funds that have significantly outperformed or under-performed the index.
Set up an automatic investment that funnels money from your bank account to the mutual fund every month. This automatic investing is one of the best ways to build wealth over the long term, since it takes the guesswork out of investing and helps you resist the urge to time the market. Keep in mind that even professional investors have trouble timing the market.
Invest a portion of any extra money you receive, like performance bonuses or incentive payments. Ramp up your investment percentage as your income increases.
- U.S. Securities and Exchange Commission. "Market Indices." Accessed July 21, 2020.
- State Street Global Advisors. "SPDR Dow Jones Industrial Average ETF Trust," Download "Daily." Accessed July 21, 2020.
- S&P Dow Jones Indices. "Dow Jones U.S. Total Stock Market Index - Quick Facts." Accessed July 21, 2020.
- Schwab. “Schwab Total Stock Market Index Fund,” Download “SWTSX FundHoldings 2020-06-30.” Accessed July 21, 2020.
- Morningstar. "How'd Active Funds Do in 2019? So-So." Accessed July 21, 2020.
- Investor.gov. "Index Fund." Accessed July 21, 2020.
- IRS. "Topic No. 409 Capital Gains and Losses." Accessed July 21, 2020.
Based in Pennsylvania, Bonnie Conrad has been working as a professional freelance writer since 2003. Her work can be seen on Credit Factor, Constant Content and a number of other websites. Conrad also works full-time as a computer technician and loves to write about a number of technician topics. She studied computer technology and business administration at Harrisburg Area Community College.