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Retirement Strategies
Most of you is investing your money today for one basic reason: to be able to retire one day and not have to work past a certain age. But to be able to retire, especially given todays economy, you need to make wide investment choices along the way.
There are three fundamental truths for investing for retirement. 1st you need to have one or more goals for retirement. Second, successful investment means taking risk. Thirdly, you must diversify.
Retirement GoalsEvery investor should have a goal—such as building a new house, sending their children to college, taking a long vacation, retiring early, or to start a new business. Goals for retirement generally need to be long-term goals. Fortunately, time is usually on your side. Time helps you reach your goals, because of compound interest. This means that you earn interest on the interest already earned. For example, if you invest $10,000 at 8%, the original investment of $10,000 grows to $14,700 after five years, $31,700 after 15 years, and $68,000 after 25 years. This is true even if you never add another Dollar to your original investment!
Taking RiskInvesting for the long term may be risky. Markets sometimes go up, but sometimes they go down as well. One fact on your side is this; the more time you have until retirement, the more risk you can afford to make. The benefits of compound interest outweigh the risks within the marketplace. While no investor want to lose money, they still have time to make up for any potential losses that might occur in the short-term.
A willingness to take risk provides you with the oppportunity to earn increased returns. Some investments, like a savings account or a CD, provides little risk and a reduced potential to earn higher levels of interest. Other investments, like stocks and commodities, have the potential to have much higher levels of risk. But that investment also provides the potential for a higher rate of return. Which would you rather have? Would you rather have an investment that earns only two or three percent interest or an investment that has the potential for a high rate of return.
DiversificationNo investment performs best all of the time. During any period of time, some investments will increase in value while other investments will go down in value. When one investment provides a dividend, another investment may provide no dividend. When you diversify your portfolio, you place you investments in various types of investments: stocks, bonds, mutual funds, CDs, etc.
Long-Term InvestmentsOver a period of time, the best long-term investments. Have been stocks. As a buyer, you may purchase stocks either directly from a company or through a broker. Stocks may or may not pay dividends to individual owners. When paid, a dividend is usually paid quarterly. Buying stocks through a broker provides you with professional management and expert advice. Buying stock through a discount broker may save you money in the short-term, but they won’t generally offer any advice on what stocks to buy. In the long term, stocks have outperformed all other investments by a big margin.
Generally, you will find 6 general categories of stocks: growth stocks, blue-chip stocks, income stocks, cyclical stocks, small company stocks, and international stocks. Growth stocks have the potential for growing faster then the economy in general, and investors like growth stocks because of the likelihood that share prices will go up significantly in the long run. Blue-chip stocks are stocks from industry leaders. These stocks have a consistent earnings growth and share prices generally go up in the long term. Income stocks pay out a large portion of profits their in the form of quarterly dividends. These companies are usually mature companies that carry little risk. Even if the economy does fail, income stocks provide a cushion beneath the share price, because investors still receive the dividend. Small company stocks are usually newer, fast-growing companies. Their share price is risky because prices tend to be volatile over a period of time. Finally, international stocks, help diversify your portfolio because foreign markets may perform differently than U.S. companies.
ConclusionWhen you meet with your broker, come prepared with a list of questions you want answer. Don’t be afraid to ask for advice; come prepared with a list of questions about why common stocks might be a better investment then preferred stocks or why one stock is riskier than another stock. Your broker is available to help you make the decisions that will prepare you to retire and live comfortably at the level to which you are accustomed.