The Power of Investing

Factors that Affect Investing

The goal of investing is to build wealth over time and/or to generate income from your investments to meet objectives. Investors purchase assets such as mutual funds, stocks, bonds, real estate and commodities with the expectation that the value of these assets will increase and that their financial goals will be realized. Successful investing requires time, patience and a clear and realistic plan directed toward your goal.

There are three factors that can affect the likelihood that your financial goals are met: your time horizon, the rate of return on your investments, and the amount you invest.

Time Horizon

The more time you have to build wealth, the more potential there is to reach your goals. The cost of waiting to begin an investing program can be significant.

Start EarlyThe Power of Investing

Bill invested $46,000 more than Jane, but he ended up with 19,820 less at the same 7% annual rate of return. The advantage of starting early allowed Jane to invest less, but finish with more money. The clear benefit: start early and give your investment more time to grow.

Rate of Return

Earning a higher rate of return will build wealth faster, but to earn higher returns, you may need to invest in securities with more risk and volatility, or price change.  It is important to understand the relationship between risk and return.

• Investors can seek higher return potential over time for taking more risk. Lower risk investments typically return less over time.

• Risk is demonstrated by volatility. Riskier investments will have larger, faster moves in price than lower risk investments. Low risk investments have a higher probability of principal protection, or less price change.

The amount of risk you are willing to take is a personal preference.

Amount Invested

“It takes money to make money” is an old adage, but how to put that principle to work may feel out of reach. A simple strategy is to start with a regular investment plan and increase your contributions a small amount each year. Doing so will have a positive impact on your ability to build wealth.

Invest MoreThe Power of Investing

Bill invested $46,000 more than Jane, but he ended up with 19,820 less, even though he invested for 20 years longer. The clear benefit: start early and give your investment more time to grow.

The Benefits of Compounding

Another way your money grows is through compound growth when you earn money on an investment’s income. Below is an example of how this works with a mutual fund investment.

Two factors create the magic of compounding:

• Re-investment of interest, dividends and capital gains income; and the amount of time you are invested.
• Mutual fund investors who reinvest their earnings buy more shares and receive investment returns on those shares, as well as dividends on the original investment. Compounding can work wonders to grow your wealth, especially over long periods of time.

ReinvestThe Benefits of Compounding

This chart shows the benefits of compound growth of a $10,000 initial investment at various rates of return, when dividends and earnings are reinvested.

5% Return

7% Return

10% Return

Automatic Investing

Automatic investing, often called dollar-cost averaging, is a simple, effective way to invest. Once you select an investment, you decide how much you will invest and how often. Then, you set up an automatic plan to invest a specific amount each month, by authorizing withdrawals from your bank account.

By investing regularly in up and down markets, you will buy more shares when prices are low and fewer when prices are high. This reduces your average cost per share and provides a simple way to invest a portion of your paycheck each month. It also removes the guesswork of trying to time the market.

A dollar-cost averaging strategy can reduce the risk of investing a lump sum in the market on a single day. By investing periodically, you spread your purchase price risk over multiple market periods.

Invest RegularlyAutomatic Investing

This chart compares automatic investments of $200 over 6 months. In March, more shares were purchased when the price fell; in May, fewer shares were purchased when the price rose. By investing regularly, you benefit from dollar cost averaging, usually lowering the average price per share.

Dollar-cost averaging does not ensure a profit, protect against a loss in declining markets or against a loss if you stop the program when the value of your account is less than its cost.

The Effect of Inflation

Because inflation affects your investment, you’ll need to consider the amount needed to meet your goal in terms of when you will use your investment, not in today’s dollars.

A million dollar IRA account provided a more lavish retirement in the 1980’s than it will today. The purchasing power of a $1,000,000 retirement account in 1980 had the equivalent buying power of about $2.6 million 30 years later in 2010, when corrected for inflation as measured by the Consumer Price Index. You will need to invest more now for more true value later. If your investment returns 7% over a year, but inflation is at 3%, the “buying power” of your investments grows by 4% (7% return minus 3% inflation).

The Role of Professional Advice

With the variety of investment options available today, some investors opt to receive professional advice from an investment manager or advisor while others prefer to manage investments on their own. The role of a professional investment manager is to serve as a consultant and provide impartial advice that serves your unique investment goals. They share advice, review your financial plan and help you determine any steps you may need to take. A professional investment manager can provide advice in many areas including economy perspective, developing an investment plan, helping to select investments and more.

The benefit of seeking advice from a professional is that they have a deeper knowledge of the finer points of finance and can also serve as a third-party to ensure all details are in order. Additionally, all financial professionals have fiduciary responsibilities to their client. While there are many financial resources and tools available, professional guidance has the ability to take into account your unique situation and how best to meet your ideal end goals. Professional advice can also provide value for your investment portfolio, but there is a cost or fee associated with receiving the advice.

Brokers: Individuals or companies that act as intermediaries between investors and firms that sell funds.
Investment Advisors: Make investment recommendations and/or conducts securities analysis.
Financial Planners: Financial planners create programs for clients based on their financial situations and future goals. They may specialize in a certain area, such as retirement.

*If using a financial professional, below are general questions to ask when considering how different investments fit within a portfolio:

• Am I taking advantage of the right financial products?
• Will my investments provide me with income?
• How does my risk tolerance relate to the investment choices?
• What tax-saving strategies should I know about?
• Is anything missing from my financial strategy?