by Jeff Reeves | August 17, 2012 7:45 am
You’ve read the stories about the death of “retail investors” out there as stock market volume remains thin and mutual funds keep seeing outflows. Also, many companies have cut back on their 401k and retirement benefits, and a number of Americans are cracking open their nest eggs and borrowing against retirement to keep afloat now.
It’s tough out there. But as legend has it, Albert Einstein believed that the most powerful force in the universe was compound interest — the process of putting a little money away now to become a little more tomorrow, and a little more the day after that, and in time to grow to a very substantial sum.
If you think retirement is out of reach or that investing is just too expensive, think again. It doesn’t take a ton of seed capital to get started, and the sooner you get involved with retirement planning, the longer you have to compound your interest and supercharge your returns.
In short, it’s not about how much money you have now, but how much time. So get started!
Here’s how you can begin building a successful retirement in 5 easy steps. And step 1 is simply socking away a dollar a day!
If you can’t do this, then you’re doomed — not just as an investor or as a future retiree, but as a functional member of society. While seemingly meaningless on the surface, this simple act has a lot of philosophical value:
But don’t think you have to wait a full year before you can get started! Simply go an Internet search for “no minimum broker” or “zero minimum broker” and you’ll find a host of online investing services that allow you to put even a small amount of cash to work. Depending on the offers at the time and the provider, you may even get free trades – meaning you literally have no barriers to investing even your small sum.
That means you can start buying a desired stock or fund ASAP – even if it’s only investing a tiny amount. Of course unless you want a $1 stock you’ll have to wait a month or two to save up enough capital … and if it’s a stock like Apple (NASDAQ:AAPL) you’ll be waiting almost two years to gather enough cash for just a single share. But the good news is that you can buy stock in as little as one-share lots once you’re ready. That could mean 6 $60 stocks your first year or 12 $30 stocks – it depends on your strategy.
There are a few core types of investors … so before you put that money to use, you should explore exactly what you want to do with your money — and equally important, what your risk tolerance is.
Find out what kind of investor you are and do your research. Then when you find a few prospective investments, you know how much you’ll need (and how long it will take to save that amount on $1 a day) in order to make that first move.
You may be inclined to just grab the $30 or $60 necessary to make your stock purchase on day one. But remember, the discipline of saving is important – and equally important is the time you’re buying yourself. Because while you’re saving up you can practice your investing in a no-risk environment on paper.
Let’s say you want to start investing in growth stocks. Start by scouring the web for as many resources as you can on the topic and practice some armchair fundamental analysis of stocks – Wall Street speak for measuring sales and earnings growth. Familiarize yourself with the big players and the big news that’s out there.
And most importantly, start investing on paper. If you like a stock, write down the current price and how much you would invest in the stock if you were really trading. Check in on it two or three times a month and see how your idea shakes out over the next year. This is a much cheaper way to learn the market than making a bad buy!
Over time, you will be come conversant in the issues of the day and will have some “real” investing experience based on your paper trading.
Step 4: Don’t Do Too Much
Here’s the hardest part. If you see big success with your investment plan, chances are you’ll be eager to do more — buy more stocks or mutual funds, and get aggressive about your retirement. That’s a natural instinct, but remember that this is a long-term game. As the saying goes, “Don’t try to eat the elephant in one bite.”
Equally troublesome is the pitfall of letting short-term setbacks cause you to panic. You might see a stock drop and sell too soon, or you might pull your money out of a mutual fund too early and face a penalty.
Relax. Slow and steady wins the race.
The fact is with a small amount of money, trading often will eat up your nest egg with fees. Also, time and time again, investors who “time the market” get burned. Aside from owning a functional crystal ball, there is no way to know for sure when it is safe or when it is unsafe — and you do as much harm as good trying to anticipate the big moves of the market and the economy.
Staying the course is key, not just as a way to learn the market and practice discipline, but to reduce your costs in the long run.
If you can manage to get to the other side of this 365-day regimen, you will have taken some very important steps in securing your financial future — and should own a single share of a few companies. But it’s a long road to retirement, so it’s time to do it all over again with new investments or simply by adding to your positions if you still believe in them.
Remember, the idea of compound interest involves a little bit of money here and there that grows modestly over time, and your reinvestment of those gains continues to snowball until you retire.
Don’t buy into this scheme? Well consider this: If you get just a 3% return on your initial investment and invest an additional $365 each year, 30 years down the road, you will have a nest egg of more than $18,700!
That’s not enough to buy your own private island, but very impressive on just $1 a day. Especially when you consider that if you just put that cash under your mattress without the benefit of compound interest, you’d have only $10,950 (that’s $365 a year x 30 years). You’re giving up a 70% return on your investment!
So get started today, saving a little at a time. It all adds up big in the long run.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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