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!
Step 1: Save $1 a Day for 1 Year
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:
- It Shows Discipline: Making a concerted effort to save daily is a good lesson to learn, and a good thing to prove you can do.
- It’s a Long-Term Goal: Saving $1 a day is important because it proves you have the ability to keep your eyes on the prize, even if the going is slow.
- It Builds Confidence: This is a goal that you can easily achieve, so there’s no risk of being disappointed or feeling like you’re over your head. Getting to $365 in 365 days will give you confidence to tackle harder tasks going forward.
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.
Step 2: Identify Your “Flavor” of Investing
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.
- Capital Preservation: Is avoiding losses equally important to you as tapping into profits? Than you should consider boning up on investments that focus on capital preservation — whether they be CDs or ultra-low risk investments like U.S. Treasury bonds.
- Income: Do you want to modestly grow your money, but in a low-risk way? Then you’re probably an income investor. That means you put your money in investments like bonds or dividend stocks not with the expectation of big capital gains, but rather that you will get a nice stream of income from those investments in the form of regular distributions. These include dividend stocks like Procter & Gamble (NYSE:PG), dividend stock funds such as the SPDR S&P Dividend ETF (NYSE:SDY) or bond mutual funds like the world-renowned PIMCO Total Return Fund (MUTF:PTTRX)
- Value: Are you looking for strong investments that remain relatively stable over the long term, but that might be undervalued with room to run based on their long-term potential? Then you’re what we call a “value” investor who looks for bargains. This is the school of investing made famous by Warren Buffett and Benjamin Graham before him. Look for the word “value” in mutual funds or ETFs that have this strategy.
- Growth: Are you looking for, pardon the overused marketing phrase, “the next Apple (NASDAQ:AAPL)” that will deliver significant gains to your portfolio? Are you prepared to swing for the fences even if it means you might strike out? If so, you’re a growth investor. Look for the word “growth” in mutual funds or ETFs that have this strategy.
- Self-Starter: Do you dream of being a cook and consider an expensive kitchen gadget a good investment? Do you want to learn new skills and start a second career, and think it’s worthwhile to invest in your education via seminars or part-time courses? These are unconventional forms of investing, but no less powerful. Tapping into your personal potential is sometimes more of a money-maker than anything else.
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.
Step 3: Create an Action Plan — and Practice It
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.
Step 5: Do It All Over Again
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.