New to investing? Don't sweat it. Learn 4 simple methods to investing with confidence so you build plenty of wealth for the future, regardless of how much money or experience you have.
How Much Should You Invest?
Let’s get back to Moadd’s question. He said, “I’ve done research about different types of stocks like REITS, Roth IRAs, and mutual funds—but still feel like a rookie. If I invest $10,000, how long will it take to see a profit and how much could I make?”
I want to be clear that none of the investments Moadd mentioned is a stock. He may be using the terms “stock” and “investment” interchangeably, but that’s not correct. There are many other types of investments, such as bonds, real estate, currencies, and precious metals.
REIT stands for real estate investment trust, which is a company that owns real estate. A Roth IRA is a type of retirement account, in which you can own just about any type of investment. And, as I mentioned, mutual funds are a collection of assets, which could include stocks, if you choose one of the four options I reviewed.
Because it’s so risky, I don’t advise investing money for short-term gains. So, asking how long it will take to see a profit isn’t the right question. A better question is, “How much should I invest each year to achieve my long-term goals, such as retirement?” Exactly how much your account will grow depends on many factors including how much you invest over time, the investments you choose, how long you own them, and whether you use a taxable or tax-advantaged account.
If Moadd doesn’t have a retirement fund, such as a 401k or 403b through work, then I’d recommend that he open an IRA and max it out each year. For 2017, you can contribute up to $5,500 to either a traditional or a Roth IRA. If you have a workplace plan, you can contribute up to $18,000 per year.
See also: Is Owning Gold a Smart Investment?
How Much Stock Should You Own?
After you open a retirement account, you’ll need to choose the investments to own inside of it. You’ll have a menu of options to choose from and may also have access to an advisor or custodian who can help. As I mentioned, every investor should own stock through a fund. But how much stock is right for you?
Subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.
The answer depends on your appetite for risk, plus other factors like your age and when you want to retire. While there’s no one-size-fits-all asset allocation, in general, the younger you are, the more stock you should own.
Here’s an easy shortcut to figure out how much stock you should own: Subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.
For example, if you’re 40, you might consider holding 60% of your portfolio in stocks. If you tend to be more aggressive, subtract your age from 110 instead, which would indicate 70% for stocks. But this is just a rough guideline that you may decide to change.
You might allocate your stock percentage to a variety of stock funds or put it all into one stock fund. The remaining amount would be in other asset classes such as bonds and cash.
Make a goal to invest a minimum of 10% to 15% of your annual gross income for retirement. If you can’t set aside that much, start small. Even investing 1% or 2% is a great start. Then increase your contributions by a percent or two each year.
Having the option to start small is another benefit of owning stock funds. Unlike other types of investments, such as real estate or businesses, you don’t need much money to buy them.
See also: How to Make Money Investing in Stocks
Minimize Risk with a Buy-And-Hold Strategy
One of the most powerful ways to build wealth and financial security is actually pretty boring. Simply choose low-cost funds inside a retirement account and contribute 10% to 15% of your income over a long period of time.
Don’t get fooled into thinking that you need to take a lot of risk to be an investor. If anyone recommends that you buy this or that individual stock, smile politely and say, “thanks for your suggestion,” and never act on the information.
Don’t get fooled into thinking that you need to take a lot of risk to be an investor.
For most investors who don’t want to make a career out of stock picking, buying individual stocks is a bad idea. Trying to find one or two winning stocks is gambling, not smart, strategic investing.
Buying and holding one or more diversified funds minimizes investment risk. If the price of one stock in a fund takes a dive, it’s no big deal because you own hundreds or thousands of other stocks that may be holding steady or going up.
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