How to invest for the long run and why you should pay attention to your portfolio
Most people know long term investing is the best way to prepare for retirement, but this only gets you halfway there. The real key to success with long term investing is what you put your money in and how it works for you. In Today's Business Buddy Blog, we're going to break down some different options for when it comes to investing for your future.
Compounding Interest Accounts
As some of you may know, compounding interest accounts are one of the most popular ways to invest money for the future. Most people have this type of account for retirement in a 401k. The interest earned on your investment is re-invested into the account thus creating a 'snowball effect' for the account owner. In the short term, this compounding interest account won't make much but in a longer period of say 10-20 years, it can grow very large.
The stability of the investment also plays a large part of how fast it grows. This is where a lot of people make mistakes when it comes to investing their 401k for example. Most people take the 'safer' approach and find an investment that's not volatile and gives a steady annual return. Funds like this usually give a return of +1-5%/year. This route makes people feel good about their money because they know its in a stable investment. They won't make mountains of money but they also don't have much risk associated with it.
People who should keep their money in funds like this are people close to retirement or their 'cash out' date. But people who still have 25+ years until retirement may want to look at other options and weigh the risks. For example, small cap ETFs (Exchange Traded Funds). These funds are more risky than the one described earlier but the potential returns can be all the way up to +40% per year!
For instance, in 2013 the Vanguard Small Cap ETF posted a 1 year return of +36.01%. While this return is much higher than the 'safer' funds, it also can go south and post a negative return. In 2015 the same fund posted a 1 year loss of -5.06%.This is precisely why staying invested for a longer period of time is best. If you stayed invested in this Vanguard ETF from 2010-2020 you would have a total return of +280.14% compared to a safe 5%/year account that would post a total 10 year return of 50%.
Plan Sooner than Later
It's a good idea for everyone to look at their 401k. Many people wait until they are approaching retirement to look at how their savings is performing. This often forces the person to live with what their account has become or make a risky investment to "catch up". The sooner you make a plan, the better! Always remember Proper Preparation Prevents Poor Performance.
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