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A Simple Approach to Investing

‚ÄčThere are so many investment options and so much investment advice it is difficult to know where to begin when we decide to invest. There are a few basic facts to consider.

The average return of the stock market has been around 10% or about 7% after adjusting for inflation. Gains and losses in individual years swing widely but the long term trend is more predictable.

The average investor has two choices. Accept the average return over the long haul or attempt to pick and choose in an effort to gain some advantage beyond average returns. There is no reliable way to beat the average.

The most important financial company that you may have never heard of is Vanguard. Vanguard invented the index fund which allows you to invest in the entire market in a single fund. Furthermore, Vanguard has very low costs. When expenses are taken into account many investment options lag the overall market by a wide margin. This could make a difference of hundreds of thousands of dollars or more over a lifetime.

Vanguard is unique in that it is owned by the investors in the funds themselves and not by private shareholders. You can learn more about Vanguard here.

A Vanguard Target Retirement Fund does everything for you. There is a broad mix of stocks and bonds in a single fund. Over time, as we age and approach retirement, the investment mix is shifted away from growth and toward greater safety and less volatility. You can read more here about an example Vanguard Target Retirement Fund.

As you can see from the graphs below, if you start early, an average rate of return produces excellent results. The first chart is at 10% and the second is the same except the rate of return is reduced to 7% which gives you the results adjusted for inflation in today's dollars.

The link to the financial calculator is here. Playing with the numbers clearly shows the importance and impact of starting early when looking to secure your financial future.

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Wednesday, 18 July 2018

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