What is the best way to invest money for you and for your children? Is it better to buy stocks, bonds or mutual funds? Considering the economic environment we find ourselves in, you might be thinking that it might be safer to hide your money under the mattress like grandma used to!
What is the real secret that rich people know that makes their money grow?
Everyone dreams of having a financially secure life. Personally, I don’t know anyone who wants or plans to be poor, do I? It is simply bad financial habits, a lack of basic financial skills, and the absence of set goals that make and keep people in bad financial shape. You will have a huge advantage in building a substantial nest egg if you become financially smart. All you have to do is learn and practice a few wealth building techniques. Be sure to pass them on to your children. It will mean a world of difference to your children’s future if you teach them the following principles as early as possible:
THE BEST WAY TO INVEST MONEY – TECHNIQUE #1 YOU NEED TO THINK LONG TERM
Look at a twenty or thirty year chart of the stock market, for example the DJIA (Dow Jones Industrial Average). You will not see the stock price go up directly or the stock price go down directly. The line on the chart zigzags up and down, which means that there are days when you make money and days when you lose money.
From 1970 to present, the DJIA has been on an upward trend, rising from around $750.00 per share in 1970 to around $11,000.00 as I look at it today. If you had invested in the DJIA in the 70s, you would have a pretty good return on your money today, despite all the days and years of declines in between. Historically, the stock market has followed an upward trend (about 13% per year over the long term). If you look at the chart, you will see corrections from time to time. These corrections occur when stock prices fall, sometimes by five to twenty percent. Sometimes you will hear people say that we are in a “bear market”. This is when the stock market drops twenty percent or more. Ouch!
These bear markets happen every three or four years, and long-term investors don’t get too out of shape when it happens. This is a normal part of investing and is just part of the stock market cycle. There’s no need to watch the stock market daily when you know you’ll hold onto your stocks for the long haul. These corrections provide a great opportunity to buy more of your favorite stocks at a discount. The longer you invest, the more all the ups and downs balance out. These highs and lows are called “volatility”, which is another word for risk. It’s safe to say that the longer you invest, the less risk you take with your money. If your children invest early on, they will pretty much eliminate all risk associated with investing.
Think what it might mean if you invested a dollar a day for twenty, thirty, forty or even fifty years! Incredible when you also think about the compound interest that comes into play.
THE BEST WAY TO INVEST MONEY – TECHNIQUE #2 DON’T EVEN TRY TO TIME THE MARKET!
This would be the perfect way to make money: buy a stock or mutual fund when the market is at its lowest point. Sell that stock or mutual fund when the market has peaked. Count all your profits. Do a happy dance… and repeat.
Unfortunately, that’s really hard to do. In fact, there are very few, if any, people who can time the market on a regular basis, so it’s not practical to think that you can defy the odds. Many have tried (I’m one of them), and lost a lot of money in the process. If you always want to try to buy low and sell high, you should consider how much it will cost to continually enter and exit the market. It costs money when you buy a stock and it costs money when you sell it. These are called “commissions” and you will pay them to your broker. Many day traders end up losing a large percentage of their money because they enter and exit the market so often.
There is also something called “spread” that you should be aware of.
The person or company that lets you buy the shares you want is called a market maker. He will always sell you a stock at a higher price than he will buy it from you, and he will always buy a stock at a lower price than he will sell it to you. The difference between the buy and sell price is how the market maker makes his money. Some stocks have small spreads and some stocks (usually small companies) have larger spreads. As you can see, continually putting your money in and out of the market will cost you dearly. Financial experts advise people not to time the market. Instead, the best way to invest money is for the long term and watch your money grow.
If you can teach yourself and your children to be patient and disciplined when investing, you will achieve far greater results.
THE BEST WAY TO INVEST MONEY – TECHNIQUE #3 INVEST SMALL AMOUNTS REGULARLY AND AUTOMATICALLY
Investing the same amount of money each month is a strategy called “average dollar buying”. This means that you buy when the market is low and you also buy when the market is high. You continue to invest regardless of market conditions. Of course, when the market is high, your money buys you fewer shares of a mutual fund or stock. But by the same token, when the market is at its lowest, your money buys you more shares of a mutual fund or a stock. Over time, the dollar cost averaging technique tends to lower the average cost per action. Investing automatically will help overcome all short-term market fluctuations and cycles. You can sign up for an automatic investment plan that can transfer your money automatically from your bank account to your mutual fund or stock account. Your financial planner can help you set this up.
Paying yourself first is a fantastic technique for building wealth. Even if it’s only a small percentage of your salary, have it automatically withdrawn from your bank account as soon as you get paid. You won’t see it or miss it, and you’ll be amazed at how much it can add up over time.
THE BEST WAY TO INVEST MONEY – TECHNIQUE #4 KIDS SHOULD INVEST IN STOCKS
You must be thinking…but stocks are so volatile! Bonds might be the best way to invest money for my kids; they are safer. As with any type of investment, there is risk. But as we discussed above, the longer you hold something, the more the volatility balances out.
It is well known that stocks outperform any other asset class if we hold them for the long term. Our children have the capacity to do this and it is the best way to invest money because they have the gift of time on their side. Over the past ten decades, stocks have beaten investment grade bonds, government bonds and treasury bills. In any thirty-year period in the 20th century, stocks beat all other asset classes 99 times out of 100. Wow! On average, stocks have created more than triple the amount of money than bonds over those 30 years. The worst thirty-year period for stocks since World War II was from 1960 to 1990. Even then, stocks created three times as much money as bonds.
There is no doubt that the best way to invest money when it comes to your children is with stocks. Even in the worst scenarios, they have proven to have much higher returns over the long term.
(An excellent book on this subject is “Stocks for the Long Run” by Jeremy Siegel.)
Your children are in a much more favorable position than the average investor. They have a horizon of 30, 40 or 50 years as an investor. They can weather the ups and downs of the market and end up with their investment in the hundreds of thousands or even millions of dollars.
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