INVESTING 101: Grow Your Wealth

Presented by: Dillon Flaherty, CFP®

Contact Dillon: Direct 315-333-1308

Start Early

It is easy to come up with all sorts of excuses to avoid investing. I don’t have enough for it to make a difference. I don’t want to lose money. Investing is boring – I’d rather day trade stocks or gamble at the casino – I want to hit it big! It is also easy to get bogged down by the thousands of investment products, account types, financial jargon, etc. The truth of the matter is, when it comes to investing, the two most important factors are time and consistency. Even if the dollar amount seems small to start with, if you consistently add money to your investments (examples: $50 every month, 5% of every paycheck) for a long period of time, you will put yourself in the best position for success to allow your returns to compound over time. Consider the following examples:

Example #1: Mary starts investing right out of college at age 20. She puts in $100 per month for 40 years and earns an 8% average annual rate of return. Over these 40 years, she would have invested $48,000 of her own money, but her total balance would amount to approximately $324,000!
Example #2: Phil waits to start investing until he’s in his early 40s, saying “I will just invest more when I have more money”. He puts in $400 per month for 20 years and earns the same 8% average annual rate of return as Mary. Over these 20 years, he would have invested $96,000 of his own money, and his total balance would amount to approximately $229,000.
Conclusion: Mary has invested half the amount of money Phil has but ends up with $95,000 more in the end. This is the power of compounding – the more time you give your investments to grow, the better off you will end up.

Diversify

The first step to investing is getting started, but where do you actually put your money to work? You can talk to five different people and get five different opinions, ranging from the “hot stock” that their coworker told them about to a complex strategy of building a real estate portfolio. Whatever your actual strategy is, you should be diversifying – don’t put all your eggs in one basket. Any one stock, real estate property, cryptocurrency, etc. can drop to $0. By buying hundreds to thousands of different assets, you are spreading out your risk. Luckily, we live in an age where diversifying is easier than ever. Investing in an index fund is an easy way to put a small amount of money to work into hundreds of thousands of stocks, bonds, etc. at a very low cost.

Know Your Goals

Investing is not a one size fits all approach. There are different ways to deploy your money depending on what your goals are. There are an infinite number of goals any individual may have – retirement, buying a house, a luxury vacation, saving for college, etc. These goals are typically time-bound, which will help guide you on how to best use your money to fit specific goals:

Saving for short-term goals: 0–1-year time frame, this money should be saved in a cash-like investment to preserve principal (i.e. checking account, savings account, high yield savings account, money market fund, CDs, etc.)
Investing for intermediate term goals: time frame of more than one year all the way up to retirement. This money should be invested in a non-retirement investment account in some combination of stocks and bonds (depending on risk tolerance and time frame).
Investing for long term goals: time frame of retirement. This money should be invested in an account specifically designated for retirement (i.e. employer-sponsored retirement plan, Roth IRA) with an objective of growth.  The best way to historically invest for growth is by investing in a diversified mix of stocks (especially for accounts with a long-time frame).

Use Tax-Advantaged Accounts

Tax-advantaged accounts allow you to earn growth without having to pay taxes on the growth every year. Some examples of tax-advantaged accounts are as follows:

Roth IRAs: Funded with after-tax money, earnings grow tax deferred, and upon reaching age 59 ½ distributions can be made income-tax free.
Traditional IRAs: Funded with pre-tax money (i.e. reduces your taxable income in the year of contribution), earnings grow tax deferred, and upon reaching age 59 ½ distributions can be made penalty-free but are taxable as income. 
Employer-sponsored retirement plans (401(k) plans, 403(b) plans, etc.): Allow you to deduct money directly from your pay stub into an account designated for your retirement. In many cases, your employer may also provide a matching contribution – this is what we like to call “free money!” Most plans allow for either Roth or pre-tax contributions.
Health savings accounts (HSAs): triple -tax advantage accounts – funded with pre-tax money, earnings grow tax-deferred, distributions can be made tax free at any time if used for qualified health expenses.

* Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investment goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions. * The examples provided are hypothetical scenarios for illustrative purposes only. No specific investments were used in the examples. Actual results will vary. * Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Dillon Flaherty, CFP® is a financial advisor at Weller Financial Group, located at 6206 Slocum Road, Ontario, NY 14519 and can be reached at 315-333-1308. Advisory Services offered through Commonwealth Financial Network®, a Registered Investment Adviser.