Novice Investing - Getting Started in Investing

Date: Tuesday 13th 2008f May 2008 02:42:10 PM

Getting Started

By: Novice Investing Staff

The Basic

Quote: My Mama told me to save and invest but I don’t understand why.

Why should we invest? What is investing? Why should you bother? In simple terms, investing is putting your money elsewhere instead of holding the cash in your own pocket. Buying baseball card is investing. Putting your money in Certificate of Deposit (CD) in the bank is also investing. Buying a car too is considered investing.

“What? Now, wait a minute. I thought car always loses its value over time?” You said. Yes, true. However, there are good investments as well as bad investments. Investments that lose value over time are bad investments. No Kidding.

First of all, why should we or anybody else invest our money? Well, the number one reason is inflation. Inflation is the public enemy number one to the wealth of everyone living on this earth. It was is and will always be there. Our primary purpose of investing is therefore to grow our wealth faster than the rate of inflation. How can we achieve that kind of return? There are lots of ways. A lot of people are successful investing in real estate, baseball cards, stocks, index fund and even commodities. In general however, the more knowledge we possess (think about the zen master), the less risk we incur and the larger our percentage return will be.

Annual Salary	Annual savings	Total funds after 40 years	Enough for Retirement?
$60,000	$12,000	$480,000	NO

The table above gave a clearer picture of our retirement nest egg after forty years and it ain’t pretty. We assume that you earn $60,000 annually. This is a high income figure for average Americans. (Average Americans earn $35,000 annually). Furthermore, as a responsible individual, you are able to save one fifth of that salary and bury it under your mattress. The total savings after forty years will grow to $480,000. Will it be enough? I don’t think so. First of all, if you can live for another twenty five years after retirement, you have to spend less than $ 1600/month to be able to live freely without other people’s financial help. Wait a minute…. How about inflation? Well, inflation runs at a rate of around 3% in this country. The total fund does not even count the effect of inflation. With inflation, your total retirement fund amounts to under $148,000. Ouch…that really hurts. In real dollars, after forty years of hard work, all you get is less than $500 of monthly allowance from your retirement fund. If you spend more than that, you will use up all your retirement fund before your twenty five years is up.

Oh no. So now what? Are we doomed? Hold your breath for one second. That is not what I meant. There are a few alternatives that help you stump inflation to the ground. For example the return in investing in the stock market in the US has averaged 10.2% for generations. What does this means to you? Well, maybe the next table will help you out.

Annual Savings $12,000	Safe Deposit Box (0% return)	Certificate of Deposit (5% return)	Average Stock market (10% return)
Year 10	$120,000	$ 170,481	$ 222,374
Year 20	$240,000	$ 613,361	$1,310,181
After 40 years	$480,000	$1,534,077	$5,854,221
Adjusted for 3% inflation at year 40	$147,147	$ 470,281	$1,794,651

You get dizzy already? Relax. Closed your eyes and repeat the phrase ‘I can do this’ five times and then open your eyes. Are you ready? Yes, you are! Here goes. If you can match the average stock market return, your money will be worth $1.8 M at year 40. If you live another twenty five years after retirement, you can spend $72,000 annually and not run out of money before then. Neat, isn’t it? Yes, indeed.

Please note that unlike other financial resources, we at Noviceinvesting.com always believe to include inflation effect into our calculation. Therefore, your nominal retirement fund will turns out to be higher than $1.8M that we got.

Who wants to be a millionaire?

Well, everybody wants to be a millionaire. Rather, the appropriate question is who can be a millionaire? And the answer should be obvious to you by now. You can. Yes, you the person reading this. Even if you earn less than $35,000 annually, you still can be a millionaire when you retire.

For those of you skeptics, here is what it takes. $200 a month and 14% annual return for 40 years. Think you can do that? Sure you can. Here at Noviceinvesting.com, we strive to better the return of the average by combining the power of fundamental and technical analysis. We will explain our methodology as you read on.

What about for those of us who are well into our 40s? Well, the good news is you are still not late in the game. Yup, you heard it right. Not late at all. It is never too late to start investing unless you are one year away from your retirement. So, with just $20/day and 14% annual return for the next 25 years, you will end up with $995,000 at retirement age! Of course, adjusted for inflation, that money is worth around $520,000. Still, it is really not bad at all.

Well, a nice little coffee break is nice every now and then. In the next section, we will talk more about the different types of investment vehicles such as certificate of deposit, bond, exchange traded fund and common stock. So, why don’t you get off your couch, stretch your leg and come right back with us by clicking here

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