When it comes to investing for retirement knowing where to start has its advantages. A lot of people never invest during their whole lives because they do not know how to read and interpret financial statements issued by companies. This is completely understandable since not knowing what you are buying can be disastrous to your wealth especially if you are investing for the short term. It takes at least some basic accounting knowledge to learn what accounts that appear in financials mean and what they can tell about the performance of a company. It is really not that hard but not everyone has the means of acquiring that education on a formal level. So does this mean that you cannot invest for your future if you can’t read financial statements? Of course you can invest. There are many options for those that are interested in investing for retirement. In fact most 401k plans do not have the option of buying individual stocks unless they are from the company that employs the person that is contributing to his or her retirement plan. So what are you really buying? The answer is mutual funds. While mutual funds are not the only product that is available in a 401k plan a lot of the money to be made is in fact by investing in them.
Investing for those that do not have the knowledge to pick individual stocks is pretty straight forward. One of the best ways to invest is in an index fund that has low management fees. An index fund is a mutual fund that tracks one of the indexes such as the S&P 500, the Dow Jones Industrial Average, NASDAQ composite or one of the Russell indexes. What you are actually buying if you invest in one of these indexes is shares or partial shares of many companies. For example, investing in a fund that tracks the Dow Jones Industrial Average would buy your shares or partial shares of all the companies that make up for the index. Through this mutual fund you would own shares from companies such as: McDonalds, Microsoft, AT&T, and Wal-Mart among others. The reason why investing in this manner is profitable is because what you are buying is basically a diversified portfolio under one symbol.
According to history the S&P 500 has never lost money over the long term especially if dividends and proceeds have been reinvested during the time the money is invested. A recession can send the S&P 500 down for some time the same as a stock market crash or any type of investor panic would. But historically the S&P 500 has compounded at around 10%-12% annually over its history. This is over the long term. We are not talking about one or two years but over a twenty to thirty year span. This good news to those that are worried about retiring and don’t know where to start. There are many mutual funds that track the S&P 500 the difference between them is the management fee. The lower the management fee, the better the results over the long term. High fees may not look like much at the beginning but as the money grows they may be substantial in terms of how fast your money grows.
Many online brokerage houses have a good listing of mutual funds that track indexes such as the S&P 500 and many others. An index fund is a great addition to any IRA especially if the option to reinvest dividends is available. Many 401k plans also have one of a few index funds available although the ones available in your 401k plan may have a high management fee. Either way it is better to own one of these funds than to allocate 80% or more of your contribution as cash that would be losing its purchasing power around 4% year over year due to the effects of inflation. Remember that to get the most out of investing in the S&P 500, all proceeds should be reinvested. This will ensure that you will have the full power of compounding especially when your investments are growing in a tax advantaged account such as an IRA or a 401k plan.
What other options are available? Some 401k plans that I have studied allow the person to invest in companies that are considered growth stocks via a mutual fund. If carefully managed a fund specializing in growth stocks can make you lots of money. The keyword here is carefully managed. Before allocating cash into an aggressive growth mutual fund you need to do some research and look at that particular funds history, turnover and returns. While mutual funds are diversified, they can still lose money especially if the manager is not careful enough. Again, you have to look at fees. While past performance is not a guarantee of future results it may give you at least a glimpse on performance. If you notice that the growth of the fund has being going down for a lot of time or is constantly losing money it would be better to keep out. The other option that is commonly available is a bond fund. Bonds are very good investments if bought at the right time. As of November, 2011 personally I wouldn’t touch bonds with a ten foot pole until the Federal Reserve hikes up interests which at some point in the future will happen. Apart from current conditions, bonds are very good investments especially for those that are near retirement. They offer a fixed income and are considered the safest investments in most conditions except from the ones that we are currently facing.
In conclusion, investing is not only for those that are finance professionals. The average Joe can invest successfully for retirement and get excellent results. The options are there you just have to take advantage of them. Like I have said in some of my other articles financial success starts with the savings habit. Save money to invest through your IRA or 401k, stay out of credit card debt and other high interest debt and in the end the magic of compounding will work out in your favor.