1. Save your money.
Saving for retirement means adjusting expectations. Saving a certain percentage of your income every year or month may take a certain amount of discipline, especially when the media promotes lifestyles that encourage spending and immediate gratification. Saving as little as $100 a month, when factoring in compound interest from investments, can really add up to big money over the course of 30 to 40 years.
2. Saving more is better.
If you were to retire at 70, having earned 6 percent compound interest on $5,000 invested every year from age 25, you would retire a millionaire. However, waiting too late can really harm you. If you wait until you’re 45 years old, you’ll have to contribute $18,000 a year to reach the same goal, making it that much harder for a secure retirement later in life.
Furthermore, investing takes patience and long-term planning. For those who sold stocks at the bottom of the 2008 crisis and never got back in, they missed out on an over 100 percent gain in the S&P 500 over the next six years.
3. Online trading.
Online trading gives young people direct access to the marketplace, allowing them to pick a host of stocks, ETFs and bond funds for direct investment. The Internet has helped democratize investing decisions, making online trading an obvious option for young people working towards their retirement.
When choosing an online broker service, it’s best to know all the facts. Fortunately, there are excellent resources available online to help you make an informed decision. Many consider value investing to be a good approach to picking stocks and holding them for a long period of time.
4. Value investing.
When picking a stock, it’s important to look at Price to Earnings ratios (P/E measure), which is basically a calculation that takes into account the price of a stock compared to future earnings. The historical average is a 16 P/E ratio; if it gets any higher than that, you should be careful. It’s also important to look at dividend rates for stocks, as stocks with a solid dividend can provide steady income no matter where the market goes.
Value investors also look at the book value of stocks, which measures assets minus a company’s liabilities. Many consider a good stock pick to be a stock trading at book value or at least close to it. Sometimes value stocks may seem boring compared to growth stocks, but they are known to have a better return on investment over the long-term.
Finance professors Kenneth French, from Dartmouth College, and Eugene Fama, from University of Chicago, noted that since 1926 value stocks have consistently performed better than growth stocks by four percentage points on an annual average basis.
5. Don’t let fear guide your decisions.
Dalbar, a prominent research firm from Boston, reported a significant finding for investors. Although the average return for the S&P 500 from 1983 to 2013 was 11.1 percent annually, investors only averaged 3.7 percent due to irrational buying and selling behavior. As a result, it’s important not to let your emotions get the best of you during turbulent market periods.
In fact, fear can often be your ally. When others are selling, this can represent an investment opportunity. Warren Buffett once said in one of his famous newsletters,
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.