Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Building Wealth: Strategies That Work
Most investors want to grow wealthy over time and have a comfortable lifestyle in later life. Investing can help get them there. Most people do not become wealthy from their earnings alone but, rather, by investing a portion of their income and letting it grow for several decades.
The goal of investing is to set aside money today with the goal of having it grow over time through a combination of regular deposits and compound interest. Of course, there are no guarantees and investors can lose money too. However, losses in stocks over holding periods of 15 and 20 years are quite rare. Holding investments for several decades reduces their risk.
Looking for tried and true strategies to invest successfully? Consider the following wealth-building strategies:
Invest Equal Sums at Regular Intervals- This is called dollar-cost averaging and the key is to do it automatically regardless of market conditions. The set amount (e.g., $100 per month) buys more shares when prices are down and fewer when prices are high. Setting up automated investments takes the “emotion” out of investing because share purchases are made on a regular schedule regardless of what is happening in financial markets.
Reinvest Dividends and Capital Gains- Reinvesting investment earnings is an easy way to buy new stock or mutual fund shares with “windfall” sums. Simply contact a mutual fund company or stock issuer and authorize them to do this.
Buy for the Long Term- Don’t try to time the markets. Market prices go up, as well as down. That is the essence of investing. Be prepared to keep your money invested for the long haul, at least five years, and ignore temporary ups and downs in the stock market. Over the long term, sound investments will increase in value.
Diversify Your Investments- Different investments perform differently under the same market conditions. When one type of stock or mutual fund is down, others may be up. Two good ways to diversify are to choose stocks from several industries or a mutual fund that contains a mixture of stocks and/or bonds. Another is to invest in stocks and/or mutual funds, such as global funds, with international exposure.
Be Patient, Don’t Panic- Investment results are best evaluated over a period of years, not just a few weeks or months. Taxes and high sales commissions can offset capital gains or magnify losses if you hold investments for only a short time. When in doubt, hang on. Even with market corrections, stocks still tend to outperform bonds for patient investors.
Figure Profits and Losses in Percentages, Not Dollars- If you have a $25 stock that goes up $5 and a $10 stock that goes up $3, which one made the greatest profit? The $25 stock went up 20 percent (5 divided by 25 = 20 percent) while the $10 stock went up 30 percent (3 divided by 10 = 30 percent).
Match Capital Gains with Capital Losses on Your Income Tax Return- Nobody likes to have a loss on their investments, but losses do occur. With careful planning, a capital loss can offset a capital gain on a dollar-for-dollar basis. In addition, when losses for the year exceed capital gains, up to $3,000 of the excess loss can be deducted against other income. The rest of the losses can be carried forward to future tax years until they are used up.
Don’t Invest in Anything You Don’t Understand- Check out potential investments before you invest. Go to the library and read the Value Line Investment Survey for stocks and Morningstar for mutual funds. In addition, read prospectuses and company annual reports and investigate investments thoroughly. eXtension (online Cooperative Extension) has a free online course for beginning investors called Investing for Your Future (IFYF). The course is available at http://www.extension.org/pages/10984/investing-for-your-future#.Uz66wE1OWM8
IFYF consists of 11 free-standing modules with the following titles: Building Blocks of Successful Financial Management, Investing Basics, Finding Money to Invest, Ownership Investments, Fixed-Income Investing, Mutual Fund Investing, Tax-Deferred Investments, Investing Small Dollar Amounts, Getting Help: Investing Resources, Selecting Financial Professionals, and Investment Fraud. Each month, a new monthly investment message is added to the course and archived messages can be found at http://www.extension.org/pages/10863/archived-monthly-investing-messages#.Uz671U1OWM8.
Another source of free information about investing and other personal finance topics is a series of Cooperative Extension webinars available at https://learn.extension.org/events/tag/mfln%20personal%20finance#.Va0k2hNViko.
Check out our Archived Monthly Investing Messages.