I once heard that time is the single most important factor when it comes to investing. The more time you have, the better off your investing portfolio. Mostly because short term movements in the market are gradually smoothed out over time. In 2012, the broad market, as measured by the S&P 500®, gained 16%. What were you doing in that time? Were you investing? Maybe you were scared and sitting on the sidelines like some investors. Yes, the stock market drop of 2008 is still recent enough to feel sore, but since then the market has continued to rise. Investors that pulled their money out of equities after that crash have missed out on the opportunity to make most of that back. If you are a young professional and just starting in your career, you should begin investing. Everyone’s situation is different, but this is time that you will never get back.
What is an Index?
I mentioned the S&P 500® earlier. In case you were not aware, the S&P 500® is considered the best gauge of the broad large cap market. There is over USD 4.83 trillion benchmarked to the index, with index assets comprising approximately USD 1.1 trillion of this total. That means that portfolio managers have created exchange traded funds (ETFs) and mutual funds that track this particular index. An index is not investable on its on. It is merely a representation. In order to invest alongside an index, you must choose an ETF or mutual fund that takes its cues from the index. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. These 500 leading companies are a good proxy for the market as a whole. Mainly because, they are the ones doing the acquisitions of smaller companies, and by their actions you can get an idea of where the market is going.
How Can I Gain 16% a Year?
There’s no guarantee that the market as a whole will gain 16% again this year. It could move sideways with very little gains or it could lose ground. The point is that no one knows what the market is going to do, so you can either sit on the sidelines and watch, or you can get invested. Here is my example. In August of 2011, I opened my Betterment account. Betterment is my preferred ETF broker. I simply deposit each month and they invest for me. I don’t have to research stocks or do anything more than push a button. Since I opened my account, and through February 1, 2013, I have gained 14% annualized. In 2011, investors were still scared the sky was falling. So I chose a conservative allocation of only 55% to stocks and 45% to bonds. You may choose a different allocation or see how your peers are invested. So instead of watching the market go up, or down, I decided to start investing. My personal goal is 7-8% a year annualized so I am more than happy with 14% for now. I will keep investing so I can hit my goals of more passive income versus income that requires my presence. I’m also working on building my dividend portfolio this year so I will keep you updated on that as well.
Are you ready to start investing? Maybe you have a few questions first? Feel free to email me at LaTisha AT YoungFinances.com or post it below.
All investing involves risk, and past performance is no indication of future results. Please see the full disclaimer for more.