Focus on the Long Run: Your Retirement Investments
When you plan ahead for your retirement, remember: It’s the long-term results that really count. Here’s an overview how your investments can best work for you…
The magic of compounding interest
Compounding interest is the “snowball effect” of investing. It works by first earning you interest on the money you’ve invested – then earning more interest on top of the interest you’ve earned. For example:
You invest $100, and it earns a 7% annual return.
At the end of the year, you have $107.
If you earn 7% again the next year, you’re earning 7% of $107, rather than $100. This adds $7.49 to your account.
In the third year, you’d earn $8 and have a total of $122.
Now imagine you’re able to make a larger investment, like $10,000. After 20 years with no withdrawals, and no additional deposits, that money would grow to $46, 610. And ten years later, it would be $100,627.
Of course, there are no guarantees of the amount you will earn – some investments gain much more, while others may increase at a slower pace. But if your workplace offers pre-tax contributions, along with matching on your behalf, you’ll get even more value from your investment.
The earlier you invest, the more time you have on your side, for greater earnings over the long term.
For the best results, talk to your financial advisor about diversifying your investments – spreading your money out across a variety of “asset classes.” Depending on your age and life circumstances, you’ll likely want to invest in a mix of low- and high-risk investments, including stocks, bonds, money markets, etc.
This helps to ensure that if one investment isn’t performing well, another will likely be performing better during the same time, in order to provide you with a balanced growth overall. This help mitigate the effects of market volatility.
Take advantage of dollar cost averaging
Dollar cost averaging happens automatically when you’re making regular investments into an IRA or workplace savings plan. Your ongoing investments inevitably result in purchasing stocks at a wide range of costs – some months, shares will cost more and other months, they’ll cost less.
When prices are lower, your flat investment amount is able to purchase more shares than when the pries are higher. Over time, the cost averages out, allowing you to purchase more shares over time at a lower average cost per share.
Don’t worry about fluctuations
Stock markets are continually changing. Stay focused on the long run, rather than adjusting your investment strategy continually. Instead, talk to your financial advisor about once a year so you can make changes, if needed, based on changing life circumstances or goals.
Horizon Bank’s team of professional financial Advisors would be happy to provide you with some Sensible Advice. Contact us today.