What is the Best Way to Invest Money?
What is the best way to invest money for you and for your children? Is it best to buy stocks, bonds or mutual funds? Considering the economic environment we're in, you might be thinking that it might be safer to hide your money under the mattress like grandma used to do!
What is the real secret that wealthy people know that keeps their money growing?
Everyone dreams of having a financially secure life. I personally do not know of anyone who actually wants or plans on being poor, do you? It's just poor money habits, a lack of basic money skills and having no set goals that makes and keeps people in a poor financial state. You'll have a huge advantage of building a substantial nest egg if you become financially intelligent. All you need to do is learn and practice a few wealth-building techniques. Make sure to pass these on to your children. It will mean the world of difference to your children's future if you teach them the following principles as early as possible:
THE BEST WAY TO INVEST MONEY – TECHNIQUE # 1 YOU MUST THINK LONG TERM
Look at a twenty or thirty year chart of the stock market, for example the DJIA (Dow Jones Industrial Average). You will not see the price of the stock going straight up nor will you see the price of the stock going straight down. The line on the graph zigzags up and down, meaning that there are some money making days and some money losing days.
From 1970 up until present, the DJIA has moved up, going from about $ 750.00 per share in 1970 to about $ 11,000.00 as I'm looking at it today. If you had invested in the DJIA back in the 70's, you'd have a fairly good return on your money today, despite all the down days and years in between. Historically, the stock market has moved up (about 13 percent a year over the long term). If you look at the chart, you will see corrections from time to time. These corrections are when stock prices go down, sometimes by five to twenty percent. Sometimes you will hear people say that we are in a "bear market". This is when the stock market declines by twenty or more percent. Ouch!
These bear markets happen every three or four years, and long-term investors do not get too bent out of shape when this occurs. This is a normal part of investing and is just part of the cycle of the stock market. It's not necessary to watch the stock market on a daily basis when you know you'll be holding your stocks for the long run. These corrections provide an excellent opportunity to buy more of your favorite stocks at a discounted price. The longer you invest, the more all the ups and downs even out. These ups and downs are referred to as "volatility", which is another word for risk. It's safe to say that the longer you invest, the less risk you take with your money. If your children invest from early on, they will pretty much eliminate any risk associated with investing.
Think of what this could mean if you invest a dollar a day for twenty, thirty, forty or even fifty years! Incredible when you also think of compound interest coming into play.
THE BEST WAY TO INVEST MONEY – TECHNIQUE # 2 DO NOT EVEN TRY TO TIME THE MARKET!
This would be the perfect way to make money: Buy a stock or mutual fund when the market is at it's lowest point. Sell that stock or mutual fund when the market has reached it's highest point. Count all your profits. Do a happy dance … and repeat.
Unfortunately, this is really hard to do. In fact, there are very few, if any, people that can time the market on a regular basis, so it's not practical to think that you can defy the odds. Many have tried (I being one of them), and have lost a lot of money in the process. If you still want to try your hand at buying low and selling high, something you should consider is how much it's going to cost you to continuously jump in and out of the market. It costs money when you buy a stock and it costs money when you sell it. These are called "commissions" and you will be paying these to your broker. Many day traders end up losing a big percentage of their money because they are in and out of the market so often.
There's also something called "the spread" that you should be aware of.
The person or company that enables you to buy the stock you want is called a market maker. He will always sell you a stock for more than the price that he'll buy it from you, and he'll always buy a stock at a lower price than what he'll sell it to you for. The difference between the buy and sell price is how the market maker makes his money. Some stocks have small spreads and some stocks (usually small companies) have bigger spreads.As you can see, continuing putting your money in and out of the market will cost you. The financial experts advise people not to time the market. Instead, the best way to invest money is for the long term and to watch your money grow.
If you can teach yourself and your children to be patient and disciplined when investing, you will end up with far superior results.
THE BEST WAY TO INVEST MONEY – TECHNIQUE # 3 INVEST SMALL AMOUNTS REGULARLY AND AUTOMATICALLY
Investing the same amount of money each month is a strategy called "dollar cost averaging". This means that you are buying when the market is low and you are also buying when the market is high. You keep investing regardless of market conditions. Of course when the market is at a high, your money buys you less shares of a mutual fund or a stock. But by the same token, when the market is at a low, your money buys you more shares of a mutual fund or a stock. Over time, the dollar cost averaging technique tends to bring down the average cost per share. Investing automatically will help ride out all short short term swings and cycles. You can sign up for an automatic investment plan that can transfer your money automatically from your bank account to your mutual fund or stock account. Your financial planner can help you set this up.
Paying yourself first is a fantastic technique to create wealth. Even if it's a small percentage of your paycheck, have it automatically taken out of your bank account as soon as you get paid. You will not see it or miss it, and you'll be amazed at how much this can add up over time.
THE BEST WAY TO INVEST MONEY – TECHNIQUE # 4 CHILDREN SHOULD BE INVESTING IN STOCKS
You must be thinking … but stocks are so volatile! Bonds may be the best way to invest money for my kids; they're safer. As with any type of investing, there is risk. But as we've discussed above, the longer you hold something, the more the gap evens out.
It is well known that stocks produce a higher return than any other asset class if we hold them long term. Our children have the ability to do this and it is the best way to invest money because they have the gift of time on their side. Over the past ten decades, stocks have beaten out blue-chip bonds, government bonds and treasury bills. During any thirty year period in the 20th century, stocks have beat all other asset classes 99 out of 100 times. Wow! On average, stocks have created more than triple the money than bonds during these thirty year periods. The worst thirty year period for stocks since World War II was from 1960 to 1990. Even then, stocks created three times as much money as bonds did.
There is no question that the best way to invest money when it comes to your kids is with stocks. Even in worst case scenarios, they have proven to have much higher returns in the long term.
(A great book on this subject is "Stocks for the Long Run" by Jeremy Siegel.)
Your children are in a much more favorable position that the average investor. They have a 30, 40 or 50 year horizon as an investor. They can ride out the market's ups and downs and still end up with their investment in the hundreds of thousands, even millions of dollars.