Saving is good. Investing is better. If you save $100 a month
and earn 0.95% annually (currently the highest yield for savings
accounts, according to Bankrate.com), you'll have more than $58,400
in 40 years, excluding taxes. If you invest the same amount and
earn an 8% annual return, your total grows to about $324,180.
Your first experience with investing will likely be within a
401(k) or similar employer-sponsored retirement plan (see
Free Money for Retirement
). Those dollars are earmarked for the faraway future. So you can
afford to take on risk and should consider putting your entire
portfolio in stocks.
You might be wary of such advice, especially if you were paying
attention during the bear market of 2007 to 2009, when Standard
& Poor's 500- stock index tumbled 55%. "But at the end of the
day, the stock market will be your friend," says Wendy Weaver, a
financial planner with FBB Capital Partners, in Bethesda, Md.
"You'll stay ahead of inflation, which can eat away your buying
power and your ability to be financially independent." In fact, the
S&P 500 has delivered a total return of more than 200% since
its 2009 low.
Still, your exact stock allocation will depend on your comfort
level. If you'd rather dial down risk, balance your investments
with some bonds and cash.
Mutual funds or exchange-traded funds are the best ways to get
into the stock market. A single investment can buy you a
diversified portfolio at a relatively low cost. You need a
brokerage account to purchase ETFs, which you buy and sell like
individual stocks. (See
Kiplinger's Model Portfolios
for a wide range of diversified-portfolio options.)
Begin with basic investments, such as the index funds offered by
your employer, if you're investing in your 401(k). The
plain-vanilla strategy of mirroring a broad market segment's
performance can help minimize surprises and give you a solid
foundation. A target-date fund is another option: Choose the year
you want to retire, and the fund's managers select the mix of
investments. As you age, the pros adjust the portfolio to the
allocations considered appropriate for that time frame. A
target-date fund may be the default investment in your 401(k).
Even the most patriotic investors will need to look overseas.
"The U.S. is facing a lot of headwinds, from our debt to taxes to
paying for social programs, whereas other countries have a lot of
growth potential," says Bob Gavlak, a financial planner with
Strategic Wealth Partners, in Independence, Ohio. To get the best
long-term returns, says Gavlak, international and emerging-markets
stocks need to be part of your investments. We recommend that the
majority of your assets stay home, with up to 70% of your portfolio
in U.S. stocks. But send the rest abroad, putting up to 25% in
international stocks and 5% to 10% in emerging-markets stocks.
Editor's note: This story was originally published in the June
2014 issue of Kiplinger's Personal Finance.