En español | Feeling like you’re behind the eight ball or off to a late start in investing for your retirement?
It’s never too late, although planning and saving for retirement in a market that is shaky and sometimes volatile can undoubtedly undermine even the best of intentions. A significant number of Americans 50 and older have been hit hard, and African Americans today are definitely feeling the pinch.
A recent survey by Ariel Investments, a privately owned money management firm, revealed that African Americans are less likely than whites to have money in the stock market. According to the survey, white participation rates have consistently hovered at around 80 percent, whereas black participation rates have swung between a low of 57 percent and a high of 74 percent.
In 2010, the investment rate for whites has remained steady at 79 percent, while it has fallen to 60 percent for blacks, continuing a downward trend from 68 percent in 2004, 64 percent in 2006 and 62 percent in 2008. But considering nationwide unemployment rates, this isn’t terribly surprising.
It is, however, pretty sobering news, and yet, the past is, well, the past — and the future looks more promising. The encouraging news is that, while overall stock ownership among blacks may have declined this year, for the first time in the survey's 12-year history, more African Americans are choosing stocks and stock mutual funds as the "best investment overall" relative to real estate. Additionally, only 30 percent of blacks believed that real estate was the "best investment overall" this year, compared with to the 41 percent who chose stocks or stock mutual funds.
Among whites, 27 percent chose real estate, compared with 55 percent who chose stocks and stock mutual funds.
Participation in the stock market is an important part of building wealth, because stocks have historically outperformed all other investments in the long term. Saving for retirement by investing is important and doesn't have to be complicated if you stick to basic investing principles.
Six Tips to Help You Jump Start Your Retirement Savings and Security
1) Start Early
The earlier you start investing, the more time you have to build up your money.
2) Match Investments to Meet Goals
What is your goal? Retirement? Buying a car? Saving for your children's college education? Identify your goal. Then learn about and choose an investment strategy that will most likely help you achieve it.
To protect your money and reach short-term goals, such as saving for a down payment on a house to buy next year, look to cash investments. If you want to provide a steady stream of income to supplement your wages or for retirement, consider bonds. If you want growth for the long term, such as saving for retirement or your child's education, your should focus on stocks. Historically, stocks have had the highest rate of return over the long term. From 1925 to 2002, returns were as follows:
Cash > 3.8 percent
Bonds > 5.4 percent
Stocks > 10.2 percent
3) Understand Investment Products
Many investment products are available. Here are basic descriptions of some of the main ones.
Stock or equity. When you own shares of a company's stock, you own a piece of the company, sharing in its successes or failures along the way. For example, you could own shares in Microsoft Corp. or Sears Holdings Corp.
Bond or fixed-income investment. When you buy a bond, you become a lender. The bond issuer is the borrower. The bond issuer might be a company, a city, a state or a federal government agency. They may borrow for short periods to manage cash flow or cover operating costs. They may also borrow money for longer-term goals, such as to build new facilities or pay for new technologies. Cities or states may need to build bridges or provide other community services.
Mutual fund. A mutual fund is a pool of money that is professionally managed for the benefit of all shareholders. As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. A mutual fund may focus on stocks, bonds, cash, or a combination of these asset classes.
Exchange-traded funds (ETFs). ETFs are stocks that act like mutual funds. Most ETFs duplicate a stock or bond market index, such as large and small U.S. company stocks, industry and country sectors, and bond indexes. They are bought and sold like stocks on major exchanges.
Annuity. An insurance product that pays on a regular basis over a set amount of time.
4) Understand and Manage Risk
Asset allocation and diversification are strategies to help manage risk as you continue to build financial freedom.
Individual risk tolerance, or how we feel about taking risks and losing or gaining money, affects the way we invest. Understanding how you view risk can help you select appropriate investments. If you can't sleep at night because of your heavy reliance on technology stocks, you may want to review and change your investment portfolio.
Be sure to understand risk versus reward. More risky investments, such as stocks, can make a lot of money, but they can also lose a lot of money. Bonds are generally less risky than stocks, and cash equivalents are the least risky while generally providing the lowest returns.
Because of these risks, your goals and time horizon for investing are key to selecting appropriate investment vehicles. If you want to put a down payment on a house next year, is putting all of your money in stocks a good choice? No. For a short-term goal like this, stocks are too volatile and risky to reasonably achieve this goal.
Remember that you could lose money. Your stock could go down in price. A bond issuer could fail to pay you interest or return your principal. If interest rates go up, your bond value may go down because you're locked into the lower interest rate. Currency values and political instability can hurt international stocks. And don't forget inflation, which can erode any gains that you make, especially if your money is in cash, such as a money market account making little interest.
5) Diversify: Don’t Put Your Eggs in One Basket
Investing in different types of assets reduces risk. If one type of investment goes down, another may go up, so spread your money around.
- Different assets — stocks, bonds and cash
- Different industries — health, energy, metals, etc.
- Different-sized companies — small, medium, large
Don't invest your money in one stock (e.g., Enron).
With a pool of many stocks and/or bonds, mutual funds are a way you can get diversification. Each fund has to tell you what kind of company (small, medium or large, the industry or industries, location, etc.) it invests in.
Keep in mind that having three mutual funds does not diversify your portfolio if the funds all have similar objectives, such as U.S. large- cap or global energy.
How you allocate your money in different asset classes to reduce risk and meet your investment goals accounts for 90 percent of all investment success. Diversify across asset classes. Set a mix of cash, bonds and stocks to meet your goals.
When saving for retirement, typically your investments will be more aggressive when you are young and more conservative as you approach retirement.
6) Remember to Rebalance the Allocation of Your Investments.
Rebalancing helps you stick to your investment plan. For example, let's say your investment strategy is 60 percent stocks and 40 percent bonds. One year later, stocks are down and bonds are up. Now your portfolio is 55 percent stocks and 45 percent bonds, so it's out of balance with your strategy. Rebalance by selling some bonds and buying some stock. A good time to rebalance is annually when you get your Social Security statement or if you experience a major financial event.
It’s never too late to start planning for a better future — and that future can begin right now. The economy and the markets may do what they will, but if you take advantage of the many resources available to you, you will be better equipped to make the right choices at the right time.
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