On Dec. 31, 2019, the Washington Post headlined: “Investors have enjoyed bull market for the ages ─ but many Americans have been left out.”
Opined writer Thomas Heath, “The U.S. stock market is set to conclude the decade near record highs, a financial boom that emerged from the wreckage of the financial crisis but left on the sidelines the millions of Americans without money to invest.”
Only 52 percent of Americans own stocks, mainly through retirement plans, leaving 48 percent with no participation in stock market growth. Obviously, one must meet basic living obligations first, including managing debt prudently, before sidetracking money into long-term investments. Good money habits start early in life and that includes “saving for a rainy day,” as parents and grandparents once urged, and should do so today as an example to children who are watching and learning. At one time “home ec” (home economics) was taught in schools; now, not so much.
The goal of savings is freedom ─ economic freedom, peace of mind, financial independence, choices. The goal for every person, those just starting out, or those anywhere on the age wave curve, is to have at least one year’s worth of living expenses in a money market fund or other safe repository as a start. In a 40 to 50-year working career, you will encounter income interruptions, some by choice and some forced.
Debt management is an art form and financial advisers can help you to make prudent choices. With college or other debt, pay down high cost debt first. Use credit cards strictly to get cash back or points toward travel and hotel stays, paying off the balance monthly. The interest rates on credit card balances, payday loans and car title loans are outrageous, a modern form of indentured servitude. Aim to be debt free by retirement age.
Carry adequate levels of insurance, including life, disability, health, property and casualty, including umbrella liability. If you cause an injury or damage, you don’t want lawyers advertising “big check settlements” hounding you. All of these things are part of a basic financial plan, which includes forward looking strategies to achieve financial freedom. Every high school or college graduate entering the work force, or contemplating a major life transition such as marriage, buying a first home, starting a business, etc., should have a plan.
The goal of long-term savings is future buying power. That means investments with a reasonable chance of positive returns net of inflation and taxation. Currently, a person with a 15 percent average tax bracket with annual inflation at 2 percent, must make at least 2.35 percent on savings to break even. At a 20 percent average tax bracket (federal and state or local taxes), 2.5 percent. Current inflation rates are below long term averages and, invariably, will be higher at some point.
A diversified stock portfolio over time is likely to deliver positive returns exceeding inflation and taxation. Stock prices go up and down, and buying on dips pays off, as does patience.
Thomas Heath in his article said, “Soaring markets have minted a new generation of millionaires, aided by high-growth technology companies such as Apple and Netflix.” America and the world will continue to grow and progress, and economies will go through cycles. But to participate in long-term growth, and take advantage of “stocks on sale” during periodic dips, you must have reserve capital along with disciplined savings. The best time to buy stocks is when you have the money.
You can start investing with a few hundred dollars in mutual funds or exchange traded funds (ETFs). If you have access to an employer-sponsored retirement savings plan like a 401(k) or 457 plan, take advantage. If there’s an “employer match,” contribute at least enough to maximize the matching amount. Don’t ignore “free money.”
Heath noted, “The number of households worth $1 million, not including their primary residence, grew to 11.8 million, as of one year ago” per the Spectrum Group, “an increase of 51 percent over 2009.” No one can guarantee performance over the next decade, but the odds are that stocks will deliver positive returns in the long run. For those in their 20s, 30s, and 40s, note that retirement and old age is expensive, especially if you want to travel, have fun, and do things for family and charities. If you want to be a millionaire (adjusted for inflation and taxation), invest early and often! Time is more important than timing.
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-3553;firstname.lastname@example.org. Securities & advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis is a registered representative and investment adviser representative of SFA, otherwise unaffiliated with Capital Insight Group. He’s a Gallup Certified Clifton Strengths Coach and Certified Exit Planning Advisor.