Too Young to Think About Investing? Think Again!

Maintaining a long-term time frame may also give you the luxury of being able to tolerate short-term market volatility. Because while past performance cannot guarantee future results, it’s worth noting that longer-term holding periods have often been associated with a lower likelihood of portfolio losses.

[vc_row][vc_column][vc_column_text]

The word compounding describes what happens when your investment earns money and this amount is reinvested and generates more earnings.

[/vc_column_text][vc_column_text]Time and compounding is a simple equation with potentially powerful long-term results.

Compounding — the best kept secret of long-term investment success.

“How did it get so late so soon?” — Dr. Seuss

Dr. Seuss’s whimsical take on life has been delighting children of all ages for generations. His simple, but powerful words continue to resonate today, even in the context of planning for a financially secure future. Because when you get right down to it, the younger you are, the more you potentially have to gain by taking advantage of the time ahead of you.

Compounding: A Snowball Effect

The word compounding describeswhat happens when your investment earns money and this amount is reinvested and generates more earnings. The process of compounding has often been compared to the way a snowball grows as it rolls downhill. You might say that a longer investment time frame is akin to a bigger hill, because each creates conditions for greater growth potential.
And thanks to the potential role of compounding, the more you invest, the more significant the potential long-term benefit. For example, assume that two workers both earn $30,000 annually. Each invests 6% of income and receives a 3% raise each year. Investor A never increases her investment, but Investor B increases her investment by 1% of income each year until she is eventually investing 12% of income. Over the course of 30 years, each account earns an 8% average annual investment return.
The result? At the end of the 30-year period, Investor A would have $296,864, whereas Investor B would have $535,005 — simply because she took advantage of time and gradually increased her investment amount.

Time and Compounding — A Simple Equation

One easy way to estimate how long it may take for compounding to help double the value of an investment is to use the “rule of 72.”

Here’s how it works: Divide 72 by the rate of return earned by an investment. The number you end up with equals the approximate number of years it would take for the investment to double in value, assuming it continues to earn the same return. For example, an investment earning an 8% annual return would double in value in about nine years (72/8 = 9).

Stay in It for the Long Term

Maintaining a long-term time frame may also give you the luxury of being able to tolerate short-term market volatility. Because while past performance cannot guarantee future results, it’s worth noting that longer-term holding periods have often been associated with a lower likelihood of portfolio losses.[/vc_column_text][/vc_column][/vc_row]

Inter-generational Wealth Planning:

Opening the dialogue about wealth transfer is a complicated, personal decision. It is influenced largely by how wealth holders themselves have been brought up to view money and the responsibilities that come with it.

Opening the dialogue about wealth transfer is a complicated, personal decision. It is influenced largely by how wealth holders themselves have been brought up to view money and the responsibilities that come with it.

Wealth transfer is a sensitive topic within families. But addressing it is crucial to ensuring that a planning process is created and passes from one generation to the next.

Discussing the transfer of wealth from parents to children can be uncomfortable for both parties. Yet by introducing children to the wealth management process from a young age, affluent families may be able to reduce family tensions later in life and help ensure that the planning tradition passes intact to future generations.

Closing the Communication Gap

Opening the dialogue about wealth transfer is a complicated, personal decision that is influenced largely by how wealth holders themselves have been brought up to view money and the responsibilities that come with it. For instance, some individuals may fear that discussing wealth with their children will lead to feelings of expectation and entitlement. Others may simply prefer to control all money issues themselves. Still others with young children may be uncertain about their future wealth and reluctant to discuss it until their children are older and have proven how well — or poorly — they handle money.

Embracing the Planning Process

One strategy that may help families overcome planning challenges is to think about wealth planning not as a one-time exercise, but as a process that you live with every day — and that you integrate into children’s lives at a very early age.

For instance, when children are young, you can teach them to divide their allowances into three portions — one for saving, one for spending, and one for giving. Consider matching their giving and saving money and set an example by handling your own money in a similar fashion.

Once children become teenagers, allow them to make their own decisions about how they spend their money, and as difficult as it may be, allow them to live with the consequences of their decisions. As children make the passage to adulthood, gradually involve them in the family business as well as the family’s charitable giving activities.

Creating a Win-Win Solution

Certainly, the more wealth a family has, the more important it becomes to make managing wealth a process, especially if wealth has existed for multiple generations and there are instruments such as family foundations in place. In this way, early involvement helps families prepare heirs for their future role as stewards of the family wealth. It also helps develop the skills and experience needed to manage a family business or wealth plan, while ensuring that such knowledge is shared and passes successfully to the next generation.

Working With Professionals

Working together with your team of planning professionals — your financial advisor and estate and/or tax planner — you will be able to assess your current situation and develop first steps toward implementing a plan of action.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual’s situation is different. You should contact your tax and/or legal professional to discuss your personal situation.

Does Your Portfolio Reflect Your Risk Tolerance?

There are many types of risk associated with investing. Understanding each type and the effect it may have on your portfolio returns is crucial to your long-term investing success.

There are many types of risk associated with investing. Understanding each type and the effect it may have on your portfolio returns is crucial to your long-term investing success.

Because all investments entail risk, you may want to review your mix of stocks, bonds, and cash investments with an eye toward creating a risk/return profile that is appropriate for your situation.

Smart investors understand all types of risk — and use that knowledge to their advantage

When it comes to investing, many people associate risk with losing money. But investing entails different types of risk. Understanding each type — and the potential return associated with your retirement portfolio — can help you determine whether your investments are appropriate for your situation.

Examining Risk and Return

Stocks historically have exhibited the highest level of market risk — or the potential that an investment may lose money in the short term. Over long periods of time, however, stocks have outperformed both bonds and cash investments.1 This risk/return tradeoff may influence how you allocate your investments. For instance, consider weighting assets that you intend to keep invested for 10 years or more toward stock investments.

Bonds carry their own risks — credit risk, or the possibility that a bond issuer could default on interest and principal payments; and interest rate risk — the chance that rising interest rates could cause a bond’s price to fall. Ascending interest rates historically have influenced the prices of bonds more directly than the prices of stocks.1 When short-term rates are on the rise, investors may sell older bonds that pay a lower rate of interest — causing their prices to fall — in favor of newly issued bonds that pay higher interest rates. On the plus side, bonds historically have exhibited less short-term volatility that stocks, although past performance is no guarantee of future results.

It’s also important to look at cash investments, such as 3-month Treasury bills, from a vantage point of risk and return.1 Although Treasury bills typically experience a low level of volatility, they may be subject to inflation risk — or the possibility that their returns may not keep pace with the rising cost of goods and services. For this reason, you may want to use cash investments for short-term situations when you expect to access your money within 12 months or less.

Putting Risk in Perspective

Because all investments entail risk, you may want to review your mix of stocks, bonds, and cash investments with an eye toward creating a risk/return profile that is appropriate for your situation. Owning different types of assets may increase your chances of experiencing the benefits associated with each, while mitigating the corresponding risk. Your retirement portfolio won’t be risk free, but you will have the confidence of knowing that you’ve done what you can to manage a potential downside.

This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific investment strategy. For this reason, be sure to seek advice from knowledgeable financial professionals.