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In 2005, people spent 125% of their income. He spent the money he didn’t earn yet so he created a loan and paid interest on that loan every month. If you actually paid less interest on your money than you spent, vice versa. The returns you can expect from that hard-earned money largely depend on the level of risk associated with it. However, no risk equals no reward; Risk is not some big scary animal that we all run from.
The first thing to decide is how much money you want to earn from your investment. It can be from 1% to 30% and everything in between. The one percent return is incredibly low but very safe. In fact, 100% safe because your savings account is paying for it. If you think that you are earning money in your savings account, then you have forgotten to think about inflation. Let’s say inflation is about 3% a year. If your investments are making 3%, you break even. You didn’t earn a dime because inflation took away 3% of the purchasing power of your money a year ago. $100 today is only worth $97 in a year. If you invested 3%, which is $3, you’re back on $100. Take a discount of 3% on your returns and that is your actual return.
If you want high returns, don’t expect risk aversion. The higher the reward the higher the risk you need to consider. Bonds are currently sitting around 5%. This is a safe 5% and you will not lose that money. Once you consider inflation, it suddenly turns into gas money. Shares have outperformed every other investment over any 20-year period. Stocks take the hassle out of most, but there are many ways to enjoy the rewards of the stock market without the worry that you’ll be losing out on your kids’ college funds. You can buy an index fund that invests in the S&P 500 or Dow Jones. The S&P 500 is 500 companies. If you invest $500, $1 will be in each company. The S&P makes about 10% annually. There is little chance of the S&P going to zero, although there are years of correction. So you need to invest for the long term. If you start buying in one of those correction years, you will lose money but think over the long term and you will realize buying heavily in those correction years. Buy low and sell high is the game but many of us do it the opposite way.
When investing, not only is risk and return important, but so is your age. This may be new to you but age is very important to invest. Age tells us what level of risk we should expect. If you are 20 years old, then you should invest in the highest risk funds. This is because it takes longer for a person to replace that money if he loses it all. A senior citizen doesn’t have those years and the advice is just the opposite. LOW OR NO RISK AND INVEST ONLY IN FIXED INCOME WHICH ARE BONDS AND CDS AND 100% SAFE CHOICES. The older you are, the less risk you should be allowed to take. A good rule of thumb is 10% fixed income for each decade of your age. Do the math and determine your risk level.
There are many safe investments out there but as the saying goes, “no pain, no gain”. The reward for “pain” is a 10% and upward return that you can enjoy.
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