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Where I Stand: Investing for Future Wealth and Retirement

By Bill Martin
Retired business instructor
Feather River College
My wife’s nephew, Aaron, is beginning to consider his future, and I was asked to help. My concern was that many ask for financial advice and won’t follow through. Others take the advice but only temporarily. Some stay with it permanently (as I hoped Aaron would).  
Personal finance was one of my favorite subjects to teach at Feather River College. Long before that, the financial strains of a divorce had motivated me to both budget and invest. This is a “crawl before you walk” process and takes some time. Aaron still has 18 years before the typical retirement age of 65.
The first step is living on less than you earn. It requires budgeting, self-discipline, and a commitment to delayed gratification (understanding true needs instead of one’s wants).  Without practicing those, you might work your whole life long.
Assets that go down in value (depreciate) include vehicles and personal property. Other assets exhibit the reverse (they appreciate) and go up in value, referred to as growth. Those are the ones to seek.
When buying real estate, the least valuable home in a neighborhood has the best potential for growth or resale, particularly if modest improvements are made. That least expensive housing provides the potential for appreciation and for attracting more qualified buyers or renters when you leave.  
Beyond maintaining a savings account, investment in the nation’s securities markets is a good place to start. There are three categories of such investments. They represent the cash market (savings, money market accounts or certificates of deposit), the debt market (bonds that pay a fixed percentage of interest over time), and the equity market (stocks).
The cash market has the least risk, the equity market has the most, and bonds are in the middle, depending on current conditions and their maturity dates.
An immutable law of investing is that high rewards are only possible with high risk of loss. Low risk means greater safety but it lowers returns. Greater risk can be tolerated by those with many years remaining until their retirement age because there’s time for growth to overpower losses if one starts early. As you near retirement, converting to securities with less risk is advisable. During retirement, asset preservation is the favored strategy. Nephew Aaron still has 18 years, so he can accept moderate risk for another 10 to 15.
Next, the most important rule for investors who seek success is to compound their investment gains. When you start with $100 and it grows by $7 within a year, reinvest the proceeds and start year two with a balance of $107 growing for you. Don’t “eat” your gains.  Compound them so that each year you begin with more. Experienced investors know that tax-sheltered compounding is the best kind, and provides the steepest climb for your assets. Without an annual tax bite, this invests those tax savings.  
If you start with $100 and invest more monthly, that $100 will grow faster. You can boost it even more by taking a portion of any raises you receive and add that to your monthly investment.
Aaron is lucky because he works for a community college. Like hospitals, all public schools, and many public agencies, employees have access to a 403b7 account (the number represents a section of the IRS Code). In addition to his monthly paycheck’s routine withholdings, he can add to that investment with a pre-tax contribution.  
What he sets aside will decrease the taxable income in his monthly check.  Circumstances vary, but I have seen that a $100 per month pre-tax contribution only reduced my monthly net check by $40 because I stayed in a lower tax bracket.
I’ve been a mutual fund investor for 35 years. I tried investing in individual stocks, but it’s time consuming to manage those yourself.  Mutual funds bypass that, and provide additional benefits. Mutual funds are asset pools with specific investment goals, and they are managed by professionals with knowledge, resources, and talents far beyond my own. When I own shares in such a fund, I get the same rate of return the billionaires do. 
Depending on its goal, each fund holds hundreds of stocks, bonds, and sometimes cash as well. The diversification is so broad that a major loss in some of its contents doesn’t affect the gains much, and even a downturn of an entire market segment doesn’t wipe out their value.  Again, this is dependent on the risk profile of the fund.  
Mutual funds do not require “trading.” I acquire and hold. No one should engage in an emotional buy-sell-buy cycle. Now, let’s look at one of the most powerful investing methods anyone can use for consistently great results!
Dollar Cost Averaging (DCA) will minimize the cost of the shares you buy in a fund (or even a stock, if you prefer). It’s a simple method that requires planning and discipline. Whether markets are up or down, you minimize the cost of every purchased share. Here’s how it works.
DCA means buying the same security, at the same interval, and for the same amount each time. $100 a month will buy you four shares of Fund X at a price of $25 per share. If the price at your next purchase interval is $20, you’ll acquire five shares. If the price rises to $30, you’ll acquire 3.333 shares.
Did you notice that you’d acquire more shares when prices are down and fewer when they are up? This is what minimizes the average cost per share. You benefit in both up and down markets. You can do this on autopilot for years at a time while letting the pros manage the fund. Sleep well at night and focus on other things in life.
Trying to liquidate your investments over time? DCA works identically for redeeming shares. In both directions, it protects you from buying in at the highest price or selling out at the lowest one, getting the highest average payout possible.
The last lesson I shared with Aaron (and now with you) is one of the most important motivators I’ve experienced. Building wealth is like a three- legged stool. Three things will always control your financial fate. They are the amount you invest, the rate of return you get, and the time over which you’re investing. Time is my favorite.
Few of us start out as millionaires, and most of us can’t pony up thousands of dollars a month to invest late in our careers. Nobody can consistently earn a 20% rate of return for multiple years in a row. The thing that all of us have in equal measure is time. Time lets compounding work for us. Those who start early can have the greatest advantage as investors, no matter the size of their initial outlay. 
The tortoise really can outrun the hare. That’s what I advised Aaron. Start now, live on less than you earn, and make regular contributions to your investments. You’ll cross the finish line with a smile on your face and money in your pocket!

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