The Power of Compound Interest

A dollar is worth more today than it is tomorrow, and with the help of compound interest, that couldn’t be truer. This concept is often referred to as the “time value of money” and it shows us that those who are too hesitant to invest their money are in fact, choosing a negative investment.

It seems like discussing retirement is usually reserved for those who are older and approaching the end of their careers. For one reason or another, young people are seldom encouraged to open and contribute to investment accounts while the potential for growth couldn’t be greater.

What is Compound Interest?

To better understand compound interest, we can contrast it with simple interest. With simple interest, you can gain a return on your initial investment over any number of periods. If you invest $1,000 and the return rate is at 5% annually, your account will earn $50 year after year. The growth will be linear. At the end of the first year, your account balance would be $1,050 and increase to $1,100 and the end of the second year, then $1,150, and so on.

On the other hand, compound interest allows the growth to be exponential. The 5% annual return rate is a percentage of the new account balance year after year. The return would increase every year instead of just being the same $50. Because your account balance is higher each year, so is your return.   At the end of the first year, your account balance would be $1,050 and increase to $1,102.50 at the end of the second, then $1,157.63, $1,215.51, and so on.

The Power of Starting Early

Compound interest can be highly profitable, especially over the long run. To illustrate this, we’ll compare a set of twins, Simon and Duncan, who took slightly different approaches to investing and compare the results when they reach retirement.

Simon decided to begin investing as early and as much as possible. At age 27 he had zero dollars in his IRA but decided to dedicate $6,000 per year until retiring at age 60. Over the 33 years, his highly diversified portfolio had an average annual return of 11%. When he retired at age 60, his IRA’s balance sat at $1.65 million.

Duncan brushed off retirement savings when he was younger. He’s got so much time left, so why worry about it right now? So he opened up his retirement account 10 years later than his brother Simon. At age 37, Duncan began investing $7,000 per year ($1000 more than his twin) and received the same 11% annual return and retired at age 60 just like Simon. But his IRA’s balance only grew to $638,000.

Those 10 years made a difference of over $1 million! From age 27 to 37, Simon only contributed $60,000 but those early contributions made it so that he was over a million dollars richer at age 60. Duncan did very well but could have earned so much more had he simply started a few years earlier.

This chart shows us that the total amount each of them invested was very close. But Simon’s early start gave his money more time to grow, making his balance down the line so much greater. And the huge financial advantage does not end there. During their retirement years, Duncan’s account would continue to grow at about $70,000 per year, while Simon’s account would be earning about $182,000 per year (assuming 11% avg. annual return rate). After 10 years in retirement, Simon will have earned over $1.1 million more than his brother.

The purpose of this example is not to urge anyone to compare their numbers with anyone else’s. We all have unique financial positions. Rather, it is to help us understand the extreme potential in long term compound interest and the colossal effects of putting off investing. “We’re in a recession so it wouldn’t be good to invest when everything is crashing…There’s an election coming up that will crash the market…Stocks have been so green lately, I don’t want to buy in when everything’s high…” We can always come up with reasons to not invest in our futures. But what a mistake it would be to act as the slothful servant who buried his talent out of fear, instead of investing it like his brothers (Matthew 25).

By Brenton Walker

References

“Compounding and the Cost of Waiting.” Compounding and the Cost of Waiting – Wells Fargo, Wells Fargo, https://www.wellsfargo.com/financial-education/retirement/compounding/.

Which Investment Account is Right For Me?

It can be daunting to plan out retirement when there is a seemingly endless number of rules, components, and factors to consider. Because of the complexity of it all, so many put off investing until much later in life, when the greatest potential for long term growth has already passed. As it is important to choose the right option depending on one’s unique financial position, here are the foundational elements of ten different investment accounts that will be discussed in more detail below.

(Numbers for 2022)

Individual Retirement Accounts (IRAs): Traditional vs. Roth

IRA accounts are the perfect place to periodically deposit money so it can continually invest and grow over many years to make retirement much easier. Most everyone qualifies to open an account and there are few barriers to entry. Here are the main differences between Traditional and Roth IRA accounts to know about:

Joint/Individual Investment Accounts

Custodial Accounts

SIMPLE IRAs

401(k)/403(b)

Roth 401(k)

Solo (Roth) 401(k)

These plans have all the same tax and contribution rules as traditional 401ks. But Solo 401ks are made for self-employed business owners who don’t have any other full-time employees. You also have the option to have a Solo Roth 401k plan, which would employ the Roth tax rules.

ESA

529

“This is a good choice for you if…”

Roth IRA: If you want to consistently contribute money over the long term to an account with major tax benefits that’s separate from any employment or other retirement program.

Traditional IRA: If you want to roll over a previous 401k plan or if you want to have a tax deduction with your contributions now instead of a tax break in retirement.

Simple IRA: If you are the owner or employee of small businesses.

401(k)/403(b): If you are offered this option through your employer.

Solo (Roth) 401(k): If you own a business, have no other employees, and want to contribute much more per year to retirement.

Joint/Individual: If you already max out your plan through work and max out a Roth IRA but want to invest even more.

Custodial: If you want to invest for expenses to benefit your children, or if you want your child to have some money for any use when they reach of age.

ESA: If you want to invest for your child’s education expenses.

529: If you want to invest more than $2,000/year for your child’s education expenses.

By Brenton Walker

References

Kagan, Julia. “Simple IRA .” Investopedia, Investopedia, 26 Nov. 2021, https://www.investopedia.com/terms/s/simple-ira.asp.

O’Shea, Arielle. “529 Plan Rules and Contribution Limits.” NerdWallet, 19 Sept. 2022, https://www.nerdwallet.com/article/investing/529-plan-rules.

Williams, Rob. “Saving for College: Coverdell Education Savings Accounts.” Schwab.com, Charles Schwab, 24 Feb. 2021, https://www.schwab.com/learn/story/saving-college-coverdell-education-savings-accounts

Wednesday Wisdom from Main Street Money

Matson On Market Bubbles

Losing money in bubbles is not just something that happens to “dumb” people or “other people.”  It can happen to the most brilliant of people, it can happen to you, and maybe it has in the past, and it can literally destroy your life savings. No one knows where the next bubble is going to be in advance, but you can protect yourself from them by following the three simple rules of investing. If it is highly popular and on the cover of every magazine, chances are it is not a prudent investment, but rather a bubble waiting to happen.

Matson On Wall Street Bullies

You should know that most larger financial organizations don’t want you to solve these problems (with investor behavior). It is simply not in their best interest. Your problems are their profits.

Excerpts from Main Street Money by Mark Matson

Wednesday Wisdom from Main Street Money

Matson On Facilitators

It’s my belief that financial advisors don’t want to upend the gravy boat, and thus tend to tell clients what they want to hear. Instead of helping you fight your instincts, emotions, and perception biases, they inadvertently use them against you. There is good news and bad news in that scenario. The bad news is that if you have the wrong advisor, one who’s not really a coach, you are in danger. The good news, as an investor, is that if you have the right coach, and the right support group, you’re probably going to do fine.

Excerpts from Main Street Money by Mark Matson

Elections Impact on the Market

Now that the election is over, investors are wondering what the future has in store for their portfolios. The reality is that while elections may have short term impacts on the markets, over the long run, the impact is minimal. A Free Market System is based on capitalism, which always finds a way to thrive. Our structured portfolios are based on a long-term investment philosophy and will be more efficient than active management if and when taxes increase. Our portfolio managers at Matson Money are prepared to rebalance if necessary to ensure you maintain your expected risk tolerance level.
So what should you, as an investor do now?

1. Stay positive. Nothing beneficial has ever come out of being negative.

2. Get educated to break the investor’s dilemma.

a. Fear of the future leads to trying to find someone who can predict the future.

b. Since nobody can predict the future accurately, investors look to track record investing, which academically has proven to be disastrous.

c. Trying to find the right answers leads to information overload, which leads to frustration and emotion-based decisions.

d. Since we as humans gravitate toward pleasure and retreat from pain, we break the rules of prudent investing and sell investments that are doing poorly and buy what’s increased in value.

e. This, in turn, leads to performance losses, which leads to more fear of the future. The investor’s dilemma starts all over again in a never-ending cycle.

We, as investor coaches, are here to help you break the investor’s dilemma and tune out all the media hype of doom and gloom. Every month we offer educational classes to help you understand what’s really important in investing. Our ultimate goal is to guide you along the road to true investing peace of mind.
Call us to find out when the next investor coaching session is and reserve your seat.

Words of Wisdom from Main Street Money

Becoming a Seasoned Investor

Seasoned in my mind, means several things, such as:

  • Being able to withstand physical hardship, strain, or exposure.
  • Being able to bear up under hard times.
  • to be competent with a skill or ability.
  • When you are seasoned, you can see the truth about a situation.  You are not naive.  Naive means deficient in worldly wisdom or infomed judgment, lacking in experience, or to learn from experience.

When you are seasoned, you become prudent.  But here’s the catch: Most investors are not mature or seasoned, nor are most advisors.  They repeat the same mistakes over and over again ad infinitum, without really learning.  Unseasoned investors chase markets.  Unseasoned investors also panic in down markets.  They stock-pick, they invest in track records, and they market-time like crazy.  That last type of investment behavior really ticks me off, and I see it all the time.

Excerpts from Main Street Money by Mark Matson

 

 

 

How to Prepare your Portfolio for the Unknown

Unless you’ve been living under a rock since New Year’s Day, you should be well aware of the

tumultuous events that have been taking place around the world – the disaster in Japan and the

uproar in the Middle East and North Africa are just a few global measures that are causing

economic changes around the globe. We’ve seen gas prices soar and a rise in food and beverage

commodities, but the place in which these changes are especially apparent is the stock market.

Inflation has caused investors to shift their assets and determine which of the world’s financial

markets are being hit the hardest with higher interest rates and a rise in inflation. If you have any

game pieces playing in the stock market you’ll surely want to know which markets are being

affected by the ever-changing economic fundamentals. Let’s discuss the possible risks that your

portfolio faces, and aim to strengthen any weak spots.First off, let’s discuss the risks you must

consider – inflation and interest rates. These are two of the biggest factors to put into perspective

when considering stock market choices. Currently, higher energy and commodity costs are

sticking it to both consumers and producers. However, the big question that investors need to

mull over is how much of these high prices are due to speculation. Instead of looking at

speculations in the stock market, it’s crucial to consider supply and demand realties, and how

they will subsequently affect inflation, and in turn interest rates. Possible solutions to market

volatility and the risk of rising inflation and interest rates starts with broadly and efficiently

diversifying your portfolio. Here are some suggestions of market choices to invest in during this

time: U.S. and international stocks, commodities, inflation-protected bonds, real-estate

investment trusts and cash, all of which have the ability to withstand inflationary bouts.

Next, let’s discuss the risks you must anticipate – war, disasters, political and economical

upheaval and social unrest. While the stock market is extraordinarily resilient, and has been

fighting against all the shocks in 2011 so far with great momentum, it’s hard to say whether it

will continue to stand firm against the current troubles in the Middle East and Japan that are

disrupting the technology, automobile, and oil industry. Possible suggestions for anticipating

these risks include adding gold and other precious metals to your portfolio, as well as

implementing hedge-fund-like long-short strategies, which attempt to generate stock-market

returns, but with lower risk. Essentially, you bet that some investments will rise while others

will fall.

Of course, we must discuss the risks that never go away – markets and companies. Yes, market

risk is inescapable, but don’t view your portfolio like betting at a horse race – because the

favored winner may inevitably lose horribly. The key to market strategy is diversification and

implementing a safety margin. Keep these three risks that all investors should understand in

mind: valuation risk – overpaying for an asset, fundamental risk – buying something that turns out

to be flawed, and financing risk – using leverage. Other suggestions include avoiding

concentration in similar stocks and mutual funds, as well as never overlapping markets or

sectors.

Finally, a risk you must fear is that of playing it too safe. It’s a difficult balance to find – risk it

all and you could end up with too many losses, risk too little and you could be in danger of not

having enough money in later years, and of missing major market advances. Any suggestions

for not playing it safe simply revolve around going around your judgments and taking small risks

that yield small returns. Hopefully then you’ll start to feel more confident in your investing

strategy. Unless you can predict the future, it’s crucial to embark on a strategy that will preserve

capital in a period of heightened volatility. Simple steps like assessing risk, identifying

opportunities and looking past the present and into the future can shed light on how to handle the

markets twists and turns. And even though the future of the stock market can never be certain, at

least you can equip your portfolio with a nice safety net.

Key Investment Questions

Seven Questions to Ask Before Investing:

We have all heard of the seven deadly sins, things that you should never do or you risk the harshest

of punishments. But many people don’t know about the seven deadly questions, involving your

investments. There are seven questions that one must answer before dropping a dime on investments,

otherwise their money could be lost in the fiery pits of… well you know where. Making investment

decisions isn’t easy, especially if you are just entering the game. There are a lot of details that many

people don’t think about until it’s too late. So, if you want to avoid the eternal pain of poor investment

plans, ask yourself these seven questions.

1. “Why?” It’s a simple question, but it’s often the hardest one to answer. Why are you investing,

and what do you hope to gain from it? In other words, you must set specific goals. Maybe you want

to save for retirement, maybe you want to send your kids to college, or maybe you just want some

breathing room from everyday expenses. Whatever the reason, it’s important that you define why you

investing your money and what goals you wish to accomplish in doing so.

2. “What is my time frame?” When can you expect to earn your money back? This all depends on

what kind of investments you make. Most of the forms of investments which you can cash out of at any

time, such as stocks, bonds, and mutual funds, often leave you with the risk of not getting back all that

you paid in. Many other investment options will limit or restrict the opportunities that you have to sell

your holdings. Make sure you are aware of these before you enter the game.

3. “What am I going to get out of it?” What can you realistically expect to earn on your

investments? Having an unrealistic idea of playing the stock market and striking it rich could leave

you simply striking out. Most earnings, as millions of people encountered in the past few years, are

dependent upon the market, and can rise or drop based on market changes. Other investments, such as

bonds, have fixed returns that aren’t as susceptible to market changes.

4. “What kind of earnings will you make?” Very few times when investing does a wad of cash

appear in your mailbox if you’re successful. Many times your success is paid to you in things like

potential for earnings growth, as in real estate purchases. Other times it can come through interest

or dividends. Knowing the details of your payback can help you make better decisions when you are

paying in.

5. “What’s my risk?” And here comes the basic balance in investing, risk versus reward. The higher

the risk, the higher the potential reward. Overall there is no guarantee that you will get your money

back or receive the earnings promised to you. Unless you have your money in a savings account or a

U.S. Treasury security, both of which are backed by the federal government, your money is essentially

unprotected. Make sure that the risk you take is worth the reward that you expect to achieve.

6. “Is my money diversified?” We can all remember our mothers as some point or another

saying, “Now, don’t put all your eggs in one basket.” Well your mother’s wise words ring true in terms

of investments as well. Certain types of investments do better in certain situations, so by diversifying

your investments, you are spreading your eggs across many baskets. That way if a certain industry tanks

or sector is struggling, you will have plenty of other baskets holding your money safe and sound.

7. “What is the effect of taxes on my investments?” It may seem like the nightmare of early April

IRAs/401(k)s/403(b)s

Could An IRA, 401(k), Or Any Other Qualified Plan Be Your Only Retirement Savings Solution?

Absolutely not, here is the problem…

The money in your IRA/401(k) or other qualified plans is not all yours!  As much as 40% of it (maybe more) belongs to the government because your invested money is ONLY tax-DEFERRED, not tax-EXEMPT.  And you eventually have to pay tax on every dollar in your account even if you leave it all to your family.

When it comes to retirement planning, simply starting is often the hardest part.  We can help you find the best retirement planning tools but also the motivation to begin.  We can help you determine how much to save and the best way to do so including IRAs, Roth IRAs, 401(k)s, 403(b)s, 457s, and Non-Qualified Plans.

Here is the Solution…

Take some time to get a Retirement Planning Analysis.  This will solve two problems (1) determine which retirement investments are the best for you, and (2) how much you need to save to reach your retirement goals.

Contact us at info@proinvestmentcoach.com to set an appointment or call us at 800-332-8327.

2012: New Year, Same Advice

We have all been conditioned by the financial services industry to ask the question, “What will the markets do in the new year?”  There is always someone in the financial services industry who will attempt to answer that question with some prediction.  Sometimes they guess right, but more often than not they guess wrong.  Our answer to that question remains the same:  WE DON’T KNOW WHAT THE MARKETS WILL DO THIS YEAR!

We are not fortunetellers.  We do not own and do not want to own a crystal ball.  The financial markets are controlled by over six billion people making daily buying and selling decisions.  One of our basic views is that no one knows whether the markets will go up, down, or remain unchanged over the short or long-term.  What we do is properly position our clients with well-diversified, efficient portfolios to take advantage of market conditions.  Our goal is to obtain market returns.

One of our most important responsibilities to our clients is to provide the coaching to keep you disciplined.  We can help you to stay focused on your long-term goals and not panic when markets go lower and not to become greedy when the markets rise.  Investing this way is not necessarily glamorous or sexy, but very prudent.  Fear and greed are the two most powerful emotions that destroy investors’ peace of mind and their investment returns.

As we enter 2012, we hope you have peace of mind on your investments and retirement goals.  This is accomplished by attending our Coaching classes where we teach you more about our Free Market Investment Philosophy, our Free Market Efficient Portfolios, and our Free Market Strategy for capturing Market Returns with lower volatility.

Our advice remains the same:  turn off the hype on TV, don’t listen to the talking heads and recognize that they have no idea what is going on in the future with the markets.  Finally, as a believer in our investment philosophy, invite a friend or relative who is not taking advantage our coaching to come to one of our seminars.  We truly want to “save the world one investor at a time!”