Hamilton Herald Masthead


Front Page - Friday, February 6, 2015

When investing, use the ‘Power of Three’

Financial Focus

Stan Russell

Many factors will affect your results as an investor – and some of these factors are beyond your control, such as interest-rate movements or the eurozone debt crisis or the sales results of the companies in which you invest. However, as you work toward your financial goals, you will find that you actually have control over three of the most important drivers of investment success: time, money and return.

Let’s look at these three elements: 

Time – Time can be a big asset – if you use it wisely. However, many young people, just starting out in their working lives, think they can wait until “later” to begin investing, as their retirement is so far away. But this could be a mistake. The earlier you start to invest, the more money you will put away, and the greater the potential for your money to appreciate. If you do wait until mid-career before you start seriously saving and investing for retirement, you will still have options, but you may need to make some trade-offs, such as possibly retiring later than you had originally planned. So here’s the key: Start investing as early as possible – and keep investing.

Money – Not surprisingly, the more money you invest on a regular basis while you are working, the more money you’ll likely end up with when you retire. Suppose, for example, that you invested $3,000 per year and earned a hypothetical 7 percent annual return. After 30 years, you’d have accumulated about $303,000 (assuming the investment was placed in a tax-deferred account, such as a traditional IRA). But if you put in $5,000 per year, instead of $3,000, and earned the same hypothetical 7 percent annual return, you’d end up with about $505,000 after 30 years, again assuming the investment was placed in a traditional IRA. The difference between $3,000 per year and $5,000 per year isn’t all that much – just about $40 a week – but after 30 years, these relatively small differences can add up to a big sum of money. Of course, this is just a simple illustration that shows how saving more can possibly put you in a better position in the future. Keep in mind that there are no guarantees and that the value of your investments will fluctuate.

Return – You might think that your investments’ rate of return is the one variable over which you have the least control. However, “least control” doesn’t mean “no control.” You can control your potential return to the extent of selecting a mix of stocks, bonds, government securities and other investments that reflects the level of risk you’re willing to tolerate in exchange for the potential growth you’d like to achieve. By creating this mix, you can help yourself avoid the biggest investment risk of all – not reaching your long-term goals. 

By investing for as many years as you can, putting in as much as possible each year and choosing an investment mix that provides you with the greatest potential reward given your risk tolerance, you can take command, to a significant extent, of your own investment success. And that’s a type of authority you won’t want to relinquish.

 This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. (Member SIPC). Contact Stan at Stan.Russell@edwardjones.com.