How to Invest and Grow your Wealth

How do you invest and grow your wealth with markets down and inflation up? Are you kidding? No, as a matter of fact this may very well be a perfect time. But we are in a bear market. Consider that stocks are on sale. Will they rebound? Let’s see what history tells us!

What is a Bear Market?

A bear market is defined as a decline in the market indexes of 20% or more. All the indexes are in bear market territory in 2022. The average bear market lasts about 388 days. Since 1928, we have had one about every four and a half years.

The S&P 500 is up 10.26% per year over the last 100 years. That includes 21 different bear markets with indexes down over 20%. Long-term results are positive, so do not panic and stay the course.

Do you have a course? What do you know about investing? What are you investing in? What are your goals for accumulating wealth? Do you have a strategy? With these questions in mind, let’s begin our journey into the world of investing.

Education

Yes, you need to educate yourself and learn about investing. Don’t give your money to anyone to invest for you, not even a professional. Learn about the markets. S&P 500, Dow, Russell, NASDAQ, Bond Market, real estate market, taxes and retirement planning.

They are linked together. You need to know what they are and how to invest in them. Your biggest wealth-building strategy is to get out of debt and invest your money to grow it to large sums. It can be done.

Hire a professional to help you on your journey. Do not blindly follow their advice. Make your own decisions based on what you know and what is recommended by the professional money manager. Make them teach you. Ask them why.

Stocks

What is a stock? It is often referred to as equity. This is ownership in a corporation, such as Apple (AAPL). If you purchase shares in AAPL, you become an owner of the company. If the stock pays dividends, then you will receive a return on that share. Dividends are often paid quarterly.

As a stockholder, you also take on risk as an owner. The value of the stock can go up and it can go down. Either way, you have risk. As discussed previously, there is a potential for a slow but steady rise in the value of the stock. Often the performance of the company, profitability, impacts its value.

Learn about the many different types of stocks: common stock, preferred stock and dividend-paying stock, to name a few.

Exchange Traded Funds

There are many different types of Exchange Traded Funds (ETFs) available for investing. Basically, these funds are a pool of investment instruments. ETFs are available for just about anything you may want to invest in. There are ETFs for bonds, stock industry sectors, commodities, currency and inverse. These are just some that are available. Currently, there are more than 3,000 ETFs listed in the United States.

Mutual Funds

These are pools of funds managed by an investment professional. They can be equities, debt or money market funds.

Further breaking this down, you can have an equity fund that only buys Large Cap stocks. Or, some might prefer socially responsible companies. This type of fund would only buy environmentally acceptable stocks.

When I look at mutual funds, I generally only seek those funds that have paid out net of fees above 10%. Their track record has to be at least 10 years. The longer the track record, the better. My favorite are those funds that pay more than 10% and have an 80-year track record.

Do your homework.

Bonds

Bonds are debt instruments. For example, your mortgage is debt. The holder of your mortgage may take several mortgages, package them together and then sell a bond at a fixed rate of interest.

There are many different types of bonds from corporate AAA rated to junk bonds. Municipal bonds are issued by a governmental agency such as a state or county government. Then, there are Treasury Bonds issued by the federal government.

As you can see, the risk varies from the most secure Treasury Bonds to junk bonds. The greater the risk, the higher the rate of return.

These instruments are known as fixed income because the interest rate to the borrower and lender is fixed.

Real Estate

Where do we begin with this asset class? How about we begin with personal home ownership. I know many are saying that this is beyond their financial ability. “Prices are too high; now, mortgage rates are at least double from where they were a couple of months ago and appear to be going higher. Not going to happen for me.”

Well, newsflash: real estate has gone up for more than 100 years. If you believe it will be less expensive next year, then wait. This is an area where you should move forward when you are ready. Prepare for a successful home ownership. Get on a budget, pay off all consumer debt and have an emergency fund.

Once these are in place, then go for it, and yes, a good solid down payment is necessary. Mortgage rates, while higher now, are not at all-time highs. They most likely will come down and you can refinance then.

As a pure investment-producing income, there are many possibilities. Do you want to invest in commercial real estate or do you prefer residential? It is up to you. Which are you comfortable with? How will you pay for it? Is financing an option? Again, do your homework. Educate yourself on the options available.

Taxes

This is everyone’s favorite topic, I am sure. Who knows the tax code? Who cares about the tax code?

Spend some time here and understand the potential impacts on your wealth building, as giving away more than you need or want to will impact your ability to grow your wealth.

The easy stuff is don’t pay more than you have to. Adjust your withholding to pay your taxes. Do not overpay. A tax refund is not a gift, it is your money. Keep it.

Here is a link to calculate how much you should pay: https://thepersonalfinancewizard.com/tax-withholding-calculator/.

This is only a small part. Once again, hire an expert. The greater your net worth, the more tax help you may need. Learn the tax impact of your transactions and what that means to your investment returns.

While none of us likes paying taxes, learn the game. It will save you a bundle.

Retirement Planning

You might say, “I will never be able to retire! I could never have as much money as I will need to retire. I currently have nothing saved for retirement.”

Take a deep breath. It is possible, if you plan properly. Instead of working toward an age, work toward accumulating enough to live off of. The first thing to do is to create a retirement budget. This budget needs to include anything and everything you plan on continuing into retirement. Then, add things that you want to do in retirement. Once your budget is built, you can then plan on what amount you will need to save to achieve your goals.

There are always numerous ways to achieve your dreams. Let’s assume for a moment that you have prepared a retirement budget. That budget says you need $65,000 per year. The Social Security average monthly payment was $1,614 per month, or $19,370 per year. Subtract that from your needed amount and you get $45,630 additional that you will need.

If you have a pension (these are rare these days, but some folks do), this would further reduce what additional amount you will need. How much will you need in retirement savings to achieve your goal?

Continuing with this example, if you need $45,630 and we assume a 10% return (per our discussion above) you will need about $450,000. How do you get there? The answer is not simple. More calculations.

As you save for retirement, there are a couple of things to do to position yourself for success. Begin saving for retirement as early in life as you can. The more time you have, the easier the lift. Then, get your contributions to 15% of your income as quickly as possible. Seek investment returns greater than 10%. This will move you toward your goal.

Conclusion

To wrap this up, there are many variables to consider when investing. The short answers are to learn as much as you can. What are your goals? Work toward them. Perhaps one goal is to read a book about investing. If you’re a beginner, read one on investing for beginners.

This is high-level information and you will find other possible solutions and investment vehicles.

Finally, do not do anything you do not understand. Do not do anything you are not comfortable with and will keep you up at night. Remember, this is your money and your life. You choose.

Good luck! You work hard for your money. Make sure it stays your money!

Thanks for reading. I hope you found this helpful. QCBN

By Steven Calabrese

Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner-operator of a website known as thepersonalfinancewizard.com. Such topics as budgeting, investing, paying off debt, and goal setting are discussed.