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How To Start Investing

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How To Start Investing

We see a lot of people that are saving up for their retirement through a savings account or a roth 401k. Unfortunately your roth 401k is maxed out at $51,000 which leaves a lot people saving their money in their savings account, with around 1.5% compound interest. Unfortunately the average inflation rate is 2.1% per year, which means that these people lose 0,6% of their savings each year. The solution lies in the stock market.

The S&P 500 index, established in 1871, has yielded a annual 10% since they were created. If you invested 1$ in the S&P 500 index in 1871, it would have grown to $247,563.55 today.
This is ofcourse not a very realistic number, as no one lives more then 100 years. But, lets take a real life example of 40 years. If you had invested 1$ in the S&P 500 index in 1970, you would have $78.30 right now. If you would have put in a $1000 at that time, it would have grown to $78300.00 right now.
How a single $1,200 investment grows over time
 

Savings Account (0.5%)

Money Market Fund (2%)

Certificate of Deposit (5%)

Stock Market (9%*)

Initial investment

$1,200

$1,200

$1,200

$1,200

5 years

$1,230

$1,325

$1,532

$1,846

 

10 years

$1,261

$1,463

$1,955

$2,841

15 years

$1,293

$1,615

$2,495

$4,371

25 years

$1,359

$1,969

$4,064

$10,348

 

30 years

$1,394

$2,174

$5,186

$15,921

 

35 years

$1,429

$2,400

$6,619

$24,497

40 years

$1,465

$2,650

$8,448

$37,691

*Based on the stock market's historical rate of return.
 
Now, this looks great and all, but with $37,000 your not going to retire. So, lets switch the number to $1200 a year, which is $100 a month.

Savings Account (0.5%)

Money Market Fund (2%)

 

Certificate of Deposit (5%)

Stock Market (9%)

Initial investment

$1,200

$1,200

$1,200

$1,200

5 years

$7,321

$7,695

$8,494

$9,674

10 years

$13,596

$14,865

$17,803

$22,713

 

15 years

$20,030

$22,782

$29,684

$42,775

25 years

$33,390

$41,174

$64,200

$121,136

 

30 years

$40,323

$51,829

$88,899

$194,211

35 years

$47,432

$63,593

$120,423

$306,646

40 years

$54,721

$76,582

$160,656

$479,642

 
As you can see,  becoming a millionaire just became a lot easier according to these statistics. Now you might think, what are the risks? The general idea of the stock market is that it is extremely volatile, and has a lot of risks carried with it. Luckily, this is not true.

What we are doing here is investing in the S&P 500 index fund, instead of a simple stock. The S&P 500 is made up of the 500 richest companies in america. This means that with this fund, you are essentially investing in 500 different companies in more then 50 different sectors. This means that your exposure to risk is minimal, as different sectors of the market each give different results.

If the Biotech industry has a small dip, and the Technology sector is running up, the risks level each other out. In case of a financial crisis the only thing you have to do is to hold. In 95% of the cases, a financial crisis has never lasted longer then 5 years, and in 100% of the cases a financial meltdown has never lasted longer then 10 years. We therefore advice you to start investing with atleast a 10 year time horizon.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

 

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