3 Keys to Getting Your Share of Market Returns

In a world of non-stop chatter about the next big stock or cryptocurrency to own, I believe it is important to simplify investing and focus on what really matters. Remember when you played sports and your coach would always preach about the importance of fundamentals? If you are seeking a simple and effective way to build lasting wealth, here are 3 keys (or fundamentals) to intelligent investing.

First, time is the most important factor in investing. To be clear, I said time, not timing! The amount of time you are invested is most important. It is quite simple, more time usually equals more wealth. If you begin investing at age 18 and remain invested throughout your lifetime, you have a remarkably high likelihood of success. However, if you begin investing at age 50 and plan to liquidate all investments by age 60, you are going to have a much harder time achieving your goals. That being said, if you are like most people, you didn’t get started as early as you wish you would have, and that is ok. You just need to get started right away. Procrastination is not the intelligent investor’s friend.

Next, the allocation of your investments is also important. The big decision is stocks (equities) or bonds (debts) of companies. You could invest in many other places, but for now, let’s stick with these two. The question to ask yourself is would you rather own a portion of the equity of a company or a portion of the debt of a company? The answer to this question goes back to time. How long do you plan to invest before taking any withdrawals? The longer your investment horizon, the higher you should allocate your portfolio to stocks. If you have more than 10 years to invest, stocks (or slices of ownership in companies) can be a great option. For the sake of an example, let’s pretend you have 25 years to invest before you plan to take any withdrawals, it would probably be ideal for you to invest your portfolio into a diversified portfolio of stocks. John Bogle (founder of Vanguard & creator of the first index fund) and Warren Buffett (the most famous investor in American history) have both said that most investors should be investing in broadly diversified, equity index funds. Most index funds are simple and cost-effective, allowing them to work very well as a long term vessel for your wealth. A popular index is the S&P 500 which consists of the largest public companies in the United States. There are many different index funds that track this particular index. If you would like to learn more about my approach to investing, visit my website.

Finally, it is important to understand where your money is located. Is your money in a Roth IRA, Traditional IRA, taxable account, Roth 401k, Traditional 401k, or Health Savings Account (HSA)? For the most part, these are six vastly different accounts with the key differences being accessibility and taxability. Let’s start with accessibility. There are stipulations around accessing all six of these accounts, but some are more accessible than others. To keep it simple, let’s assume you’re under age 59 and not experiencing a disability or major life/health event. The most accessible of these accounts for you is probably the taxable account or the Roth IRA. You can access your taxable account without penalty. You could also take a withdrawal of your basis (the overall amount you have contributed) from your Roth IRA with no penalty. In terms of taxability, you usually get a tax deduction when contributing to a Traditional IRA, Traditional 401k, and HSA. Then, you pay no tax until you withdraw money from these accounts (HSA distributions are tax-free if used for eligible health expenses). When you are retired you will pay income taxes on the distributions from these accounts. Conversely, you usually get no tax deduction from contributing to a taxable account, Roth IRA, or Roth 401k. You pay no tax on the growth of either of the Roth-style accounts, but you do pay tax on the growth of the taxable accounts (usually 15% long-term capital gains). Then, you can access the Roth-style accounts tax-free throughout your retirement. Personally, the Roth IRA and the Health Savings Account are my two favorites because once you place funds in them, you never have to worry about taxes again (if you follow the rules).

To be clear, I do not intend for this to be specific investment or tax advice for you or anyone else. In order to determine where and how to invest for your specific goals, you should talk with a licensed professional, preferably, a CERTIFIED FINANCIAL PLANNER™. To determine your specific tax consequences, consult a licensed tax professional. Also, it is important to understand that all investing involves risk, and you can lose money through investing.

Please reach out to me directly if you would like to discuss anything you have read in this post. The best way to reach me is by email (Blake@wavewealthplanning.com) or book an initial consultation with me on the website. Investing can be complicated, but I believe in making it simple so more good people can build long-term wealth.

Here to help,

Blake