Some educators are intimidated by investing. Hearing terms like “IPO,” “price/earnings ratio” and “margin” may make you think that it’s all too complicated and you’d be better off just stuffing cash under your mattress.
Not so! You don’t need to understand complex jargon to build a sound financial future for yourself. While some of the technical terminology may sound confusing, there are actually some very simple concepts that can help you meet your goals.
- Start now. Long-term compounding is one of the most powerful tools available to investors. With compounding, your savings generate earnings, which are then reinvested to generate their own earnings. It’s never too late to start, but the sooner you begin, the better. The chart below illustrates the power of compounding.
- Don’t avoid risk; manage it. A well-balanced portfolio divided among asset classes such as stocks, bonds and cash equivalents may help you manage risk and reduce volatility (ups and downs). Different asset classes tend to react differently to economic and market conditions, so gains in one asset class may help offset losses in another. Your asset allocation, or the mix of asset classes you use, plays a large role in determining the returns your money earns.
- Maintain a long-term outlook. Stock market results in 2008 were miserable. The S&P 500®, a broad measure of the U.S. stock market, was down 37.0% in 2008. But if the short-term drop had scared you into selling, you would have missed the 26.5% returns the index posted in 2009. Over the past 25 years, 1988 to 2012, the average annual return of the S&P 500 has been 11.3%.*
- Avoid or postpone taxes when possible. Tax-deferred or tax-free accounts can give your investment portfolio a significant boost. Because you don't have to pay taxes on your earnings every year, your investments compound untaxed, significantly enhancing their long-term growth potential. Examples of tax-advantaged accounts include your 403(b) or 457 plan; individual retirement accounts (traditional and Roth); 529 college savings plans; Coverdell education savings accounts; and health savings accounts (HSAs). In some cases, you can defer taxes on your contributions to these accounts as well, helping your account to compound even faster.
- Avoid unnecessary fees. Every investment has fees, but some have far more than others. These fees can eat into your return (for illustrations, use the calculator “How Will Fees Affect My 403(b) or 457 Plan Savings”). Be sure to read the prospectus or other information about the investment. You can also check fees at 403bCompare.com.
Get Expert Help
If you’re interested in working with a financial advisor, be sure to download the CTA Guide to Working with a 403(b) or 457 Advisor.
* Source: Standard & Poor’s, www.standardandpoors.com. Past performance is not a guarantee of future results. Individuals cannot invest directly in an index.