A baby-boomer’s guide to investing
You’re a baby boomer. You grew up in one of the fastest growing times in human history. You know about hard work and probably a little something about climbing the career ladder. Most importantly, you believe in the financial system because you have seen phenomenal growth in the stock market throughout your time. You are ready for investing in your 40s.
But now that you’re in the home stretch on your journey towards retirement and most likely juggling obligations such as tuition for your kids and mortgage payments, you’re probably looking around and feeling just a tad bit uneasy. Don’t worry. It’s normal.
Things have been rough in the stock market the last few years, but let’s help you put things into perspective:
The stock market since you were born (or around that time)
Let’s say the baby boomer generation started investing in in 1965. Back then, the S&P 500 was at $92 (and you could probably buy a steak for a nickle). Fast forward to today: the S&P 500 is currently at $1,260 (and a steak will run you close to $40). This means that the stock market has grown 5.85% a year for the past 46 years!
In other words, $1,000 invested in 1965 would be worth over $13,600 today!
Check out the graph below to gain some perspective of the ups and downs of the stock market, and the eventual tendency to head back up.
How many times has the stock market taken a beating?
In the last 60 years, the stock market has seen about 10 recessions that have caused prices to take a hit. Even through these tough spells, the stock market recovered and forged higher than before, and it will do the same once we get back on track not too long from now.
What you should you do if you’re looking at retirement.
Now that (hopefully!) your confidence in the stock market has been restored, it’s time to start thinking about what matters to you. Retirement is definitely up there in your list of goals, so let’s see what you need to be looking at.
Chances are that you’re looking to retire in about 15-20 years. That’s still a long time away, so you can afford to take some calculated risks. You don’t really need a stable dividend paying stock right now. But, you don’t need a brand new company with plenty of promise and the associated risk either.
Instead, you should aim for medium growth companies that have established a name, but are still on their way up. A great stock of this type is Amazon (AMZN). It has demonstrated its success in owning the web retail space and has a lot more potential.
How to deal with the money for your other expenses – like your kids education.
Chances are that your kids are heading out to college and the time has come for the big expenses that go along with it. The money that you have carefully saved for this day must now come into use, but obviously, you won’t be spending all of it at once. So what do you do with the part that you’re not using till next year or the year after? You invest it of course!
Your time horizon for this money is extremely short. That is why you must keep it safe in money market funds or short term bonds. Either of these options is better than the average savings account at the bank. There is one more place you can put your money in that is relatively safe. These are dividend paying stocks.
Dividend stocks grow modestly while paying paying you an income periodically. Generally, you would go for a company with a large market cap and known dividend yield. These two measures will get you a stock that is fairly stable which pays you an income like a bond or a savings account.
What you need to remember – you’re wiser than you think.
You have lived through a lot and seen even more. That is precisely why a complete melt-down of the stock market is not something you believe in. You have way more faith in the world than that, and so you realize that market swings are just temporary bumps in the road that lead to long-term growth.
Just don’t forget the following things which are important if you’re in your 40’s:
1. You have both, a long term and a short term need for money
2. You cannot afford to take much risk with the money you will need in the near future, therefore you need to put this money in bonds, savings accounts or stable, dividend paying stocks.
3. You can afford to take some moderate risk with the money you are saving for retirement, such as investing in a growth stock that has potential to…grow.
Go ahead and trade some growth and dividend stocks on Wall Street Survivor before you start in the real markets.