investing in success with surf realty
The surest way to build wealth is to make investing a regular habit and place your money where it can grow most effectively. The difference that consistent investing can make is significant.
For example:
Putting $5,000 in a savings account earning 2% annually grows to $7,430 in 20 years.
Alternatively, investing $5,000 in one-year CDs at 3.44% interest, adding $100 monthly, and rolling over proceeds each year yields over $44,000 in the same period.
Even so, that may not be enough to fund a worry-free retirement. If your target is $250,000 in 20 years, starting with $5,000, you’ll need to consider investments that potentially outperform a basic savings account. The key questions are: What is a reasonable expected return, and how much more must you invest along the way?
The Magic of Compounding
Compounding is like a snowball rolling downhill, the longer it rolls, the bigger it grows. Additional contributions and reinvested earnings dramatically increase your total over time. Making investing a habit harnesses the power of compounding and moves you steadily toward your goals.
Investing goals should be specific and motivating. Vague targets like “financial security” or “a comfortable retirement” make it hard to measure progress and stay engaged. Instead, define goals you can quantify:
“$500,000 net worth by age 60”
“A portfolio that generates $2,000 per month to supplement Social Security”
Clear, concrete goals act as a roadmap and give you a tangible incentive to stick to your plan.
Start by assessing your current finances with a personal balance sheet. Include savings accounts, stocks, bonds, mutual funds, ETFs, real estate, 401(k)s, and IRAs. Estimating the value of furniture or jewelry is fine, but focus on financial assets. Understanding where your money is now informs realistic goal-setting and helps determine appropriate investments based on your timeline.
Short-Term Goals
For goals under five years, like a vacation next summer, prioritize safety. The stock market can swing widely, and you don’t want to be forced to sell at a loss. Consider low-risk options such as certificates of deposit timed to maturity, money-market funds, or online savings accounts.
Medium-Term Goals
Goals with a three- to ten-year horizon, such as buying a house, allow for slightly more risk. You can use longer-term CDs with higher interest or mutual funds focused on stable dividend-paying stocks. These options balance growth potential with reasonable protection from market drops.
Long-Term Goals
For long-term goals like retirement or funding a child’s education, you can take on more risk and diversify across stocks, bonds, and long-term CDs. Take full advantage of tax-sheltered plans:
Traditional IRAs: Tax-deferred growth; contributions may be deductible.
Roth IRAs: Contributions are not deductible, but withdrawals in retirement are tax-free.
401(k) plans: Often include employer matching contributions, boosting your savings.
Revisit your goals and investment strategy annually. Investments appropriate while accumulating a retirement nest egg may no longer fit after retirement. Use resources such as financial publications, online tools, and advisors to adjust your portfolio as circumstances change.
Risk isn’t just the chance of losing money—it also includes the risk that your returns won’t keep up with inflation. Even investments with near-guaranteed returns, like CDs in federally insured banks, carry this risk.
Controlling Risk: The Investment Pyramid
A helpful way to visualize risk management is the investment pyramid.
Base: Financial security—your home, emergency savings, and insured accounts. This is the foundation. Aim for six months to a year of living expenses. Use banks, credit unions, CDs, online banks, or money-market funds to protect and grow this money.
Middle: Moderate-risk investments—mutual funds or ETFs that focus on low-risk, dividend-paying stocks, high-quality bonds, and carefully selected individual stocks. Real estate fits here too.
Top: High-risk investments—penny stocks, micro-cap stocks, commodity futures, precious metals, and most limited partnerships. Only invest what you can afford to lose in this layer.
Risk rises with potential return. The higher the payoff, the greater the chance of losing money. That doesn’t mean avoiding high-risk investments entirely—it means confining them to the top of the pyramid.
Understanding Specific Risks
Stocks: Prices can fall due to poor management, declining revenue, or broad market sell-offs. Even strong companies can lose value during market-wide downturns, as seen in the dot-com crash or the 2008 financial crisis.
Bonds: Bond prices fall when interest rates rise and rise when rates fall. Individual bonds can also lose value if the issuer’s credit rating drops. Higher-yield bonds usually pay more to compensate for greater risk.
Other investments: Real estate values fluctuate with local supply and demand. Precious metals like gold and silver may not perform well during periods of low inflation.
Matching Risk to Your Situation
Prudent risk depends on your goals, age, income, financial obligations, and time horizon. A young investor with few responsibilities can take more risk than a couple nearing retirement. Time allows younger investors to recover from market setbacks, whereas older investors may need more stability.
A penny saved isn’t always just a penny earned—it depends on when you earn it and how you save it. This principle is known as the time value of money, closely linked to opportunity cost.
Which would you prefer: $10,000 today or $10,000 a year from now? Obviously, today. Inflation will reduce the value of that future $10,000, and delaying means you miss out on a year of potential earnings.
Misunderstanding this concept can lead to seemingly smart decisions that aren’t optimal. For example, a 15-year mortgage is often praised because it saves interest compared to a 30-year loan. But faster repayment also means giving up the chance to invest that extra money elsewhere.
If the money you’d spend on higher monthly payments could earn more invested than the mortgage interest rate, you might actually come out ahead by choosing a longer-term loan. Of course, the interest saved is guaranteed, while investment returns are not—you must weigh potential risk and reward carefully.
Diversification simply means not putting all your investment eggs in one basket. No single investment performs well all the time, when one declines, another often rises. Spreading your money across different assets can increase overall returns while reducing risk.
Some investors diversify by dividing their money equally among several investments and adjusting the mix once a year, taking gains from top performers and reallocating to underperformers. While it might feel counterintuitive to sell what’s doing well to invest in laggards, this strategy effectively means selling high and buying low.
Diversification doesn’t require exact allocations. Think in terms of ranges:
Stocks: 50–80% of your portfolio
Bonds: 20–40%
Cash: 10–25%
These ranges serve as guidance, not rigid rules. Your personal mix should reflect your age, income, risk tolerance, and investment goals.
Also, stocks and bonds don’t have to mean individual securities. Mutual funds or exchange-traded funds are often the most practical way to gain broad exposure efficiently.
Bond – An interest-bearing security that obligates the issuer to pay a specified interest amount for a set period (usually several years) and then repay the bondholder the principal.
Capital gain (or loss) – The difference between the price at which you buy an investment and the price at which you sell it.
Central Registration Depository (CRD) – A computerized database containing information about most brokers, their representatives, and the firms they work for.
Certificate of Deposit (CD) – A short- to medium-term instrument (one month to five years) issued by a bank or credit union, paying higher interest than a regular savings account.
Compound interest – Interest earned on both the original investment and previously accumulated interest.
Diversification – Balancing risk by investing in a variety of securities.
Dividends – A portion of a company’s earnings paid out to stockholders.
Exchange-Traded Funds (ETFs) – Mutual funds that trade like stocks on an exchange. An ETF’s portfolio can represent a market index, subsector, or specific industry.
401(k) plan – An employer-sponsored retirement plan that allows employees to divert part of their pay tax-free. Employers may match contributions, and earnings grow tax-deferred until withdrawn.
Home equity – The difference between a home’s market value and the outstanding balance on its mortgage and any home-equity loans.
Individual Retirement Account (IRA) – A tax-favored retirement plan. Contributions to a traditional IRA may be deductible; earnings grow tax-deferred, and withdrawals are taxable. Roth IRA contributions are never deductible, but earnings and withdrawals are tax-free in retirement.
Money-Market Fund – A mutual fund investing in short-term corporate and government debt, passing interest payments to shareholders.
Mutual Fund – A professionally managed portfolio of stocks, bonds, or other investments divided into shares.
Opportunity cost – The cost of forgoing one investment in favor of another.
Portfolio – The collection of all your investments.
Prospectus – A document describing a securities offering or the operations of a mutual fund, limited partnership, or other investment.
Risk tolerance – Your willingness to risk losing some or all of your investment for a chance at higher returns. Greater potential gain usually comes with greater risk.
State Securities Regulators – Government agencies that protect investors and maintain the integrity of the securities industry at the state level.
Stock – A share representing ownership in a company. Stock prices fluctuate based on company performance and investor expectations.
Time value of money – The concept that money today is worth more than the same amount in the future due to inflation and lost earning potential.
Total return – A measure of investment performance combining price changes and any dividends or distributions. For mutual funds, it assumes dividends and capital gains are reinvested.
