I'm trying put together a financial primer for my neighbor, to help get him a basic financial understanding.
I doubt he will add much self help, so I want to cover the basics to get him into the market. He's got 11 years before retirement and say another 20 years for the money to be invested after retirement.
Here's what I have so far. I'm running out of steam, so please correct or add to what I have as you see fit.
I'll check it tomorrow and maybe have another go at it.
Things that affect the value of our savings.
Inflation and investment fees.
If a savings account earns 2% and there is any kind of fees charged by the custodian* of the money, you only grow at 1%. However if the inflation rate is 3% you would actually loss 2% for that year.
* custodian= the company that handles/holds your money
It is important to minimize investment fees charged by the custodian.
Fees can cost you a lot. If you have $200,000 and it earns 9% over 20 years, that grows to $1,120,192, but if you had to pay 2% in fees every year, your $200,000 would only grow to $773,937. The fees would have taken $346,255 out of your pocket.
The lowest maintenance fee around is Vanguard's VTSAX at 0.03%. Fidelity also has some low cost funds.
Often you are restricted in what you can buy, then you just do the best you can with a diversified fund.
Because it is near impossible for anyone to pick the right stocks year after year, for most people it is wise to buy a total stock market fund. VTSAX is named
“Vanguard Total stock Market Index Fund” VTSAX has 3,637 stocks that it holds. When you buy VTSAX you own some stock in all those companies.
Fidelity has similar funds and costs.
The fund above VTSAX at the present time pays Dividends and interest of about 1.8%. But you
are more interested in long term growth. The price of VTSAX has grown from $30 in the year 2000 to $75 in 2019.
Types of Accounts
Taxed and Tax deferred.
A regular account is taxed a time of sale or when dividends or interest are paid.
There are special (lower) rates for Qualified dividends and interest.
Tax deferred accounts, get a tax deduction from your income when you invest money and grow tax free until you take the money out, usually during retirement when you must pay the taxes.
Risk Tolerance
As far a your risk tolerance, that is something each person needs to decide. One way to look at it, how will you feel if you invest for 4 years and the market drops 40% meaning your nestegg drops 40%?
Or another way, what if you keep money in a cash account and it breaks even, earns 3% but inflation eats up 3%, but the market gains 40% and you missed out on a 40% gain?
The stock market is volatile, it does go up and down, but over many years it has an upward climb. There is usually more risk in letting 20 years of inflation take away the value of your nest egg than putting your money in the stock market. Of course there is a chance of have the wrong twenty years and you could lose money, but that would be very rare.