Personal finance: Prepare for your future
By Mark Wineka
SALISBURY — The ultimate sin when investing?
Jolene M. Philpott, financial advisor for Edward Jones in Salisbury, told Catawba College’s personal finance class there often is a high cost in waiting to make investments, whether it’s the stock market, individual retirement accounts, 401(k)s, bonds, mutual funds or education savings accounts.
“Start preparing for your future now,” Philpott said. “Procrastination has a cost.”
How much does it cost a person to put off investing for just three years?
Philpott used a example of contributing to an IRA at $5,000 a year through the age of 50 and adding $1,000 a year to that contribution from ages 50 to 65.
She also assumed a hypothetical rate of return of 7 percent, calculated annually.
For a person who started investing at age 30, the IRA’s value would be $826,527 by age 65.
But if that same person waited until age 33 to start investing in the IRA, its value would be $666,134 by retirement age. The cost of waiting those three years in the beginning: $160,393.
What if he or she had waited until age 35 to start that IRA? It would have cost that person even more, Philpott noted.
By not investing $25,000 between the ages of 30 and 35, the person would have missed out on an extra $250,596 by retirement age at 65.
Philpott said only a small percentage of Americans — 3 percent — are financially independent when they reach age 65. Seventy-five percent have to keep working beyond 65, and 22 percent have to live off family or charity.
As for today’s stock market, Philpott posed three questions to the students and gave emphatic answers to all three.
When is a good time to invest?
“Now — absolutely, now,” Philpott said.
Do you need a lot of money to invest?
“No, absolutely, no,” she said.
Should a person invest internationally? “Absolutely,” Philpott said, “because it’s a global market.”
Philpott said she bought her first car with money she made while baby-sitting that she turned around and invested in Food Lion stock.
While stocks haven’t performed well over the past 10 years, Philpott recited the Edward Jones company line that “good performance often follows bad.”
In the most recent decade, 2001-10, the average annual return of the S&P 500 has been 1.4 percent.
But Philpott said over the past 85 years, only 11 periods have existed when the annualized 10-year return has been less than 4 percent.
Each time that has happened, she said, returns over the next 10 years have been above average, with the annualized return averaging 12.5 percent.
“There’s still opportunity in the market,” she says.
Again, Philpott’s key message: Don’t wait, even if you’re investing as little as $50 a month.
She advised the college students, however, to make paying off any credit card debt their priority.
Many college graduates also face paying off student loans in their 20s. Rather than trying to pay off the loans as soon as possible without investing, Philpott said it might be wise to take advantage of the whole 10-year term of a student loan, paying as you go, and still leaving some money to invest in something such as a 401(k).
One student asked how concerned he should be investing in a market that seems to fluctuate wildly with news around the world, such as the environmental catastrophe that has recently hit Japan.
Philpott said many things have had short-term impacts on the market since 1973, such as wars, new presidents, natural disasters and the 9/11 terrorist attacks, but a person would have missed out on great investment opportunities by staying out of the market and not looking long term.
In 1973, the Dow Jones Industrial Average at year’s end was 850.86; at the end of 2010, it was 11,577.51.
Companies around the world are linked to each other. Edward Jones uses the iPhone as an example of a global product. The phone is engineered in the United States and manufactured in China with parts from South Korea, Switzerland, Germany, Taiwan, the United States and Japan.
The top performing developed stock markets between 2005-09 have been Canada in 2005, Spain in 2006, Finland in 2007, Japan in 2008 and Norway in 2009.
The United States’ stock market in those same years ranked 18th in 2005, 22nd in 2006, 18th in 2007, third in 2008 and 17th in 2009.
Countries with developing stock markets not even included in the above rankings — nations such as China, Brazil, Peru and Russia — offer even greater opportunities.
Professor Al Carter promised the Catawba students that they’ll have a lot of tough financial decisions to make, even early on as they finish college and begin their work careers.
Do they take care of their credit card debt first? How fast should they pay off their student loans? How soon do they start investing and in what — common or preferred stocks, bonds, mutual funds, certificates of deposit?
“You’re making the decisions — not Mom and Pop anymore,” Carter said.
Contact Mark Wineka at 704-797-4263.