Leverage Payroll Savings
The more you work for the government, the more they want you to save for your retirement. For federal employees, there are two main retirement account options: the Basic Retirement Plan and the Thrift Savings Plan (TSP).
The Basic Retirement Plan is an employee-directed plan, which means that you get to select your own investments. There is a plan of action put in place to help manage your portfolio and keep it on track.
The Thrift Savings Plan (TSP) is similar to the Basic Retirement Plan, except that the TSP is employer-directed, which means that the Portfolio Service Aggregator (PSA) handles the whole thing. You have an option to change which funds you want to invest in and to direct the PSA to sell or buy various funds, but for the most part, the PSA does the heavy lifting for you.
With the Basic Retirement Plan, you can choose your own funds, which means that you have more control over which funds you go into and out of. The downside of this is that you will pay more in taxes.
On the other hand, there is a minor convenience to being in the employer-directed TSP, even though you have very limited control over which funds you’re invested in. Since the TSP is employer directed, quarterly and annual taxes are automatically withheld and paid for you.
Use Other Periodic Savings Methods
You may have enough money saved up to buy the stock of your choice. If not, you can use other periodic savings methods. One of those is the dollar cost averaging method.
This involves buying a set number of shares each month at predetermined times. Each time you make a purchase, the order should be set so that one order is placed when the market is low, and an equal-sized order is placed when the market is higher than its previous high.
For instance, if the stock market sinks to a new low level the first week of the month, buy X number of shares at that time. The second week of the month should see the market rise to a new high. At that time, buy X number of shares at the new high.
Another effective method is to place a single order for a set number of shares the first Monday of every month. You might not get the exact share price you want, but you will receive a good price within a set range.
You can also combine the two methods.
Emphasize Funds Over Stocks
Most investors think that the only way to make money investing in stocks is to try and pick stocks that are going to shoot up in the short term. However, buying a diversified stock index mutual fund is just as effective as any other investment and will work to compound your money overtime, making your savings grow larger and larger.
The idea that stock indexes don’t fluctuate like individual stocks is a myth that many people who trade stocks still hold onto. Although stock index funds can be extremely volatile, well diversified stock index funds do not experience nearly the volatility that an individual stock can go through. Keep in mind, over the long term, stocks have historically outperformed bonds.
Stocks are a harder asset to track and monitor for the average person, which is another advantage to funds. You do not need to keep track of any specific stocks, just monitor how your funds are doing in general.
The main reason so many new investors do not succeed is because of the common belief that you can make money easily by trading stocks. This belief can be quickly dispelled once you get in and start trading. The reality is you cannot make money in the stock market by simply trading intraday. It’s not how the system works.
Avoid Major Losses
One of the best ways to deal with risk is to avoid taking it. When you invest money, even in stocks and bonds, you run the risk that your investment will lose money. There are some strategies you can employ to help you avoid ending up with significant losses.
Deciding just how much risk you are willing to take with your investments is one one of the first things to work out. If you have younger children who will be dependent on your investments for their college educations, for example, you might be more conservative with your investments. But if you are well into your retirement years or have developed a solid retirement plan, you might be more willing to take the chance of making significant gains with investments.
One of the best ways to reduce your risk is to diversify your investments. Diversification can reduce the losses associated with an individual performing poorly, as well as help avoid having to withdraw all of your investments due to a market crash. If one strategy performs poorly, another strategy or holding might be doing very well. When you put money into a broad range of investments, not all of your money is in just the one that has lost money.
Consider Dollar Cost Averaging
Dollar cost averaging is one of the simplest and most effective forms of investment. To pursue this form, you simply make a fixed amount of investment over a period of time. This has the effect of averaging the cost of the asset purchased over a series of months or years. Investing this way helps lower the average cost per share you pay and decreases the risk of paying a higher price than needed. The downside is that there is an opportunity cost for missing out on the asset performing at a high level.
Tip: Regular investment is important. Research by Larry Swedroe, professor at the University of Chicago Booth School of Business, has shown that investing in cash rather than an asset can make for better results. Swedroe’s study shows that even a small amount of shares every month in a period of two years leads to better portfolio performance than just holding cash.
Tip: Avoid market timing
Dollar cost averaging is a long term strategy. You should refrain from market timing or doing any short term investment during this period. The price of the shares typically declines at the beginning of the investment. This means that you would be forced to pay more than the market price. In addition, you would end up selling at the low price and buying at the high price.
Tip: Choose low cost funds