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I have some money I would like to put into very long term savings. At least 40+ years. What's the best way to save the money?
I would like to accrue as much interest as possible and get a headstart on retirement. But I don't really know anything about this area.
From what I read a long term Roth IRA is the best way to save at this stage. Which would involve me putting in max 5500 every year until retirement.
How does one go about doing this? And is there a better way to save the money?
I'd open the Roth IRA account and fund for 2015 and 2016. For the very long term, I'd learn about index funds, specifically a low cost S&P mutual fund or ETF.
I know of no way to answer your question without 'spamming' a particular investment.
First off, if you are a USA citizen, max out your 401-K. Whatever your employer matches will be an immediate boost to your investment.
Secondly, you want your our gains to be tax deferred. A 401-K is tax deferred as well as a traditional IRA.
Thirdly, you probably want the safety of diversification. You achieve this by buying an ETF (or mutual fund) that then buys individual stocks.
Now for the recommendation that may be called spamming by others :
As REITs pass the tax liability on to you, and as an IRA is tax deferred, you can get stellar returns by buying a mREIT ETF.
To get you started here are five:
Lastly, avoid commissions by having your dividends automatically reinvested by using that feature at Scottrade. You will have to pay commissions on new purchases but your purchases from your dividend Reinvestment will be commission free.
Edit: Taking my own advice I just entered orders to liquidate some positions so I would have the $ on hand to buy into MORL and get some of that sweet 29% dividend return.
What explains the most of the future returns of a portfolio is the allocation between asset classes. In the long term, stock investments are almost certain to return more than any other kinds of investments. For 40+ years, I would choose a portfolio of 100% stocks.
How to construct the portfolio, then? Diversification is the key. You should diversify in time (don't put a large sum of money into your stock portfolio immediately; if you have a large sum to invest, spread it around several years). You should diversify based on company size (invest in both large and small companies). You should also diversify internationally (don't invest in just US companies). If you prefer to pick individual stocks, 20 very carefully selected stocks may provide enough diversification if you keep diversification in mind during stock picking. However, careful stock picking cannot be expected to yield excess returns, and if you pick stocks manually, you need to rebalance your portfolio occasionally.
Thus, if you're lazy, I would recommend a mutual fund, or many mutual funds if you have difficulty finding a low-cost one that is internationally diversified. The most important consideration is the cost. You cannot expect careful fund selection to yield excess returns before expenses. However, the expenses are certain costs, so prefer low-cost funds. Almost always this means picking index funds. Avoid funds that have a small number of stocks, because they typically invest only in the largest companies, which means you fail to get diversification in company size. So, instead of Euro STOXX 50, select STOXX 600 when investing to the European market. ETFs may have lower costs than traditional mutual funds, so keep ETFs in mind when selecting the mutual funds in which to invest.
For international diversification, do not forget emerging markets. It is not excessive to invest e.g. 20% to emerging markets. Emerging markets have a higher risk but they also have a higher return. A portfolio that does not include emerging markets is not in my opinion well diversified.
When getting close to retirement age, I would consider increasing the percentage of bonds in the portfolio. This should be done primarily by putting additional money to bonds instead of selling existing investments to avoid additional taxes (not sure if this applies to other taxation systems than the Finnish one). Bond investments are best made though low-cost mutual funds as well. Keep bond investments in your local currency and risk-free assets (i.e. select US government bonds).
Whatever you do, remember that historical return is no guarantee of future return. Actually, the opposite may be true: there is a mean reversion law. If a particular investment has returned well in the past, it often means its price has gone up, making it more likely that the price goes down in the future. So don't select a fund based on its historical return; instead, select a fund based on low costs. However, I'm 99% certain that over a period of 40 years, stocks will return better than other investments.
In addition to fund costs, taxes are the other certain thing that will be deducted from your returns. Research what options you have to reduce the taxes you need to pay. 401-K was explained in another answer; this may be a good option.
Some things recommended in other answers that I would avoid:
I recommend you two things:
I like these investments because they are not high risk.
I hope this helps.
Say you have $15,000 of capital to invest. You want to put the majority of your capital into low risk investments that will yield positive gains over the course of your working career.
$5,000: Government bonds and mutual funds, split how you want.
$9,500: Low risk, trusted companies with positive historical growth. If the stock market is very unfamiliar for you, I recommend Google Finance, Yahoo Finance, and Zack's to learn about smart investments you can make. You can also research the investments that hedge fund managers and top investors are making. Google "Warren Buffett or Carl Icahn portfolio", and this will give you an idea of stocks you can put your money into.
Do not leave your money into a certain company for more than 25 years. Rebalance your portfolio and take the gains when you feel you need them. You have no idea when to take your profits now, but 5 years from now, you will be a smart and experienced investor.
A safe investment strategy to start is to put your money into an ETF that mimics the S&P 500. Over the past 20 years, the S&P 500 has yielded gains of about 270%. During the financial crisis a few years back, the S&P 500 had lost over 50% of its value when it reached its low point. However, from when it hit rock bottom in 2009, it has had as high percentage gains in six years as it did in 12 years from 1995 to 2007, which about 200%. The market is very strong and will treat your money well if you invest wisely.
$500: Medium - High risk Speculative Stocks
There is a reason this category accounts for only approximately 3% of your portfolio. This may take some research on the weekend, but the returns that may result can be extraordinary. Speculative companies are often innovative, low priced stocks that see high volatility, gains or losses of more than 10% over a single month. The likelihood of your $500 investment being completely evaporated is very slim, but if you lose $300 here, the thousands invested in the S&P 500, low risk stocks, government bonds, and mutual funds will more than recuperate the losses.
If your pick is a winner, however, expect that the $500 investment could easily double, triple, or gain even more in a single year or over the course of just a few, perhaps, 2-4 years will see a very large return.
I hope this advice helps and happy investing! Sending your money to smart investments is the key to financial security, freedom, and later, a comfortable retirement.
Good luck,
Matt McLaughlin
