Raising a Millionaire - Where Do I Start?

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Where Do I Start? Investing is like a long car trip. There's a lot of planning that goes into it.

How long is the trip? (What is your investing "time horizon"?)
What should you pack? (What type of investments will you make?)
How much gas will you need? (How much money will you need to reach your goals?)
Will you need to stop along the way? (Do you have short-term financial needs?)
How long do you plan on staying? (Will you need to live off the investment in later years?)

Running out of gas, stopping frequently to visit restrooms, and driving without sleep can ruin your trip. So can saving too little money, investing erratically, or doing nothing at all.

To prepare for the journey that investing will take you through it is important to first settle your finances. Do not ever rush past this step or it will come back to haunt you.

You must answer the following questions before you can successfully set about your savings/investing journey:

What are your goals? Is this money for retirement? A down payment on a house? Your child's education? A second home? Income to live on in the proverbial Golden Years?
How much money can you devote to a regular investing plan?
How much will college cost when my child needs to go?
How much yearly income is reasonable for retirement?

Do not let yourself get away with fuzzy answers, either. In the end, investing is a lot of numbers. You need to get used to that, and quickly. As a matter of fact, it can be quite liberating. You can see exactly what you need to get to your destination, and can be accountable to yourself along the way.

At this point it is also important to set the expectations of what you could get out of investing your long-term savings.

Do not worry you do not have to do all the math yourself. There are online interactive calculators available that can help you figure your future money needs. The more specific you can be, the more likely you are to set and achieve reasonable goals.

After you have a rough idea of how much money you'll need and how much time you have to get there, you can start to think about what investment vehicles might be right for you and what kind of returns you can reasonably expect.

Time Is on Your Side
To help put this into context, let's look at how various types of investments have performed historically. Bonds and stocks are the two major asset classes that have been used by investors over the past century. Knowing the total returns on each of these, and their associated volatility, is crucial to deciding where you should put your money.

Putting your money into cash reserves, U.S. Treasury bills, or more recently, money market funds, has yielded roughly 4.2% per year during this century, according to Global Financial Data. While this may not seem like a lot today, it is important to remember that for most of this century, inflation was nonexistent, making a 4.2% average annual return attractive until the 1960s. Though it is interesting that cash reserves have outperformed bonds this century, if one expands the time frame back to 1802, cash returns trail the return of bonds, and during the 1980s and 1990s, cash reserves have consistently trailed bond returns.

Long-term government bonds have returned around 4.0% per year since 1900. Surprisingly, they are not that superior to short-term bonds. The best decade for bonds in the past century was the 1980s, when bonds returned 13.81% annually. The worst was the 1950s, when bonds lost -3.75%. Had you invested $1 in long-term bonds in 1900, you would have about $50 today.

Stocks have also been very good to investors. Overall, stocks have returned an average of 9.8% per year since 1900 - quite a bit higher than bonds. Surprisingly, the range of the returns for stocks is not that much larger than the range for bonds over the same period. According to Global Financial Data, the worst return in one decade was the 1930s, when stocks declined 0.17% per year, including dividends. The best decades have been the 1950s, when stocks increased by 18.23% annually; the 1980s, when stocks increased by 16.64% annually; and the 1990s, during which stocks have increased by 17.3% annually. Had you put $1 into stocks in 1900, you would have over $10,000 today.





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