Money sitting in a savings account feels safe. You can see it, track it, and know exactly what you have. But here's what's also happening. Inflation is quietly eroding its value every single year.
Investing isn't about getting rich quick or taking unnecessary risks. It's about giving your money the opportunity to grow enough to maintain its purchasing power over time, and ideally, to build the financial future you want.
Why Investing Matters
Let's look at the numbers. If you save $10,000 in a typical savings account earning 0.5% interest, in 20 years you'll have about $11,049. Sounds like growth, right?
But factor in average inflation of 3% annually, and that $11,049 will only buy what $6,115 buys today. Your money actually lost value while sitting "safely" in the bank.
Now consider investing that same $10,000 in a diversified portfolio with an average 7% annual return. In 20 years, you'd have approximately $38,697, and even adjusted for inflation, that's real growth.
This isn't theoretical. This is how wealth builds over time. And the earlier you start, the more time compound growth has to work in your favor.
Understanding Investment Basics
Stocks or Equities
When you buy stock, you own a small piece of a company. If the company grows and prospers, your stock value typically increases. Companies may also pay dividends, regular cash payments to shareholders.
Potential for higher returns. Historically, stocks have returned around 10% annually over the long term.
Volatility. Stock prices fluctuate daily. Values can drop significantly in market downturns.
Best for these situations. Long-term goals that are 10 or more years away when you have time to ride out market ups and downs.
Bonds or Fixed Income
When you buy a bond, you're lending money to a government or corporation.
They pay you interest regularly and return your principal when the bond matures.
More stable. Bond values fluctuate less than stocks, though they still carry risks.
Lower returns. Bonds typically return 3 to 5% annually, depending on type and economic conditions.
Best for these situations. Shorter-term goals or diversification to reduce portfolio volatility.
Mutual Funds and ETFs
These investments pool money from many investors to buy a diversified collection of stocks, bonds, or other assets.
Instant diversification. One fund purchase gives you exposure to dozens or hundreds of investments.
Professional management. Fund managers for mutual funds or algorithmic strategies for ETFs select and manage the holdings.
Accessibility. You can start with small amounts and don't need expertise to build a diversified portfolio.
Best for these situations. Most investors, especially beginners who want diversification without buying individual stocks.
Key Investing Principles
Start Early
Time is your most powerful investing tool. A dollar invested at age 25 has 40 years to grow before retirement at 65. That same dollar invested at age 45 has only 20 years.
Thanks to compound growth, which means earning returns on your returns, starting early makes a dramatic difference. Don't wait until you have a large sum or feel like an expert. Start with what you have now.
Diversification Manages Risk
The saying "Don't put all your eggs in one basket" applies perfectly to investing. Spreading money across different investments reduces your risk because different assets perform well at different times.
When stocks decline, bonds might hold steady. When U.S. markets struggle, international markets might perform better. When one industry suffers, another might thrive.
Diversification doesn't guarantee profits or prevent losses, but it helps smooth out the ride.
Think Long-Term
Stock markets fluctuate constantly. Daily news cycles create anxiety with headlines about market drops and economic uncertainty.
But here's what matters. Over rolling 20 year periods, the S&P 500 has never had a negative return. Short-term volatility smooths out over time.
The biggest risk isn't market crashes. It's selling during crashes and missing the recovery.
Successful investing requires discipline to stay invested through market cycles, continuing to contribute even when markets decline.
Keep Costs Low
Investment fees might seem small at 1% or 2% annually, but they compound just like returns, except they work against you.
On a $100,000 portfolio earning 7% annually over 30 years:
With 0.25% fees, you'd have approximately $717,000
With 1% fees, you'd have approximately $574,000
With 2% fees, you'd have approximately $432,000
The difference between low-cost and high-cost funds can cost you hundreds of thousands of dollars over a lifetime.
Look for low-cost index funds and ETFs with expense ratios under 0.20%.
How to Start Investing
Step 1: Build Your Foundation First
Before investing, make sure you have:
At least a starter emergency fund $1,000$2,000
High-interest debt paid off or under control
A plan for irregular expenses
Investing works best when you're not forced to sell at the wrong time because of an emergency.
Step 2: Determine Your Goals and Timeline
Different goals require different strategies.
Retirement 30 or more years away. Aggressive growth portfolio, mostly stocks
Retirement 10 to 15 years away. Balanced portfolio, mix of stocks and bonds
Retirement less than 10 years away. Conservative portfolio, more bonds and stable investments
Medium term goals of 5 to 10 years. Moderate portfolio, balanced approach
Short term goals under 5 years. Keep in savings, not investments, because market volatility is too risky
Step 3: Choose Your Investment Accounts
Employer retirement plans like 401k and 403b. Start here if your employer offers matching contributions. That's free money you don't want to miss.
Traditional or Roth IRA. Tax advantaged retirement accounts you open individually. Contribute up to $7,000 annually, or $8,000 if 50 or older.
Taxable brokerage accounts. No tax advantages but no restrictions on withdrawals or contribution limits. Use for goals beyond retirement.
Step 4: Select Your Investments
For beginners, target date funds or balanced index funds offer simplicity with built in diversification. Choose a target date fund matching your expected retirement year, like Target Date 2050 Fund, and it automatically adjusts from aggressive to conservative as you age.
Alternatively, build a simple portfolio with:
U.S. stock index fund at 60 to 70%
International stock index fund at 20 to 30%
Bond index fund at 10 to 20%, increasing as you near your goal
Step 5: Automate Your Contributions
Set up automatic monthly investments from your checking account or through payroll deduction. Consistent investing removes emotion from the equation and helps you build wealth steadily regardless of market conditions. Even $100 or $200 monthly makes a significant difference over decades.
Common Questions
What if I don't have much to invest?
Start with whatever you can. Many brokerages now allow you to begin with $100 or less. The habit of investing regularly matters more than the initial amount.
What if the market crashes after I invest?
Market downturns are temporary. Historically, every significant market decline has been followed by recovery and growth. If you're investing for long term goals, short term declines are actually opportunities to buy more at lower prices.
Should I hire a financial advisor?
Many people successfully invest on their own using simple, low cost index funds. Consider an advisor if you have complex situations, need accountability, or want comprehensive financial planning beyond just investments.
Moving Forward
You don't need to be an expert to start investing. You need to understand the basics, choose a simple approach, and commit to contributing consistently over time.
The best investment strategy is the one you'll actually follow. Start with small steps, build your knowledge as you go, and give your money the time it needs to grow.
Your future self will thank you for starting today.
This material is for educational purposes only and should not be considered investment advice. All investments involve risk, including possible loss of principal.
Past performance is not indicative of future results. Asset allocation and diversification do not guarantee a profit or protect against loss.
Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.
The target date is the approximate date when investors plan to start withdrawing their money.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial.
Chesapeake Financial Planners | 2402 Scotlon Ct, Forest Hill, MD 21050 | 410 6527868 | www.chesapeakefp.com
