Hugh F. Doherty, DDS, CFP
To get rich off your investments, you don`t have to pore over newspaper stock tables and read every personal-finance magazine. You don`t even have to know where the Dow is trading. The trick is to make investing automatic. Start salting away $400 a month at age 35, and by age 65 you`ll have more than $900,000 (assuming a 10 percent annual return, the stock market`s long-term average).
Dentists are particularly prone to fall short on retirement savings. You need on average a $9,000-$12,000 pretax monthly income for retirement. Therefore, the $900,000 won`t be enough. Keep in mind that most retirement investments should be growth-oriented (stocks), as opposed to income-generated investments (bonds). Here are some other strategies you can take to get the most out of your savings without a lot of time, money, or effort.
The other strategies
For these methods to work, you have to take a buy-and-hold approach, accepting that the ups and downs of the financial markets may jolt your portfolio in the short term. Over time, though, if history is any guide, you should come out way ahead.
(1) - Dollar-Cost Averaging
Dollar-cost averaging is financial jargon for investing a set amount of money at regular intervals into mutual funds, stocks, or other investments. It commits you to invest regularly, regardless of what the market is doing. Electronically, you don`t even have to write a check. Virtually all mutual-fund companies can set up a dollar-cost averaging program. It`s particularly useful in a volatile market. If your investment goes up, you`ve made money. If it drops, that just means you can buy more.
(2) - Index Funds
If you get worked up about which stocks are hot and which are not, relax. You can always invest in index funds. These funds mimic the performance of stock market indexes (such as the Standard & Poor`s 500) by buying and holding the equities that make up these benchmarks. Over the past 10 years, U.S. stock index funds out-performed more than 92 percent of actively managed funds. The best-known index fund is Vanguard, the king of indexes. This method is called "passive" investing.
(3) - Balanced Funds
Like index funds, balanced funds can help you diversify without much effort. Typical balanced funds invest 60 percent of their assets in stocks and 40 percent in bonds and cash. The five-year average, annualized return for this steady group is 12.8 percent.
(4) - Asset Allocation Funds
A variation of balanced funds is asset allocation funds. Their managers do all the thinking and trading for you, constantly shifting their investment mix (T-bills, long-term corporate bonds, international bonds, large- and small-company stocks, international stocks, REITs) in anticipation of the market`s next move.
(5) - Dow 10
A strategy known as Dow 10 holds that by simply buying and holding the highest-yielding stocks in the Dow Jones Industrial Average, you can do well. It`s a safe approach. You get to invest in a handful of the largest companies in America, and the chances of those businesses getting seriously hurt is significantly lower than the next hot Internet stock. The performance numbers certainly bear that out. From 1973 through 1997, the Dow 10 gained an average of 18.86 percent a year.
(6) - DRIPS
When it comes to buying individual stocks, the cheapest and easiest way to invest is through dividend reinvestment plans. Roughly 1,100 companies offer DRIPs, which let you buy stock directly from the issuing company. Dividends are automatically reinvested in new shares. That way, your stake in the company grows without you having to lift a finger. Companies with DRIPs include Coca-Cola, Delta Airlines, AT&T, and Hewlett-Packard. For the small investor, DRIPs are the perfect plan. Call The DRIP Investor at (800) 233-5922.
Make Investing a Habit
Stop killing yourself and start putting together a stress-free investment plan to increase your retirement savings. Whatever your investment method, remember that you don`t have to be Warren Buffett to build wealth from savvy investments, as long as you make investing an unbreakable, automatic habit.
Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: Drfinnet@aol.com. Web site: www.dr.hughdoherty.com.