I think no one would argue that investing for retirement is essential. Most of my friends place their money in savings account or in GICs (US's equivalent of CDs), and very few invest in the stock market in the likes of stocks, ETFs or mutual funds. Which is the best place to keep your money? Some almost ensures your principal amount, but there's limited growth. Stocks may sound risky to some, but if you base your purchases on companies, with low valuation or fair valuation, which also has stable earnings, and manageable debt levels, and you have a long-term view (in 10s of years), then you substantially lower your risk.
Yes, we want to guarantee our principal, but we also need to remind ourselves of other risks. Chuck Carnevale, a popular author here says it well in his article:
Too much emphasis is being placed on short-term price volatility [of the stock price] as a primary determinant of risk, and too little on maintaining an appropriate standard of living that can keep up with inflation.
In a series of articles, I'm going to talk about some tips that I have learned. Because I'm a do-it-yourself investor (particularly a value and dividend growth investor), the personal experience I draw from will have more emphasis on it, though most tips discussed apply to other forms of investing for retirement as well.
Without further ado, the first tip: Start Early.
Start early. Make the mistakes (that's inevitable), learn from them, and move on. Chances are, you are going to make multiple mistakes, but you'll learn a valuable lesson from each of them. The earlier you make the mistakes, the better because the more time you have to recover from them.
I have indeed made my fair share of mistakes, and I'm learning from them. In my first year of "investing", I read an article about some leveraged instrument whereby if a certain index was up 1% in a day, it'll go up by 3%. Likewise, if the index was down 1% in a day, it'll go down by 3%. One could see how enticing the gain would be, say if you're in a bull market where most of the days are green days, you could quickly gain 15% in just a few days. However, if you boarded the wrong ship, you're losing 3 times as much. At first, I was cautious, and just followed the author of the article to see how they'd do. They started making huge gains and I thought I could too, by following what he does. The result? I ended up not following them entirely. So, I ended up making small profits, and losing big time when I actually did lose. Emotion played a big part in trading those monsters. Anyway, it wasn't investing. It was gambling.
And that is how I landed on dividend growth investing. It is a safe haven compared to what I was doing before. Dividend growth investing allows me to focus on the increasing dividends I'm receiving every year. Most importantly though, is to look for bargains, where the company stock price is lower than its intrinsic value. In other words, look for undervalued companies with growing earnings.
A good resource for research is Morningstar. Searching for Aflac (NYSE:AFL), for example, you'll find Morningstar currently gives it 4 stars, meaning it's a good value to buy.
Click on the "Valuation" tab and you'll see the Price to Earnings (P/E) ratio of Aflac at 8.1. Scrolling down, we have a graph showing its 10-year P/E. The P/E is actually at its 10-year low.
Another Lesson Learned
In mid 2012, I bought Aflac at low 40s only to sell it a month later. Why? I felt the stock price didn't move much. I had no patience, and I didn't know how to look at valuations at the time. Morningstar shows the P/E was 8.7 in 2012, so even though the price of Aflac has increased by ~16% since my first purchase, it is actually cheaper now because its TTM PE is 8.1. Isn't that strange? Anyway, I hate buying securities at a higher price than what I paid for before, but the price says nothing about the value of the company. After looking at this valuation, I picked up Aflac again below $50. This time, I aim to hold it for the long term.
We can see that the price line (black) is below the earnings line (orange), indicating that it's undervalued. Notice also that, the earnings has been in a general growing trend. Looking for a dividend growth company to invest, it's essential that it has increasing earnings so that it can continue to pay (and increase) its dividends. Further, FAST Graph indicates its debt to capital is 22% which is very manageable. In addition, its payout ratio is only 23%, so there is indeed plenty of room for Aflac's dividends to grow. For a long-term investor, an initial look at Aflac indicates it is a good buy for dividend growth.
The whole point of this article wasn't to encourage people to buy Aflac shares. Rather, I wanted to point out for investing, especially so for retirement, that when thinking about adding a company to your portfolio, make sure you're buying a great business at the right valuation (not price).
I really believe in learning by doing. It's only through experience that you'll learn real world investing. We're so lucky to be living in the digital age. There are tons of resources online, knowledge to be harvested. You can easily read articles from a variety of sources and authors to gain a wider perspective to find the investing style that fits you. Reading articles on Seeking Alpha is an excellent start.
Once you've learned from your mistakes, (I'm almost certain any DIY investor would have made some form of mistake one way or another), then, the earlier you invest, the longer time horizon you have, and the more compounding can do its magic.
Disclosure: I am long AFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.