Is now the time to start investing for retirement, or should we wait for THE correction? I have been asked this question repeatedly mostly from younger folks who have amassed a pretty decent sum of money that is ready to be invested, but they can't pull the trigger because stock prices appear too lofty.
It is no secret that the markets have had an incredible run over the last 8-9 years, but there is not a soul on the planet that knows what will happen in the future. Unfortunately, the headlines are always about how highly valued stocks are today, and the impression that is often conveyed is that a nice big juicy correction is coming straight at us!
I will agree that there will be a correction. I have no idea how big, or how long, or if the next correction will bring the big bad bear market along with it. Throughout history, the markets have had ups and downs and some of those downs have been devastating to large groups of people. Fortunately, for the majority of investors the stock market trend has always been up over the long term.
The takeaway: Time IN the markets is far superior than timing the markets! (Did Buffet say that?)
What Does History Show Us?
Anyone can look up any chart of the stock markets' history, but being a Fidelity Investment client, I am fortunate to get some really cool charts and graphs along with their e-mails to me.
Here are a few that I received recently that drive home the point I am making about long term investing:
The chart above covers a 30 year period with various investing styles. I would take note of the column on the far right. The WORST 30 year period between 1926-2015 returned 7.80% annualized. You can also see by the other columns that an investor did not HAVE to be invested 100% in stocks to have made a favorable return.
Obviously, keeping cash on the sidelines has the worst track record, and that is precisely what many younger folks are facing right now.
The sooner you start, the better off you will be and here is another chart from a Fidelity Investments article that I really love:
Even if you have saved and invested less, but began 10 years sooner you would have more money than if you started later, based on a 7% annualized return, so what are YOU waiting for? That BIG correction??
The takeaway: Start as soon as possible for as long as possible!
So What Should You Buy With Prices So "High"?
If I had a timeline of 30-40+ years to retirement, I would take the money I have saved that has been stuffed in my mattress and break it up into 2 equal chunks. So let's say I am 35 years old and have $100,000 earning absolutely putrid returns in the bank, and I wanted to begin investing for retirement.
The 2 equal chunks, which would be in $50,000 chunks each is a decent way to jump in the pool. Select 5 stocks to invest in with half the money now and wait until a pullback or before the end of the year to invest the rest into the same stocks! I would select the 4 best (most reliable) dividend paying companies on the dividend aristocrat list, and another solid one that will be on the list at some point, in my opinion.
I would invest $10,000 in each of the following stocks right off the bat, and another $10,000 in each later:
1) Johnson & Johnson (JNJ): JNJ is in virtually every part of our health programs. From cutting edge prescription drugs, to over the counter baby shampoo! I don't think we will need any LESS of this company well into the future, plus the darn thing is on a roll and has a solid 2.57% dividend yield with an elite aristocrat status.
2) Procter & Gamble (PG): From baby diapers to adult diapers, and everything else humans have relied upon, PG is part of our lives from birth to death. I do not believe much will change in that respect, do you? An awesome aristocrat elite status with a current dividend yield of 3.00%
3) AT&T (T): Seems like there are always issues with T. The payout ratio is too high, it takes on debt, it buys other amazing companies to keep up with and usually ahead of the rest of the players in the sector, and has an elite aristocrat dividend track record that cannot be overlooked. The current yield of 4.85% is truly a gift in my opinion and while you might be able to buy it a little cheaper after its latest aquisition, why wait to begin collecting a great dividend!
4) Exxon Mobil (XOM): Yes, I know all about the oil patch troubles over the last two years but I firmly believe that oil products will ALWAYS be in every part of our lives. From food production to the carpet you walk on, petroleum is everywhere, and the shale surge has reduced costs while natural gas is the "coal" of the future, and XOM has one of (if not the largest as of now) the largest reserves. XOM is making the USA energy independent. An elite dividend aristocrat, its' current yield is a sweet 3.65% and the share price is near its 52 week low. Personally I do not believe it will stay that low for much longer and now is the time to begin an opening position!
5) Apple (NASDAQ:AAPL): What can I say about the largest and most valuable company on the planet that hasn't already been said. Yes, it is at its highs, but with a PE ratio of just 17.55, I believe the stock price has more room to run. Let's face it, as Apple goes, so goes the tech sector. It has a yield of just about 1.60%, but to me it is a ground floor opportunity for investors to cash in on a future dividend aristocrat, and a company that keeps turning the tech world on its head! Remember, APPL has nearly $200 BILLION off shore just waiting for some sort of legislative action to bring our moola home, just waiting to be added to the current APPL dividend, which has a payout ratio of about 27%!!!
The takeaway: Owning the greatest companies on the planet, sooner than later, could jump-start a retirement plan for you younger folks who could be waiting for a long time before the BIG CORRECTION!
The Bottom Line
There are no guarantees of course but the sooner you get started, with a long time horizon, I believe the better off you will be when you are ready to leave the rat race!
Take a look at what is facing many baby boomers right now as I type this!
Are YOU ready? Are YOU still holding off? Inquiring minds want to know!
Not To Bore You, But ...
Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something: stock picks, technical strategies, books, videos, subscriptions with "secret ideas," gadgets, and even snake oil.
My promise to you is that my work here will remain free to all of my followers, with the hope of giving to you some of the things that took years for me to learn myself. That being said, let me reach out to you with my usual ending:
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Disclosure: I am/we are long JNJ, PG, T, XOM, AAPL.
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.