Culbert: Knowledge pays off

##Jim Culbert

About the writer: Jim Culbert, reachable at jhculbert@gmail.com, retired to McMinnville in 2009 from a career in the U.S. Forest Service. He has been an investment club or individual life member of BetterInvesting since 1983. He and his wife participate in the McMinnville chapter, which welcomes anyone interested in learning more about investing.

Knowing how to invest one’s savings is critical for achieving one’s financial goals.

Owning a savings account is common, and is one of the easiest ways to start. But that’s not enough on its own.

Although some financial institutions are currently offering accounts with annual percentage yields topping 5%, the national average was just 0.58%, as of Feb. 17.

The personal savings rate, the share of disposable income being saved by the average American, was most recently calculated in December at 3.7%, according to the federal reserve bank in St. Louis.

This suggests that, on average, people saving with cash are only gaining about 3%. Unfortunately for them, with the inflation rate running 3.09% in January, inflation is reducing that apparent 3% savings gain down to nearly zero.

Looking long term, comparing stocks to bonds and cash for the period 1928-2023, stocks have returned an average of 9.8%, bonds 4.6% and cash 3.3%, not considering the 3% inflation. Obviously, investing in the stock market in some fashion offers the potential for greater accumulation of wealth than simple cash savings.

There are many different ways to invest in the stock market. Opening up an account with a provider such as Charles Schwab or Robinhood is easy to do, and offers maximum flexibility to choose different kinds of investments, including individual company stocks.

For those without the time or interest required to analyze individual companies as potential investments, mutual funds offer a range of other options, such as following the S&P index or investing in an area of selected focus, such as large capitalized companies listed with the Dow Jones Industrial Average.

In the United States, traditional pensions have become increasingly rare. They have largely been replaced by retirement benefits that are less costly to employers, such as 401(k) retirement savings plans.

What the account holder may be able to invest in depends on what kind of plan the employer offers, so it can be limited. And I am not aware of any 401(k) plans that offer the option to purchase individual company stock.

Another popular type of investment vehicle is an Individual Retirement Account, known as an IRA. You can set up an IRA with a financial institution, mutual fund, stock broker, or life insurance company.

With an IRA, owners generally have more flexibility. They can invest in mutual funds, bond funds, money market funds and individual stocks, among other things.

Finally, let me sound one investment warning.

Cryptocurrency investing is purely speculative. What’s more, the price fluctuates significantly, and the currency itself has no underlying value. That makes it ill-advised.

For those who might be interested in learning more about investing, I highly recommend the organization BetterInvesting, found on the web at www.betterinvesting.org. It is a national nonprofit that has helped more than 5 million people from all walks of life learn how to improve their financial future.

The organization provides unbiased investment education, including classes and webinars for all experience levels, along with a video learning library, support for investment clubs, powerful online stock analysis tools and access to BetterInvesting magazine and an annual national convention.

BetterInvesting promotes stock investment, not stock trading. The goal is to hold companies in a stock portfolio as long as the company’s fundamentals remain intact and the potential for an appropriate return on the investment continues to exist.

The easy-to-follow methodology has proven to be successful for seven decades. It starts with these core principles:

1) Invest a set amount of money regularly. Do so regardless of the swings in the market. This will help you maintain a lower and more favorable average cost per share of stock.

2) Reinvest all earnings. By reinvesting all your dividends and profits from the sale of stock, you’ll fully leverage the power of compounding.

3) Buy stock in high-quality growth companies. Search for growth companies that increase earnings consistently over time.

4) Diversify your portfolio. Spreading your stock investments over a number of different companies of differing sizes and industries will help reduce the risk.