Home » Investing » New Investors: 1 Trick to Make Millions the Safe Way
New investors need this one trick if they’re going to make millions by the time they retire. And it’s absolutely possible if you keep to this golden rule.
Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances.
Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities.
Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. Amy’s work can be found regularly on the Financial Post and MoneyWise Canada.
When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog Finley, and travel.
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New investors have come to the right place if they’re looking for investment advice. The Motley Fool was the first place I looked when I first had kids and wanted to learn about my finances. Since then, I’ve not only learned a great deal but come up with some solid tips and tricks to help other new investors.
That’s why today, I’m going to go over the very best trick I can recommend after years of working for Motley Fool. And it comes down to two words: automated contributions.
How it works
Automated contributions are pretty self-explanatory. Whether it’s your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), or anything else, this can be your lifeline to creating millions.
Every single time you get paid, new investors should put aside a set amount into these investment accounts. You can do the calculations, but a great place to start is around 10%. So, if you’re making $50,000 per year, that’s $5,000 you’ll set aside each year for investments!
Will it hurt? Not if you change your mindset. Think of putting those automated contributions aside just like an automatic bill payment. But these are bills towards your future. Plus, it’s way easier to put aside $250 bi-weekly than $5,000 all at once.
Now what?
From there, the next choice is putting your investment somewhere safe. Now, new investors should speak to a financial advisor. But I can also give you a few things to look out for to put automated contributions away safely.
A great place to start is by looking at the Big Six banks — especially right now. These banks have been around for 100 years, offering solid growth but also dividends. Dividends are cash in your pocket each quarter, no matter what. Furthermore, all the banks trade at incredibly cheap rates.
But if you’re a new investor, I’d recommend Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM). It has the highest dividend of the batch, offering $6.44 per share per year. So, you can set it up that your contributions automatically go right towards the stock.
Then what?
Watch the magic happen. Automated contributions made by new investors coupled with compound interest and dividend reinvestment is the perfect combination. Let’s take a look at how it can play out over a decade or more.
The first year, that $5,000 will bring in about $219 of dividends for reinvestment and perhaps give returns around 7%. That’s based on historical performance at a compound annual growth (CAGR) over the last decade.
If we then fast forward, new investors can keep contributing that $5,000 each year and reinvesting dividends. After a decade, this could turn to $98,550 based on past performance. Two decades? That’s $353,313. To make a million, it would take 30 years and 40 years to make about $2.7 million.
Foolish takeaway
Now, this is just an example for new investors. But think of it. This is just one investment and only $5,000 per year. If you make more money and can put more away towards other solid companies similar to CIBC stock, you could have even more millions stashed away.
The key is continuing to contribute with that long-term growth mindset in your head. If you keep that going, there’s nothing new investors can’t accomplish.
You buy shares in the fund, which is often diversified among many investments, reducing your risk and potentially even increasing your returns. A mutual fund is a great way for inexperienced investors to earn significant returns in the market.
Investors with $1 million to put to work often consider alternative assets. Some alternatives, such as commodities, can be easily traded using ETFs. Others, such as fine art, collectibles or venture capital, are held outside of traditional investment portfolios.
Common investing mistakes include not doing enough research, reacting emotionally, not diversifying your portfolio, not having investment goals, not understanding your risk tolerance, only looking at short-term returns, and not paying attention to fees.
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
If you always spend less than you earn, your finances will always be in good shape. Understand the difference between needs and wants, live within your income, and don't take on any unnecessary debt.
Buy a low-cost index fund that tracks the S&P 500; your $100,000 could grow to $1 million in about 23 years. You'll get there even faster by investing additional funds. Add $500 monthly and reach $1 million in just 19 years. Of course, past results don't guarantee future outcomes, but history is on investors' side.
Certificates of Deposit (CDs) and Money Market Accounts (MMAs) are low-risk investment options that offer guaranteed returns. CDs are loans to a bank for a fixed term, and in exchange, the bank pays a fixed interest rate on the money.
Assuming that you can earn this 10% average return over your investing career, if you are getting started investing this year and you want to become a millionaire in 30 years, you would need to invest $506.60 per month. This amount may seem like a lot, but it may actually be pretty doable for many people.
Long story short: It is possible to retire with $1 million at 55. However, $1 million may not be enough for most people. You'll need to create a customized financial plan based on your lifestyle goals if you want to try, though — there is no magic formula or a one-size-fits-all plan to do it.
This might seem like a no-brainer because what investor sets out with the intention of losing their hard-earned cash? But, in fact, events can transpire that can cause an investor to forget this rule. Buffett thereby swears by Rule 2.
While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos)Mini-bonds (sometimes called high interest return bonds)Land banking.
As we journey through this guide, remember that Rule #1 investing entails four steps: Discovering a wonderful business, understanding its value, purchasing at a discount, and repeating for prosperity.
Enter the 1% rule, a risk management strategy that acts as a safety net, safeguarding your capital and fostering a disciplined approach to navigate the market's turbulent waters. In essence, the 1% rule dictates that you never risk more than 1% of your trading capital on a single trade.
First, don't sell at the first sign of profits; let winning trades run. Second, don't let a losing trade get away. Investors who make money in the markets are okay with losing a little bit of money on a trade, but they're not okay with losing a lot of money.
Is the 1% rule realistic? The 1% rule in real estate investing is a useful guideline but not always realistic in every market. It states that the monthly rent of a rental property should be at least 1% of the property's purchase price.
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Introduction: My name is Gov. Deandrea McKenzie, I am a spotless, clean, glamorous, sparkling, adventurous, nice, brainy person who loves writing and wants to share my knowledge and understanding with you.
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