Three things you don't have to be to be an investor
May 09, 2014
We recently asked our Facebook fans what untrue beliefs about investing they'd heard, and three descriptions emerged of what an investor had to be. We break down why these descriptions are off the mark—and what it really takes to be an investor.
1. You don't have to be rich
Investing's one tool that can help you build your wealth, but you don't have to be wealthy to use it. An Investment Company Institute study reports almost 57 million U.S. households (about 46%) are using mutual funds to build wealth. The same study reports that 62% of investing households have incomes under $100,000, with 24% having less than $50,000.
If your employer offers a retirement plan, such as a 401(k) or 403(b), you don't even need to have a minimum amount saved to start investing for your future. Instead, you can defer a percentage of your pay into an account under the plan.
You also don't have to be rich to start investing with us. You can open an account with us for as little as $1,000 when you choose Vanguard STAR® Fund, a diversified fund that includes stock and bond investments, or one of the Vanguard Target Retirement Funds. Most of our other funds have a minimum of $3,000. And our low expense ratios (82% less than the industry average*) and account fees (waived if you opt for e-delivery) let you put more of your investing dollars to work for your benefit.
2. You don't have to be a financial expert
You don't need an advanced degree in economics or financial management to be an investor. Of course, it's good to know some investing basics. Our principles for investing success explain the four areas in your control—setting appropriate financial goals, having a balance of broadly diversified mutual funds suitable for those goals and your time horizon, keeping costs as low as you can, and adhering to your strategy even when events distract you—and how focusing on them can help you achieve your financial aims.
You can always turn to us for information about investing and financial planning. Our website's loaded with resources that can help you learn more about investing and financial planning. And our advice services offer you the support and expertise you want, whether it's supplying tools for you to use, getting insight from a financial expert, or having a Certified Financial Planner™ professional handle your portfolio for you.
3. You don't have to be older
There's no age restriction on investing. Any age is a good one when it comes to taking action for your financial future. The sooner you start, the more time you have to take advantage of "the power of compounding." It's what happens when, instead of taking out any earnings you get from an investment, you keep that money invested. Over time, the returns build on each other—or compound—and can produce earnings on top of earnings.
As this illustration shows, whether your time frame is 3 years or 30, compounding can make a real difference in your investment balance. However, starting to invest when you have a lot of time ahead of you lets you maximize the advantage of compounding.
This hypothetical example assumes two initial $10,000 investments that each earn 6% ($600) annually. The flat lower line shows the investment value when those earnings are withdrawn each year. The curved upper line shows the value when earnings are reinvested annually. As the reinvested earnings generate their own annual returns at 6%, the accumulated value accelerates toward the end of the 20-year and 40-year periods. The "returns not reinvested" line does not include $24,000 in earnings that were distributed to the shareholder and consequently not reinvested in the portfolio for future growth. The expense ratio assumed in this example is 0.23%. Taxes are not included in the calculations. This hypothetical example does not represent returns on any particular investments.
It's also never too late to start investing. With life expectancies lengthening, you can save effectively for a long-term goal like retirement no matter what your age. The important thing is to just get started.
*Vanguard average expense ratio: 0.19%. Industry average expense ratio: 1.08%. Sources: Vanguard and Lipper, a Thomson Reuters Company, as of December 31, 2013.
- All investing is subject to risk, including the possible loss of the money you invest.