Investment Ideas for the New Investor
Investing for Beginners
Getting started as an investor is essential in order to begin laying a foundation for financial success. The traditional approach to investing has been to open a retirement account and begin paying into it each month, and then after 30 years—voila!—a nice nest egg is ready for you. Generally, retirement accounts tend to have a heavy amount of exposure to U.S. equity markets due to the stock market’s very strong historical growth figures. But as many close-to-retiree-age folks discovered in 2008, a retirement account heavily exposed to the U.S. equity markets can be diminished in a matter of months if a global economic meltdown erupts.
If you are just beginning to invest and you have 20+ years before retirement, it may be wise to speak with a financial adviser and seriously consider investing in a strategy that seeks to benefit from the explosion of growth in China and India. Let’s examine why.
What should I invest my 401k in?
Retirement planning and investing has a very clear stated goal—to make money over the long term. This goal is why most retirement accounts over the last 30 years have been heavily exposed to the United States equity markets. If we rewind to the 1960’s and 1970’s, where was most of the global economic growth expected to occur over the next 30 years? Of course, the answer is America. Sure, there were other countries during the 60’s and 70’s that were emerging, namely Germany, Japan, and Russia, but it wasn’t thought that any of them would really grow more than the United States over the next few decades.
But this has changed. The 2008 Global Credit Crisis has changed things. The U.S. recovery is currently hitting a major slow-down, and the Federal Reserve is saying that it may take 4-6 years to recover to pre-crisis levels. Growth is expected to be very sluggish for an extended period of time, and no one is really sure what the economic future of America holds. The most difficult reality facing new investors is that there is a strong probability that the U.S. equity market and U.S. economy in general will not grow as steadily over the next 30 years as it has over the previous 30 years. So, what other alternative options are there for new investors?
Investing in Foreign Equities
China, India, and Brazil are currently growing at a red-hot pace, and the growth is not expected to slow down significantly, especially in China and India, anytime soon. Economists generally expect China to surpass the U.S. economy by 2030, but depending on the current U.S. recovery, it could be even sooner. To understand how much the economic balance of power is shifting at the moment, one must understand how the current sluggish recovery in the U.S. and Europe is affecting the global economy. If the U.S. and Europe suffer through very slow and sluggish growth during the next 10 years and China and India continue to grow as expected, the performance gap between these counties will only narrow.
Investing in Foreign Markets
The best decision a new investor may make is to consider investing in emerging market such as China and India. A very small capital exposure to foreign and emerging market has been common in retirement planning over the last 20 years, but the degree of exposure may need to begin increasing significantly in order to truly find yield for your invested capital. There are several ways to take advantage of foreign markets. Forex trading is one. One investing opportunity that is beginning to open up currently is investment in the Chinese Yuan. The Chinese Yuan is expected to increase dramatically over the long-term. Due to several reasons, it is difficult to purchase large amounts of the Yuan right now, but investors can begin positioning themselves for future growth by investing in Exchange Traded Funds. A financial adviser may help explain this option further.
A second, and more common, option is to invest in Chinese and Indian equity markets by purchasing stock in several companies. If you are more interested in investing your money personally, you may be more interested in doing research and determining which companies to invest in individually, or you can invest in an index or mutual fund that is heavily, or even completely exposed, to Chinese and Indian equities.
There is no doubt that the global financial landscape is changing. Emerging market economies are allowing the power of democracy and capitalism to transform their once struggling countries into economic powerhouses. As this transformation continues over the next few decades, investors will increasingly become interested in investing abroad. By taking the first steps now, investors may be able to get in toward the bottom of what could a major move up in several of these markets over the next 30 years.
This is a guest post from Mark Trankle. Thanks for the awesome post, Mark!