How to Build Your Retirement by Trading Stocks

Written By Jeff Hindenach
Last updated February 22, 2019

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Investing
January 23, 2016

Simple. Thrifty. Living.

Investing in the stock market can be an excellent way to build up your retirement fund. According to NASDAQ, over the last 10 years the stock market has produced an average annual return of 7 percent. This is higher than any other kind of U.S. investment; Treasury Bills or Treasury Bonds only return 3 percent or 4 percent, and CDs earn even less. Here’s a quick run-down of what you need to know in order to make good decisions about online trading:

Every expert on the stock market will tell you that you can’t expect to walk away with profit in a short time. While there are day traders who do earn returns from rapid buying and selling, those people usually have specialized trading software and spend many hours each day staring at graphs on a screen. They also have days where they lose a lot of money. As a person who is buying stocks for reasons of long-term benefit, you will need to trust in the overall upward movement of the stock market over time. If you try to calculate the value of your shares every day or every week, you’ll be on an emotional roller coaster.

You can find good online trading platforms that will give you lots of tutorials and let you try experimenting with imaginary money before you invest any of your real funds. The best site for beginners is E*TRADE, since it has a long history of trading and a wealth of information for first-time traders. If you want to trade for cheap, TD Ameritrade has one of the cheapest prices for trading stocks.

The time-honored formula for investing in the stock market is to subtract your age from 100. The answer to that subtraction problem should be the same as the percentage of your money you invest in the stock market. So, if you are 30 years old, you can invest 70% of your retirement savings in the stock market. But if you’re 62 years old, you should not invest more than 38% of your money in stocks. The reason for this rule of thumb is two-fold: First, since stocks tend to do better over a long period of time, a younger person can afford to leave their money tied up in investments for more decades before they need to withdraw it for retirement. Second, a young person is still earning a salary, and they can recover more easily if some type of stock market catastrophe should occur.

In general, riskier stock choices are able to offer you higher returns – but of course, they also are more likely to decline in value and cause you to lose some of the money you have invested. Choosing the level of risk that you feel comfortable with is related to the rule above: if you are young, you can afford to invest in riskier stocks. This might mean that you buy shares directly in a company or industry that you feel has a promising future. If you want to experience less risk, or if you are older, it’s often good to put your investment into a managed fund that combines many stocks into its shares. That way, if one single stock goes down in value, you are cushioned against loss.

If you proceed wisely, and stay aware of the potential risks, investing in the stock market can be a great way to brighten your financial future.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He has a long history of financial journalism, with a background in newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as being published in The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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