Making $50,000 a Year? Here’s How Much to Invest

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Provided by Investopedia

No matter how much money you earn, the amount you invest each year should be based on your goals.

Your investment goals not only provide you with a target at which to aim, they also provide the motivation necessary to stick with your investing plan.

Your investment goals should also be based on how much you can afford to invest. With an income of $50,000, the constraints of living expenses may prevent you from investing as much as you would like initially, but if you stay focused on your goals, you should be able to increase the amount of your investments as your income increases.

By following four key financial planning steps, you can determine how much to invest in the beginning and have a plan for achieving your goals through gradual increases in the amount you invest. For purposes of illustration, this particular case involves a 30-year-old person earning $50,000 per year with an expected increase in income of 4% per year.

Set Your Goals

At age 30, you may have several goals you want to achieve, which could include starting a family, having children, providing those children with a college education and retiring on time. This is a lot to accomplish on a $50,000 income. However, it is safe to assume your income will increase over the years, so you should not let your current income constrain your goals. You just have to prioritize, and as you set up your investment plan, target each goal separately. For this example, assume the goal you want to target is to retire at age 65. After inputting some assumptions into a retirement calculator, this indicates a need for $1 million in capital. This is your target. Using a savings calculator, and assuming an average annual return of 6.5%, you need to save $500 per month starting at age 30. This is your savings goal. Your next step is to create a spending plan that allows you to meet this goal.

Create a Spending Plan

The mistake many people make when creating a personal spending plan is they determine their savings amounts around their monthly expenses, which means they save what they have left over after expenses. This invariably results in a sporadic investing plan, which could mean no money is available for investing when expenses run high in a particular month. People who are intent on achieving their goals reverse the process and determine their monthly expenses around their savings goals. If your savings goal is $500, this amount becomes your first expenditure. It is especially easy to do if you set up an automatic deduction from your paycheck for a qualified retirement plan. This forces you to manage your expenses on $500 less each month.

Lock in a Percentage of Your Income

A savings goal of $500 amounts to 10% of your income, which is considered an appropriate amount for your income level. Assuming your income increases by an average of 4% per year, this automatically increases your savings amount by 4%. In 10 years, your annual savings amount, which started out as $6,000 per year, will increase to $8,540 per year. By the time you are 55, your annual savings will increase to $16,000 per year. This is how you reach your goal of $1 million at age 65 starting out on a $50,000-per-year income.

Invest According to Your Risk Profile

This investment plan assumes an average annual rate of return of 6.5%, which is achievable based on the historical return of the stock market over the last 100 years. It assumes a moderate investment profile, investing in large-cap stocks. If you are adverse to risk or prefer to include investments that are less volatile than stocks, you will have to lower your assumed rate of return, which will require you to increase the amount you invest. At a younger age, you have a longer time horizon, which may allow you to assume a little more risk for the potential of higher returns. Then, as you get closer to your retirement target, you will probably want to reduce the volatility in your portfolio by adding more fixed-income investments. By staying focused on your benchmark of a 6.5% average annual rate of return, you should be able to construct a portfolio allocation that suits your evolving risk profile over time, which will allow you to maintain a constant monthly investment amount.

Written by Richard Best of Investopedia 

(Source: MSN)

Any Bulls Left?

The number of bulls is dwindling. In periods of extreme market volatility such as we have experienced in recent weeks—and Friday, January 15, 2016, in particular, when the Dow was down over 500 points at one point before paring losses—we find it helpful to try to take some of the emotion out of our investment decisions. As difficult as that can be at times, this approach can help us reduce the chances of selling at the bottom, even though the natural reaction for many is to panic and hit the sell button.

One way to help measure how close to the bottom stocks may be is to use sentiment indicators to identify extremes in bullishness and bearishness. When the bulls are all washed out, in theory, there are few sells left to put more pressure on stocks. In this case, extreme bearishness can be viewed as a contrarian indicator and may signal that selling could be near an end.

Technical analysis can also help identify key price levels that may signal breaks in either direction. These tools can give us an idea of when the selling might stop and a reversal might ensue. An objective look at some data can be reassuring and help us make better investment decisions.

A closer look at sentiment indicators suggests most of the selling may be behind us. We haven’t seen full panic—or capitulation—but we have gained some confidence that the upside opportunity for stocks may outweigh the downside.

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The latest American Association of Individual Investors (AAII) survey indicates an extreme scarcity of bullish investors, even more extreme than was observed in the summer of 2015. In fact, based on the latest AAII survey, bulls are as scarce as they were in 2009 and 2003, the last two major market bottoms. The reading of bulls during the latest week came in at 18%, the lowest level since April 2005. Bears have spiked as well, up to more than 45%, the most since April 2013.

Using weekly data, the eight-week moving average of the bulls is below 26% [Figure 1]. For comparison, this was the lowest since March 2009 during the depths of the financial crisis. The only other time it was less than 26% over the past 20 years was March 2003. This extreme level of bearish sentiment may suggest a lack of new sellers and that stocks may be nearing a bottom.


Another way to assess investor sentiment is by looking at the ratio of bullish to bearish positioning in the derivatives market. Recently, positioning in the derivatives markets has become much more bearish, according to data from the Chicago Board Options Exchange (CBOE). Coupled with the action in the AAII sentiment poll, this shows how dour most view the stock market currently. From a contrarian point of view, this could be a sign that a bottom may be near.


We can also use more traditional technical analysis to assess how likely it is that stocks are nearing a bottom. Over the past few weeks, the S&P 500 Index has incurred some technical damage, with the index now testing its August 25, 2015, low at 1867. From a technical perspective, a sustained break below the 1867 support level would establish a lower low, indicating the downtrend may continue.

Conversely, a bounce off of the 1867 level would indicate stabilization by setting up a higher low, increasing the potential for a short-term bottoming process.

Another form of technical damage occurred on January 8, 2016, when the shorter-term moving average (50 periods) crossed below its longerterm moving average (200 periods) on the daily price chart (which some refer to as a “death cross”). This is the second time this cross has occurred over the past six months—the first occurred on August 28, 2015, very close to the stock market lows of August and 2015 [Figure 2].

Since 1980, the S&P 500 has experienced 16 of these crosses. In 11 of those instances, the S&P 500 was higher 3 months later, with an average gain of 4.7%. The numbers improve after 6 months, with gains in 10 out of 15 instances, and an average gain of 7.4%. And over 12 months, stocks are only down if accompanied by recessions. This indicator has provided many false bear market signals over time and often indicated the approach of a rebound.


Evidence of “capitulation,” essentially marking investors as throwing in the towel, can also signal the end of selling may be near. When the S&P 500 Index was at 1867 on August 25, 2015, many technical and sentiment stock market indicators were at extreme levels on heavy trading volume and were characterized by some as capitulation. This essentially means investors have all headed for the exits, leaving no one else to sell (in theory) and signaling a potential tradable stock market bottom.

The Relative Strength Index (RSI) can assess capitulation by measuring the depth of oversold conditions. A greater frequency of steep declines over a period (in this case we use 14 days) coincides with a low RSI. The RSI at just over 18 on August 24, 2015, was considered extremely oversold, compared with the recent low back on January 8, 2016, at 29. Holding this level would be considered a higher low, indicating the potential start of a short-term bottoming process and increasing the possibility that stocks move higher.

We can also look at the percent of S&P 500 companies above their 50-day moving average to assess capitulation. On August 24, 2015, this measure stood at 8.2, an extremely oversold, capitulation-like reading, compared with the more recent low of 12.7 on January 8, 2016. Again, should this level hold, it would suggest the start of a potential short-term bottoming process and, hopefully, a subsequent rebound in stocks. We may not have seen full-blown panic, but we have gained some confidence that the upside opportunity for stocks from here may outweigh the downside.

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Another way to gauge sentiment is valuations, one of the more common worries about the ongoing bull market. The latest stock market correction has brought stocks down to a reasonable forward (next 12 months) price-to-earnings ratio (PE), below 15, down from more than 17 back in March 2015 (based on Thomson-tracked S&P 500 consensus estimates). On a trailing 12-month basis, at 15.8, valuations are in-line with the average since 1950 and slightly below the post-1980 average.

While valuations alone do not drive our investment decisions, especially in the short term, they can help entice buyers when stocks fall, especially at such low interest rate levels [Figure 3]. In fact, the dividend yield for the S&P 500 at 2.37% as of January 15, 2016, is higher than the yield on 10- year Treasury bonds at 2.03%. Corporate America, outside of the challenged energy sector, remains in very good shape and, we believe, is in good position to grow profits in 2016 despite the drags from the energy sector, a strong U.S. dollar, and slower growth in China.

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Technical analysis and valuations can provide some reassurance that a market decline might be nearing an end, but fundamentals are another key piece of the story. We continue to watch a number of fundamental indicators that might provide early warning of a potentially larger bear market decline. Look for an update on some of our favorite leading fundamental indicators in this publication over the coming weeks.


As difficult as it is in periods of heightened volatility, we encourage investors to stick with their plan. The natural emotional response is to sell everything and go to cash, but that is rarely the right decision. Technical analysis tools can help inform our decisions, in addition to valuations and fundamentals. Technical indicators, like valuation and fundamental indicators, are not perfect, but the convergence of extreme bearish signals indicate selling may be near an end.

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(Source: LPL Financial)

Investor Confidence Holds Steady at 7-Year High

© TheStreet
© TheStreet
© TheStreet

NEW YORK (TheStreet) — Retail investors are feeling optimistic about their financial futures, according to a new poll.

The Wells Fargo/Gallup Investor and Retirement Optimism Index showed that U.S. investor confidence held steady in the second quarter at a seven-year high.

“They have confidence in the economy, they have confidence in the job market, the housing market seems to be inviting more first time homebuyers, so the American Dream, in their minds, seems to be alive and well,” said Mary Mack, President of Wells Fargo Advisors.

Optimism however, trumps planning.

Less than half of those surveyed have a written financial plan, according to Mack.

“I think it’s scary for some people,” she said. “So our financial advisors work with them, break it down, talk about goals and dreams and risks, and what worries you,” added Mack.

The poll found that investors also said access to online or digital investing tools is nearly equally as important as having a strong relationship with a personal financial advisors.

Additionally, a majority of investors said they do not  feel confident about investing in the market on their own and prefer consulting with a professional.

The survey also asked investors about their financial worries.

The majority of respondents, 57%, said their number one worry is personal identity theft.

That was followed by cyber-attacks on their savings or investment accounts, stock market volatility and elder financial abuse.

In a press release, Mack stated “over the past three years, we’ve seen reports of such abuse coming in from our advisors, and unfortunately, we expect to see that growth continue as the population ages.”

The poll of 1005 investors was conducted in late May. Of those surveyed, 59% reported annual income of less than $90,000, while 41% had income above that level.

Written by Rhonda Schaffler of The Street

(Source: The Street)