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Why should you invest?

POSTED: July 12, 2007 5:02 a.m.

We love lists. We want to know the 10 best pizza places in town and the 10 worst dressed celebrities at the Oscars. We long to find the top 10 movies of the year and the 10 most popular songs of the century. We want to know about the richest people in the country and the cheapest brunches in our city. In short, the list of lists could go on for a long time, but there’s always room for one more — so let’s look at the Top Five Reasons to Invest.

Here they are, in no particular order of importance:

1. Investing can help you enjoy a comfortable retirement. Most people need at least 80 percent of their pre-retirement income to maintain a similar lifestyle during retirement. You’ll get some of your retirement income from Social Security, but it almost certainly won’t be enough. To help meet your retirement income needs, you’ll need to invest regularly, both through your employer-sponsored plan, such as a 401(k), and through an IRA and other individual investments.

2. Investing can keep you ahead of inflation. Over time, even a low rate of inflation can severely erode your purchasing power. For example, suppose you currently earn $50,000 per year, and you assume a 4 percent inflation rate for the next 30 years. At that point, you would need to earn the equivalent of more than $162,000 per year just to keep the standard of living you have today. If you want to stay ahead of inflation, you will unquestionably need to invest. And you’ll need to keep in mind that, when it comes to battling inflation, not all investments are created equal. Fixed-income vehicles, such as Certificates of Deposit (CDs) and bonds may be excellent choices for providing you with stability of principal and current income, but, over time, only stocks have significantly outperformed inflation. Consequently, you will need at least some stock holdings in your portfolio if you want to protect your long-term purchasing power.

3. Investing can help you prepare for emergencies. If need a new car, or you face an unexpected — and large — medical bill, where will you get the money? By setting up an emergency fund of six to 12 months’ worth of living expenses, and investing the money in a liquid vehicle with strong protection of principal, you can help prepare yourself for life’s bumps in the road.

4. Investing can help you realize your dreams. If you want to someday travel the world, own a vacation home or even open your own business, you’ll need sufficient financial resources — and that means you have to save and invest throughout your working life. By following a disciplined investment strategy and working with a professional financial advisor, you may be able to someday turn your hopes into reality.

5. Investing can help you leave a legacy. You work hard all your life — but you’re not doing it all for yourself. If you have a family, you want to be able to leave something behind. You may also want to support a favorite charitable organization. To be able to leave a financial legacy when you’re gone, you’ll need to invest — while you’re here.

So, there you have them — five very good reasons to be a lifetime investor. And the sooner you start, the better.

Jeff Hupman is a financial advisor with Edward Jones in Rincon.

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