Today’s investors are facing problems that haven’t been seen in modern times. A shift has been taking place over the past few decades that makes traditional methods of building wealth increasingly outdated. Despite this, these traditional methods are still being accepted as fact for the new crop of American investors. The purpose of this essay is to lay out the available options for new investors just entering the workforce and compare them with each other. The strategies included in this essay are 401k’s, IRA’s, stocks, bonds, Real Estate, Pensions, and bullion. No option is perfect, but after the information is provided the option that is best for the reader’s situation will become clear. There are still available options that may not be listed in this essay; this is because they may not be common enough for the majority of investors. Whichever route an investor chooses, it is essential to start investing as early as possible. The benefits of this will be discussed first. 

Every year, countless Americans reach 65 and don’t have the portfolio to retire. This can be because of reckless spending or uninformed investing. It is essential for a young person just entering the workforce to get their ducks in a row and start saving immediately. These savings can be used to create a portfolio and pay off the ever-increasing student loans that graduates take with them. Every year an investor waits is a year of returns lost. For any of these potential strategies to work, an investor must obey one rule; spend less than you make. This is a concept that millennials have had a hard time with. Although, with advertisements being blasted every direction one looks, it’s hard to follow this principle. To be a successful investor, an individual doesn’t have a choice. Whether its saving $10,000 or $100,000, a starting stack of cash is necessary to see any real returns. Luckily, there are a few rules that can make it easier to cut down on spending. First, a young person should avoid living in big cities and high tax states. While there can be a different appeal to living in these places, the high taxes cut a great deal into what an investor can save. It is better to first earn wealth, put it away, and then move to a more desirable location. Places with low tax rates are often in the South and Midwest. Second, a young person should avoid buying a new car. Solid used cars can go as cheap as $3000. It is smarter to purchase a cheap used car during the time of increased saving than blow $35000 on a new car with crippling loans. The last rule to follow to save more is the most essential. As an individual’s income rises over the first couple years, the individual should avoid increasing spending. Living in the same conditions as income rises will balloon the amount available to put into savings. Living smart and cheap for the first couple years in the workforce will save years of working decades later. On the topic of student loans, most loans offer an option where an individual can pay a percentage of their income. This is a great option, as it leaves money that can still be invested given the individual lives frugal. Once an investor has accumulated enough cash to start investing, the research into what options are available begins. The first topic discussed is a strategy that has been relevant for centuries.

The most common investment for most of human history has been accumulating bullion. Whether it be gold, silver, or another type of precious metal, these items have proved to be an effective way to store wealth through the highs and lows of the economy. For example, one ounce of gold has never dropped below $250 since 1986 (APMEX). As the economy became increasingly volatile through the crashes since, gold has only increased in value to $1237 (APMEX). This shows that as trust in the economy decreases, the price of gold increases. Judging from the traditional prices of gold there is reason to believe that it is currently overvalued. This is because as the economy goes through highs and lows, gold has continued to rise. There is reason to believe that eventually, gold may start to head back to the mean. Despite this, it is still a smart move for any investor to accumulate a portion of their portfolio to gold and other similar type investments. These precious metals serve as the most ideal hedge against the global economy. While public and private investments may falter in the face of a collapse, physical metals could once again serve as the main currency for wealth transfers. Another traditional method of saving for a situation like this is collecting canned food, weapons, and water. The people who do this are often seen as impractical, but if cash investments are one day obsolete the people who invested just a small portion of their capital into these types of items, they will be miles ahead of other investors. Thus, it is better to be safe than sorry. In the next section I will talk about a strategy that is becoming increasing extinct. 

One strategy that a good portion of Americans relied on in the 20th century was pensions. The first company pension plan was created by The American Express Company in 1875 (Georgetown Law). For most of history retirement was usually not an option. Employees simply worked until they were dead. The introduction of pension plans made retirement possible. By 1980, 36 million workers in the U.S. were covered by pension plans, an estimated 46% of all workers (Georgetown Law). After 1980, pension plans were slowly replaced with government programs. This was largely due to the government slowly enacted laws that were making pensions obsolete. Since then, millions of Americans have lost their pension plans after they were terminated. This trend is likely to continue, as many experts are predicting all pensions to be frozen or terminated in the coming years (Social Security Bulletin). Employees now use government saving tools such as 401k’s and IRA’s. Pensions were the first wave of making retirement possible, but they simply couldn’t keep up with the changing landscape. This shows that an investor must keep up with current events to remain effective in their preparation. The next strategy I will discuss played a large part in the elimination of the pension plan.

The 401k plan was created in 1980 as the public began to realize to downside to pension plans. The 401k was seen as a cheaper alternative for companies who want to help their employees save for retirement. This was largely due to the plan being oversold by those who created it. These people, like former American Society of Pension Actuaries head Gerald Facciani, have since downplayed its effectiveness. Facciano is recently quoted as saying, “The great lie is that the 401(k) was capable of replacing the old system of pensions. It was oversold” (CNBC). The big downside to the 401k plan is it leaves investors vulnerable to drops in the stock market and high fees from Wall Street money managers. In addition to that, with 401k plans becoming mainstream, over 4.8 trillion dollars have been pumped into the stock market (CNBC). This has led to a severe overvaluation of the stock market in general. This is a bubble that is likely not going anyway anytime soon, as the recent stock market crash failed to alert the everyday investor of how putting money into a 401k plan leaves individuals at the mercy of the market. In addition to the dangers, the IRS has the right to take 10% of a 401k plan if it is accessed before the age of 59 ½. There are a few exceptions to this rule such as a medical emergency.  With all the evidence available today, there is no reason for a new investor to begin contributing to a 401k plan. The many dangers that outweigh it do not make up for the volatile returns investors have seen. The next section will discuss a great alternative to the 401k plan, especially if your employer doesn’t offer to match it.

The Individual Retirement Arrangement (IRA) was created in 1974 after Congress passed the Employee Retirement Income Security Act (Getting your Financial Ducks in a Row). This was meant to serve as another option for investors to save if their company did not offer a private pension. The largest selling point for IRA accounts is the tax-free interest on investments and not having to pay fees to Wall Street money managers. There are two different types of IRA accounts available. The Roth IRA offers no tax break for contributions, but earnings and withdrawals are generally tax-free after the age of 56 ½. The traditional IRA’s contributions are tax deductible on both state and federal tax returns for the year in which the contribution is made, while withdrawals in retirement are taxed at ordinary income tax rates. For these reasons, traditional IRA and Roth IRA accounts should be more appealing to the everyday investor than a 401k plan. Both 401k accounts and IRA accounts also share some similarities. Like the 401k plan, taking money out of an IRA account before the age of 59 ½ allows the IRS to take back 10% of the account amount. Therefore, these accounts remain illiquid for a long period of time. The choice to invest in these types of accounts lay in the investor and whether they see themselves wanting to access their retirement accounts. From one side, investing in these accounts serves as protection from yourself. These penalties will make sure an investor doesn’t take the money out to spend it on unnecessary purchases like a brand new car. From the other side, this money will be locked away for decades, and if an investor wants to take the money out to start a business or invest in another investment opportunity they will face a large penalty. In the next section I will talk about the most rock solid investment available.

Bonds are generally categorized into corporate bonds and government bonds. Government bonds offer the lowest risk option investors have today. The risk can still vary depending on how solid the government is of the bond the investor purchases. With this lack of risk comes a lower rate of return. Whether or not the return is worth it is up to the investor. Corporate bonds face more risk than government bonds, and with that comes a higher rate of return. Corporate bonds face a higher risk of being defaulted on by the company, and the investor should do independent research to see if the credit of the company is solid. Both types of bonds can still be taken advantage of by inflation. Bonds in general offer a very safe option for investors to put a portion of their savings into, especially during times of volatile markets (Investopedia). The last topic can sometimes have high risk, but it comes with higher returns.

Investing in real estate has proven to be a very effective way for investors to build wealth over time. Just like the stock market, the real estate market has seen its ups and downs, including the largest crash in recent memory in 2007. Despite this, no other investment strategy has increased over time the way real estate has. Real estate is also a tangible good that an investor can touch and feel. This emotional connection that can happen makes investing in real estate the desired strategy for millions of Americans. Real estate also offers many different tax breaks. These could include devaluation, repairs, travel, and insurance. Selling off real estate to purchase more property also offers an exception from Capital Gains tax. These countless tax breaks make investing in real estate very beneficial for the average investor. Many investors stay away from real estate because they believe they don’t have enough money to get started. This is a misconception. The 401k plan doesn’t allow investors to contribute more than $18,000 per year. If an investor would instead take that $18,000 and use it as a down payment, the returns over time could beat the 401k tremendously. Another problem that investors face is investing in real estate takes a great deal more time than simply throwing money at a 401k or an IRA plan. Real Estate also faces a similar problem as 401k and IRA plans do. It is not liquid. Selling off properties can sometimes take time, especially during times of volatile markets. There is also a great deal of risk for signing off on a $500,000 loan that could cripple an investor financially if the property fails. With the pros and cons of investing in real estate, I believe this is best way to store and grow wealth over time. If an investor collects a few properties early in their career, by the time they retire they could all be paid off and cash flowing at a rate a 401k or IRA plan couldn’t touch.

 