Make a Gift to Your Future Self: Open an IRA

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Retirement, retirement, retirement. Now’s the time to make a gift to the “future you.”

This might not be the favorite topic of twenty- and thirty-somethings, with your busy lives and student loans. But that’s the young you. There’s also an old you waiting to come out who’ll one day be very grateful. Like it or not, this old self is coming. And his or her problems are yours… or soon will be!

The key thing to remember about the stock market is that incremental investments compound over the long term. The markets tend to rise over time (more on that below), so ongoing gains produce bigger returns for your retirement.

Say you put away $10,000 this year and the market rises 10 percent. You’ll have $11,000 the following year. If it rises another 10 percent that year, you’ll now have $12,100. Two years of 10 percent returns will make not 20 percent, but 21 percent. That’s 10.5 percent a year. Yep, compounding gives you an additional 0.5 percentage points of return.

Now extend that process out five years. Assuming a steady 10 percent gain per year, you’re now making over 12 percent annualized.

Of course, there are ups and downs along the way. They can hurt, but averaging all the volatility still points to higher prices over time. That’s why it’s important to start early and stick with it as the years go by.

Open an IRA with TradeStation to start saving now!

Next, it’s important to understand why stocks tend to rise. It’s not magic, after all.

Consider a key index like the S&P 500… a list of stocks. Yippee. But think a second longer. Well-informed experts seeking the most important firms pick these 500 companies. They look at factors like size and liquidity. But the most important thing is that the list changes over time. Some companies are added as they become more important and others falls out as they lose relevance.

That means the index always reflects a “best and brightest” of the world’s biggest economy. In recent months, for instance, scientific and technology-testing company Keysight (KEYS) was added to the index. Fintech upstart Jack Henry (JKHY) and semiconductor maker Maxim Integrated (MXIM) also joined. Firms like this are still in growth segments of the economy.

Meanwhile struggling energy companies like Range Resources (RRC) and Chesapeake (CHK) were removed from the S&P 500. Others like AutoNation (AN), Transocean (RIG) and Bed Bath & Beyond (BBY) also dropped out in the last year or two.

Now combine this process of ongoing refinement with compounding returns. Money put to work now will grow over time, keeping pace with changes in the economy and business cycle. You’re not just saving money. You’re literally hiring the smartest, sharpest and most proven business leaders, for decades, in one purchase. The future you could be very grateful.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.