Haven’t got the stomach for investing in the stock market? You are in good company. Only 52 percent of Americans own stock, through their retirement accounts or directly in companies, according to the Federal Reserve’s 2010 Survey of Consumer Finances.
Younger Americans seem particularly risk-averse: Just 13 percent of millennials (born 1980-1995) surveyed recently said they’d invest in the stock market.
Their caution in understandable, given the stock market crash in 2008: Investors lost $7 trillion that year.
Even so, stocks should be an important part of your savings strategy, Money Talks News founder Stacy Johnson says in the video below. Without a portion of savings invested in stocks, you are unlikely to keep up with inflation, never mind build real wealth.
After watching Stacy’s video, come back here to read about 12 ways to start investing safely and simply.
1. Gain confidence
Stocks are riskier than a savings account or certificate of deposit. But they also can deliver better returns. There’s no guarantee you won’t lose money but, writes Forbes contributor Mitch Tuchman:
If you could be sure, it wouldn’t be risk. But you can do a lot to lower unnecessary risk, and you can learn enough about investing to become much more comfortable with the ups and downs of the markets.
To start learning, search Money Talks News for “investing.”
2. Spread the risk
Stocks are just one part of a smart savings plan. Savvy investors balance the risk of owning stocks by purchasing other types of assets, too. That way, “a sudden decline in one part of the market is offset by a corresponding rise in another,” says Tuchman.
Build wealth by diversifying your assets. Each asset type serves a different purpose, balancing your risk. Nolo explains:
Stocks help your portfolio grow.
Bonds bring in income.
Real estate provides both a hedge against inflation and low “correlation” to stocks — in other words, it may rise when stocks fall.
International investments provide growth and help maintain buying power in an increasingly globalized world.
Cash gives you and your portfolio security and stability.
3. Manage your exposure to stocks
Some investors use a rule of thumb to decide how much to invest in the stock market: Subtract your age from 100 and invest the remaining percentage in stocks. If you’re 40, for example, keep 60 percent of your investments in stocks and 40 percent in bonds. When you’re 60, have just 40 percent in stocks.
Today, many advisers and investors believe that rule is outdated. CNN Money says:
However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age. That’s because if you need to make your money last longer, you’ll need the extra growth that stocks can provide.
Try using CNN’s asset allocation calculator to fine-tune your exposure to the stock market.
4. Buy mutual funds
Choosing individual stocks well requires more research than most of us are willing to do. Mutual funds that include many stocks can better balance the risk of owning stocks.
5. Use index funds
Some experts say that all you really need for investing in stocks is an index fund. These often have lower fees and better results than actively managed funds. Vanguard 500 Index Fund (VFINX), for example, is a basket of stocks that automatically tracks the performance of the stocks of 500 major American companies.
Investment writer Nancy Tengler writes in the Arizona Republic:
Just investing in an index fund that replicates the S&P 500, according to research reported in The Wall Street Journal, generated returns eight times greater than the average fund manager returned over the past 30 years. In fact, from 1926 to 2013, the S&P 500 produced an average annual return of 12.1 percent.
Even billionaire Warren Buffett says he has instructed the trustee of his estate to “put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.),” according to The Wall Street Journal.
6. Don’t waste money on fees
Don’t let fund management fees, portfolio management fees or trading fees eat up your capital. For most of us, these services just aren’t worth it. Vanguard’s S&P 500 Index Fund’s annual fee is “less than one-fifth of a percentage point,” according to The Economist, which adds: “That compares with the 1 to 2 points a year that investors can pay for active fund management, where the experts try to beat the index.” (See: “Mirror, Mirror on the Wall, What’s the Worst Fee of All?“)
7. Rebalance yearly
Suppose you decide to put 60 percent of your savings in the stock market. As time goes on, some of your investments will grow and others will grow less quickly or lose value. Your 60 percent stock allocation will change. Once a year, adjust, or rebalance, your portfolio so it has the right balance of allocations again.
“Active rebalancing — selling gainers and using the cash to buy into parts of the portfolio out of favor — allows you to capture gains and snap up bargains in a stress-free, no-fear way,” writes Tuchman.
8. Keep emotions out of investing
One common rookie investor mistake is reacting emotionally to stock market ups and downs. If you pulled out of stocks after the 2008 crash, for example, you may have missed the gains from the recent bull market. Remember: You are in this for the long haul.
Euphoria and overconfidence are dangerous, too. Buying stock in a particular industry or sector that’s in the news can land you in trouble. By the time you’ve heard of a trend, it may well have peaked.
9. Stay the course
The easiest way to grow a sizable retirement account is to start young and save and invest steadily and consistently. Says Kiplinger:
Over the long term, we think you can reasonably expect an average return of 7 percent to 9 percent per year on your investments … . You won’t make it every year, but that’s an achievable range if you plan your approach thoughtfully and stick to your plan.
10. Learn discipline
To prevent yourself from revisiting decisions, put much of your investing program on autopilot or follow a routine:
- Have workplace retirement fund contributions deducted automatically from your paycheck.
- Schedule savings to be moved electronically into investment accounts.
- Rebalance your investment account annually.
“The research (and investor experience) supports a buy and hold, indexed approach to stocks — a straightforward discipline that the most inexperienced investor can employ,” writes Tengler, in the Arizona Republic.
11. Get every bit of your company’s 401(k) match
If you are unsure if your employer matches 401(k) contributions, ask the human resources officer. If the company does match your savings, learn its maximum matching amount.
Suppose your employer matches your contributions to your 401(k) account dollar for dollar up to, say, a maximum of 4 percent of your $4,500 monthly salary. That’s $180 you can get free, each time you’re paid.
To earn the company’s match, you’d need to put $180 in the account, too, every month. That may not sound like much, but 12 monthly contributions of $180 is $2,160 a year.
12. Save all you can
Matching your employer’s contribution is just a beginning for your retirement savings. For an idea how much to save, use a retirement savings calculator: Try Bloomberg’s, for example, or search online until you find one or two you like.
Set a rough goal for retirement savings and keep increasing your 401(k) contributions until you are putting away enough to reach that goal. The maximum the IRS allows you to save in a 401(k) in 2014 is $17,500. If you are 50 or older, you can contribute another $5,500.
Share your experience in the stock market in the comments below or on Money Talks News’ Facebook page.