Haven’t got the stomach for investing in the stock market? You are in good company.
Just 55% of American adults have any money invested in stocks, according to Gallup.
Such caution is understandable — investing in stocks can be a bumpy ride, with soaring highs followed by nerve-rattling lows. But stocks should be a part of any retirement savings strategy. Such investments provide a great way to stay ahead of inflation and build real wealth.
Fortunately, it’s possible to invest in stocks safely and simply. Start by making sure you mind the following tips.
1. Spread the risk
Stocks are riskier than a savings account or certificate of deposit. But they have historically delivered higher returns, which you need to beat inflation and build up enough money to retire comfortably.
Diversifying your portfolio helps you take advantage of the higher returns offered by the stock market without taking on too much risk. Don’t put 100% of your retirement savings in stocks. Put some in other types of investments — bonds, real estate and cash are common alternatives.
One rule of thumb is to subtract your age from 100, and invest the result as the percentage of your savings to place in stocks. If you’re 40, for example, you’d keep 60% of your portfolio in stocks and 40% in other investments.
Today, many advisers and investors believe that rule is outdated, since people are living longer. They recommend using 110 or 120 instead of 100 when doing the math.
2. Buy mutual funds
Focusing on individual stocks is an especially risky way to invest in the stock market. If a company goes kaput, you stand to lose all the money you invested in it. Mutual funds that comprise shares of stock in multiple companies — known as “stock funds” — can better balance the risk of owning stocks.
Money Talks News founder Stacy Johnson explains in “Ask Stacy — How Do I Invest in a Mutual Fund?“:
“The chief advantage of a mutual fund is that it allows an investor to own a small slice of a big portfolio. Diversifying with a bunch of stocks or bonds is much safer than putting all your money into one or two stocks or bonds.”
3. Use index funds
There are two main types of mutual funds when it comes to how they are managed: actively managed mutual funds and passively managed mutual funds, commonly called index funds.
Actively managed mutual funds are run by a professional who aims to beat the market. Passive funds aim to mirror the performance of a market index — such as the Standard & Poor’s 500 stock market index — and require little management. In fact, they can be run by a computer.
Due to these differences, active funds tend to come with heftier fees, and index funds tend to have much lower expenses.
Want to know more? Check out “This Type of Mutual Fund Offers Way More Bang for Your Buck.”
4. Don’t waste money on fees
Don’t let mutual fund fees, portfolio management fees or trading fees eat up your capital. For most of us, these services just aren’t worth it.
To cut mutual fund fees, choose index funds instead of passive funds. To reduce portfolio management fees, consider whether you really need a portfolio manager or other financial adviser. For help with this decision, check out “3 Steps to Finding the Perfect Financial Adviser.”
5. Rebalance yearly
Suppose you decide to put 60% of your savings in the stock market. As time goes on, some of your investments will grow faster than others, and some may lose value. This will cause your 60% stock allocation to change.
So once a year you should adjust, or rebalance, your portfolio so it has the right balance of allocations again. This task can be done in about 15 minutes.
6. 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 bull market that followed. 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.
7. Stay the course
The easiest way to grow a sizable retirement account is to start young and save and invest steadily and consistently.
So, put much of your investing program on autopilot or follow a routine. This means:
- Having workplace retirement fund contributions deducted automatically from your paycheck.
- Setting up bank accounts such that money is routinely moved into investment accounts automatically.
- Rebalancing your investments annually.
8. Get every bit of your company’s 401(k) match
If you are unsure whether your employer matches 401(k) contributions, ask the human resources office. 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 a maximum of 4% of your $4,500 monthly salary. That’s $180 you can get free every month — $2,160 every year. Of course, to earn the company’s match, you’ll need to put $180 in the account every month, too.
9. Contribute as much as you can
To get an idea of how much money you should be saving for retirement, use a retirement savings calculator. Try AARP’s, for example, or search online until you find one or two you like.
Set a rough goal for retirement savings, and keep increasing the amount of money you set aside for retirement until you are putting away enough to reach that goal.
Share your experiences in the stock market in the comments below or on Money Talks News’ Facebook page.