If you've been considering investing in the stock market for a while, but haven't yet opened an account and started contributing, make 2020 the year you turn intentions into dollars.
Over half of Americans (55%) say they are not participating in the stock market, according to a 2019 poll of over 8,000 U.S. adults conducted by MetLife. Gen Z (18 to 24) and millennials (defined here those 25 to 34) are opting out in far greater numbers than older Americans.
For many, it comes down to fear. "There are so many choices today — it's definitely overwhelming for people," says David Day, a certified financial planner with Colorado-based Gold Medal Waters. "When you have too many choices and there are too many options, you end up just getting paralyzed and doing nothing."
But experts say even if the stock market conditions aren't perfect, it's worth investing, be it in a retirement account or a taxable brokerage account. Don't waste time trying to get into the market at the perfect time, says Ron Guay, a financial planner with California-based Rivermark Wealth Management.
"The best time to invest in the market is when you have the money to do so. Holding money on the sidelines in anticipation of a market dip is a loser's game," he says.
Here's how financial planners recommend first-time investors get started today.
It sounds easy to determine if you're a conservative or aggressive investor, but it can be a bit more nuanced — especially if you haven't invested much in the past, or have only contributed to a target date fund within a retirement account, such as a 401(k). In those instances, you may not have had to consider risk because the fund was based on your potential retirement date and allocated accordingly.
It's a little different when you're the one picking the funds or finding a portfolio in an individual retirement account or a taxable brokerage account that works for you. The last decade has brought a charging bull market that doesn't seem to be losing steam. That environment of an economically sound market that consistently delivers good returns may have created unrealistic expectations among young people that markets will never go down and that investing isn't that risky.
Take a moment to consider what you'd be willing to risk if the market experienced a sustained downturn and you lost part of your investment. If you're not sure, there are quizzes you can take, such as the Investment Risk Tolerance Assessment created by personal financial planning professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia.
If you're looking for a fairly easy way to get started investing, Guay frequently suggests first-time investors open a managed account with an online investment advice service (also called a robo-advisor) like Betterment.
They do a nice job of first focusing the investor on their goal, such as building an emergency fund — a key component to financial health — or investing savings for a down payment for a first home or other large purchase, Guay says. "Many times investors want to jump right in and start buying stocks without even determining what the eventual use of the funds will be," he says. Having a clear goal for the money will dictate how and where you invest.
Several robo-advisors, including Betterment and investing apps like Stockpile and Stash, offer fractional share investing, which allows investors to buy a portion of a stock or ETF instead of a whole unit. This makes it easier for investors with only a limited amount of money to put everything into the market, says Ryan Firth, a financial planner with Texas-based Mercer Street.
Many of these platforms also make it easy to make regular contributions to your retirement accounts part of your routine, such as putting $100 aside every two weeks, a strategy that experts call dollar-cost averaging.
This is good for investors with a long time horizon and a goal like saving for retirement because it takes emotion out of the equation. Instead, you're continually investing, week after week, no matter what the market is doing. Plus, it keeps you from selling out during market lows and buying in at market highs.
If you're a first-time investor investing on your own, keep it as simple as possible, recommends John Crumrine, a CFP with North Carolina-based Brunswick Financial. "The easiest way to do that while still having a diversified portfolio is to invest in the broadest index funds you can find," he says
It's reasonable for an investor in their 20s or 30s to invest a majority, or even all of the money, in their Roth IRA in stocks because they have a longer time to recover from any potential losses. But instead of picking individual stocks, experts say to look for a total stock market exchange-traded fund (ETF) or index fund, which is a type of mutual fund. Crumrine says something like the Fidelity Total Market Index Fund (FSKAX) or the Schwab Total Stock Market Index Fund (SWTSX), both of which cover virtually the entire U.S. stock market, would be a good start. The Vanguard Total Stock Market ETF (VTI) is a similarly broad stock ETF option.
You could also look for a blend index fund, whether for a Roth IRA or a brokerage account. These types of funds contain a variety of stocks and sometimes bonds, to create a diversified investment option, says Sara Behr, a CFP and founder of California-based Simplify Financial Planning. The Vanguard Balanced Index Fund (VBINX), which has roughly 60% in stocks and 40% in bonds by tracking two indexes, is a good example of this type of blend fund.
When investing, you want to create a balanced, diversified portfolio, which means that you have your money invested in different types of assets, such as stocks and bonds. You want to set up your investments in a way that when one sector of the market is dipping, you are also invested somewhere that is performing well. To do that, you may need to invest in more than one fund.
That said, don't get so hung up on finding that perfect fund that you don't invest at all. "Getting invested is way more important than the difference between Fund A and Fund B," Day says.
Whether you're using a robo-advisor or investing via a brokerage, you need to understand what you're paying for your investments. Over a third of U.S. investors think that they don't pay any fees, a 2018 survey found. But it turns out, a vast majority do — and those fees can add up. In some cases, they've been found to eat away at your investment returns.
Robo-advisors offer a lot of helpful tools and easy-to-follow formats. But you are paying a bit more, usually between 0.25% and 1% of your assets, for the service's help setting up and managing your money. That's on top of the cost of the fund, typically referred to as the expense ratio.
By doing it yourself, you'll avoid those management fees, but you will still have to pay the expense ratio. The average ratio across all mutual funds, including index funds, was about 0.48% in 2018, according to Morningstar. ETFs, on the other hand, carry lower average expense ratios of 0.44%. That means if you invest $1,000 into an ETF, you'll likely pay about $4.40 in annual fees.
Most funds, and even some investment services, have minimum initial investment amounts ranging from $100 to $3,000, although you can find some with no minimum, Crumrine says. If you don't have enough to hit the minimum and start investing right away, he says you can set up the automatic money transfers to the account until you have built up enough to meet the requirement.
"Patience is an important lesson to learn for young investors. They want to see quick results," says Randy Gardner, an adjunct professor of financial planning at the American College of Financial Services and financial coach with the Garrett Planning Network of financial planners.
Everyone expects to have the next Microsoft or Apple or Google, Gardner says, and while there are stocks with big gains and years that the market does very well (including last year, with the S&P 500 rising 28.9%), the stock market returns a historical average of about 10%.
"We've been trained to expect big returns, and if we don't get them, then we're disappointed," Gardner says. "A lot of people lose confidence in the markets because they don't give the returns as quickly as people hoped."
And don't forget to reinvest the returns you do get, Crumrine says. "Reinvestment is one of the keys to growing your balances over time," he says. When first purchasing a mutual fund, as part of the order entry, the investor will have an option to automatically reinvest dividends and capital gains. This option should always be selected, he adds.
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