Megan Leonhardt* says experts say even if the stock market conditions aren’t perfect, it is always worth investing.
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.
For many not participating in the stock market, it comes down to fear.
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 financial planner Ron Guay.
“The best time to invest in the market is when you have the money to do so,” he says.
“Holding money on the sidelines in anticipation of a market dip is a loser’s game.”
Understand what you’re willing to risk
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.
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 that works for you.
The past decade has brought a charging bull market that doesn’t seem to be losing steam.
An environment consistently delivering 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.
Online investment tools can make it easier
If you’re looking for a fairly easy way to get started investing, Guay suggests first-time investors open a managed account with an online investment advice service (also called a robo-advisor).
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.
“Many investors want to jump right in and start buying stocks without even determining what the eventual use of the funds will be,” Guay says.
Having a clear goal for the money will dictate how and where you invest.
If going the DIY route: Find diversified, low-cost funds
Of course, you can invest on your own by simply signing up for an account with a brokerage.
If you’re a first-time investor investing on your own, keep it as simple as possible, recommends John Crumrine, a CFP with 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
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.
You could also look for a blend index fund.
These types of funds contain a variety of stocks and sometimes bonds, to create a diversified investment option.
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.
Keep an eye on fees
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 US 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 per cent and 1 per cent 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.
Temper your expectations
“Patience is an important lesson to learn for young investors,” says Randy Gardner, an adjunct professor of financial planning at the American College of Financial Services.
“They want to see quick results.”
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, the stock market returns a historical average of about 10 per cent.
“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.
Reinvestment is one of the keys to growing your balances over time.
* Megan Leonhardt is a senior money reporter with CNBC MakeIt. She tweets at @Megan_Leonhardt.
This article first appeared at www.cnbc.com.
