Investing in stocks is risky and can be scary — but your retirement savings need the higher returns offered by the stock market. Here’s how to seize that growth without losing your mind.
Haven’t got the stomach for investing in the stock market? You are in good company.
Only 54 percent of American adults have any money invested in the stock market, according to a 2017 Gallup poll. The poll, which has been conducted since 1998, shows stock ownership has been hovering around that level for the past five years (with a low of 52 percent in 2013 and 2016) — far from its high of 67 percent in 2002.
Younger Americans seem particularly risk-averse. A Harris Poll survey last year showed 79 percent of millennials (ages 18 to 34) are not investing in the stock market.
Their caution is understandable — this generation came of age during the Great Recession. But especially for young people, who have time to ride out ups and downs in the market, stocks should be a part of any retirement savings strategy. They provide a way to stay ahead of inflation and build real wealth.
But whether you’re 18 or 58, it’s possible to invest in stocks safely and simply. Start by making sure you’re minding 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, again, you need to beat inflation and build up enough money to retire comfortably.
One way to take advantage of the higher returns offered by the stock market without taking on too much risk is to diversify your portfolio. In other words, don’t put 100 percent of your retirement savings in stocks. Put some in other types of investments — bonds, real estate and cash are common alternatives, for example.
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 remainder as a percentage in stocks. If you’re 40, for example, you’d keep 60 percent of your portfolio in stocks and 40 percent in other investments.
Today, many advisers and investors believe that rule is outdated. CNN Money says:
“[W]ith 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.”