If someone told you there was an easy way to retire with hundreds of thousands of dollars more in savings, you’d likely take advantage of it in a heartbeat. Yet nearly half of Americans are missing out on the opportunity to grow their wealth, a survey shows.
It’s understandable why some people may not want to invest in the stock market.
It does involve a certain amount of risk, and if you’ve been burned by it in the past, you may not want to lose any more money.
But it’s one of the best (and easiest) ways to build a healthy and robust nest egg, and there are ways to invest safely while still reaping the rewards.
Investing basics: How to get started
Investing in the stock market may sound intimidating, with images of stockbrokers on Wall Street scurrying around the trading floor. In reality, though, you can start investing easily from the comfort of your couch.
If your employer offers a 401(k) plan, that’s one of the best places to start. Investing in a 401(k) is simple, and oftentimes your employer can automatically transfer a portion of every paycheck directly into your retirement account. That can make it much easier to save, partly because you no longer have to remember to set money aside each month and partly because you don’t have a chance to spend it before you stash it away.
Another perk to investing in your 401(k) is that your employer may offer matching contributions up to a certain percentage of your salary. These contributions are basically free money, so you’d be wise to take full advantage of them.
One downside to 401(k) plans, though, is that you often won’t have many investment options. That’s not necessarily a bad thing, because it can make it much less overwhelming to decide where to put your money when you only have a few choices. But if all your investment options charge high fees or if you’d rather take a more customized, hands-on approach, an IRA might be a better option.
IRAs — both traditional and Roth varieties — offer a wealth of investment options, so you can customize your investments to your heart’s delight. If you go with this option, just keep in mind that it might be wise to also find a financial adviser who can help ensure your investments align with your long-term goals.
Limit your risk while still earning high rewards
Of course, investing every dollar to your name in an up-and-coming tech stock you think will make you a billionaire is risky. But even your 401(k) or IRA carries some risk, because investing in the stock market to any degree involves depending on the market’s performance — which is out of your control. Still, there are ways to limit your risk as much as possible.
One option is to invest in a target-date fund. These automatically balance your investments depending on the year you plan to retire — or your target date. So if you’re in your 20s with several decades left to save, your fund will invest your cash more aggressively. You’ll likely see higher rewards, but if the market takes a dip, you have more time to make up the losses. Then, as you get older and closer to retirement age, your portfolio will shift to more-conservative investments like bonds, which typically see lower returns but less risk.
Another option to keep your money as safe as possible in the stock market is to invest in index funds. Index and mutual funds are similar in that they’re large collections of stocks and other assets, and by investing in these types of funds, you’re essentially investing in dozens or even hundreds of stocks at the same time. That makes them inherently less risky than investing in a single stock, because if one stock in the fund loses value, it won’t have a significant effect on your total investments.
One major difference between index and mutual funds is that mutual funds are actively managed by a portfolio manager — someone who chooses what should go into each fund. Index funds are passively managed funds that are based on certain stock indexes, like the S&P 500. That means you’ll pay higher fees to invest in a mutual fund, because there’s a person behind it trying to invest in ways to beat the market. That might make it seem like mutual funds are the better investment choice, but in reality, index funds typically outperform mutual funds over time.
If you’re feeling a little overwhelmed by all your choices, keep in mind you don’t have to choose just one investment option. Your 401(k) or IRA will likely offer a variety of mutual funds and index funds, and spreading your money across multiple funds can help diversify your investments and limit your risk even more.
Investing in the stock market is not as scary as it might appear. It’s easy to save in a 401(k) or IRA, and simply getting started is half the battle. Once you start regularly contributing to your retirement account, you can build wealth and see your savings skyrocket over time.
— Katie Brockman
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Source: The Motley Fool