Can we all agree that the stock market can be really confusing? Before I started my job as a financial educator, I knew next to nothing about stock market terminology, or how to interpret what I’d hear on the news. Since I’m not planning to be a day trader (and I’m guessing you aren’t either), my biggest goal is to use the stock market to my advantage to increase my retirement savings. Over the last five years, these are the six things I’ve discovered you need to know to be a savvy investor:
1. Need money in less than five years? Don’t put it in the stock market: The stock and bond markets are designed for longer-term investments that can withstand a little turbulence, so that even if you’re trying to ride the wave of returns you don’t end up shipwrecked if a financial storm hits. If you’re looking to fund a shorter-term goal (like saving for a down payment on a house or your dream vacation) use something like a high-yield savings account that can minimize your risk and still give you a nice return.
Tip: Even if retirement is closer than 5 years, that doesn’t mean you should move all of your money into high-yield savings. Unless you plan to spend all of your retirement savings in the first five years, you’ll want to keep some money invested in the market. Remember, your retirement could last 25 or 30 years! That’s why it’s important to work with a financial planner who can help you create an investment strategy that takes into account the entire length of your retirement, including short-, mid-, and long-range money goals.
2. Not all contributions are created equal: Many people put off saving for retirement because they have more important things on their plates today. They assume they can just catch up later. While that’s certainly possible, it’s important to understand that dollars contributed today will go much further toward your goal than dollars contributed in the future because of compound interest. Think of it like hiking up a mountain: You can take a slow walk up with gradual elevation change, or you can sprint straight up the side of a cliff. Both get you to the top, but it’s a very different journey.
Tip: One way to help you keep pace on your hike is to make sure you’re taking full advantage of any money your employer may offer. A small sacrifice today to meet their match can really propel you forward in meeting your retirement goal. Wondering how much of a difference an extra percentage point or two can really make? Check out this Fidelity calculator.
3. The ups AND the downs are all a part of the process: If you witnessed (or experienced) the deep losses that occurred during the Great Recession about a decade ago, you might be a bit risk averse. I get it. When the stock market soars we count our blessings, but when it dips we assume the sky is falling. And yet, both are a part of the reality of investing in the stock market. It helps to take the long view, not focus on what’s happening on any given day.
Tip: Make a goal to check in with your investments at least once per year to see if you’re on track for your goals and rebalance your portfolio (if needed). The rest of the time, trust your strategy and stay away from the drama.
4. Know your limits: The amount of risk you should take is a decision only you can make. As you evaluate the different investment options available to you, take into account not only the potential investment return but also how much risk you’ll need to take to get there. As one financial planner I know puts it: “You can choose the merry go-round or the roller coaster — both go up and down, but it’s a very different ride.” Curious what your risk tolerance is? Check out this NerdWallet article.
Tip: One way to reduce risk over the long-term is diversification. Create an investment mix (or invest in a mutual fund) that features a variety of industries, companies, and investment types. Investing in a cross-section of the market means you may miss out on the “high highs” of individual stocks, but you’ll also have an extra layer of protection when the “low lows” come around.
5. Fees can eat you for breakfast, lunch, and dinner: Fees can be challenging for investors to find as they are often taken out of the investment return before you see it. And while there isn’t anything wrong with an investment company charging fees, the amount you pay can have an enormous impact over time, especially if you have another 20-30 years to be invested in the market.
Tip: Dig in and see how much you’re paying for your investments. Here are some specific fees to ask about. Then, do a cost/benefit analysis. Are you making enough return to make the cost worth it?
6. You can make an impact as you invest: Investing doesn’t have to be all about making money. You can also invest for social impact. Your investments can help revitalize a neighborhood, develop affordable housing, advocate for the environment, and more.
Tip: Interested in investing for social impact? First, ask the places where you already invest to see if there are opportunities available now or coming soon. Looking to start a new investment fund? Check out these five best brokers for socially responsible investing.
Wondering if you have the right mix of investments for your goals? This Thursday, Jan. 30, I’ll be going Live on Facebook at 8pm Central to share my recipe to create a mix that’s just right for you! Only have Instagram? Don’t worry — I’ll be posting the recording to IGTV later.
P.S. – Thinking about attending my Love & Money brunch on Feb. 29 but haven’t signed up yet? Now is the time — seats are going fast! Over the course of the morning, I’ll help you and your partner increase your financial confidence, sharpen your money communication skills, gain clarity around your goals, and find a path forward together. Best of all, you’ll leave with your next money date night on the calendar, so you can continue the good work on your own! Brunch food & drinks will be served. Sign up today!