This story is part of recession help deskCNET’s coverage of making smart money moves in an uncertain economy.
If there’s one thing I’ve learned in all my years as a reporter, it’s this: The stock market is in a bad mood.
In 2006, I began a new role as a financial correspondent reporting from the floor of the New York Stock Exchange. My job was to understand why the market went up or down each day. He began each morning by interviewing mostly older white stockbrokers who were in charge of buying and selling stocks on behalf of large institutional investors. (Also true: I had to wear closed shoes and a blazer. The dress code back then was strict and a bit ridiculous.)
I knew that if tech stocks slumped right after the market opened, it could be due to lower-than-expected earnings the night before from an industry giant like Apple. Any hint of turmoil in the tech sector prompted panicked traders to dump shares at the opening bell.
The market does not really reflect reality. It gauges the moods and attitudes of people like the runners I used to interview.
“Today’s stock prices are not driven by how companies perform today,” Matt Frankel, a certified financial planner and contributing analyst at The Motley Fool, said in an email. “They are based on future expectations.”
That’s the problem: Current prices serve as an indicator of investor confidence, but stock market predictions are educated guesses at best. And to further complicate matters, “the markets aren’t always right,” according to Liz Young, director of investment strategy at SoFi.
Reports from the trading floor of the New York Stock Exchange during the “flash crash” of May 2010, when major stock indices crashed and then partially recovered within an hour.
Screenshot/CNET
Sound daunting? I hear you, but it’s still worth investing. This is why.
While the stock market represents an elite class of investors (the richest 10% of Americans own 89% of the stock), it has proven over time to be a reliable way to grow money for anyone with the tools. and information to try. And technology has made it cheaper and easier to access. Now, a whole new generation has the opportunity to start investing and building wealth. If you can afford your basic needs and have some emergency savings set aside, there’s no better time than now to invest, even if it’s just $20 a month.
Of course, the stock market feels particularly risky right now and it’s natural to want protect your money when the economy is volatile. If you are not sure about investing because you are worried about a recession, or you just don’t feel comfortable taking financial risks right now, you’re not alone. More than 40% of Americans surveyed earlier this spring said the bear market crash made them too scared to invest.
But waiting to invest is an even bigger risk. Here’s what I know for sure about overcoming worry and investing for success.
The ‘right time’ to invest is right now
Yes, the market is risky. Yes, there will be more accidents. But there is a high probability that the market will recover, just as it recovered (and then some) a few years after the global financial crisis of 2007-09.
“Things will get better again. They always do,” as my friend David Bach, author of the New York Times bestselling book The Automatic Millionaire, told me on my So Money podcast.
Sure, it’s better to buy at a low price so that you can later take advantage of the most appreciation or compound interest possible. But since it is very difficult to predict where prices will go, the “right time” to attack is often something we only realize in hindsight. Waiting to invest until you feel the time is right, when you think stocks have bottomed out, can set you up for more failure than success.
Your time in the market is more important than timing the market. Staying low until the stock picks up just means you’re going to pay more. Instead, invest steadily and continuously, and let compound interest accumulate. You’ll buy the lows and the highs, but eventually, over the years, you’ll come out ahead. “If you’re in your 30s, 40s or 50s and you don’t retire in the next year or two, guess what? Everything is on sale,” Bach said.
For example, if your parents had invested $1,000 in 1960, it would be worth about $400,000 today. That’s after a presidential assassination, multiple wars, a global pandemic, and many recessions, including the Great Recession. If the past is any indicator of the future, it is proven that markets will eventually bounce back from a recession and have longer periods of growth than decline.
Read more: investing for beginners
Diversification is your best tool against market volatility and downturns. More cautious investors might try US bonds, which are considered “safe haven” investments because they’re backed by the Treasury and offer predictable returns.
Right now, with inflation running at 8.5%, Americans are flocking to Series I savings bonds, a government-issued investment that is protected against inflation. I bonds have a fixed rate and an inflation rate that adjusts every six months. Right now, I Bonds offer an annualized interest rate of 9.62%, which means they’ll earn higher guaranteed returns than any other federally-backed bank account.
Technology makes investing cheaper and more accessible
Investing can be unnecessarily complicated and exclusionary, and the financial industry as a whole can do much more to break down the barriers to entry. Guests on my So Money podcast, especially women, people of color, and young adults, have shared how they wish they had learned to invest sooner.
My advice? Lean on technology, as well as the proliferation of social media and podcasts, for better access and education. At CNET, we’re big fans of robotic advisors like Wealthfront and Betterment that provide low-cost portfolio management. There is no need to wait until you have $1 million in the bank, which is what some professional investment advisors require before working with clients. You can start with a little cash.
And if you’re a fan of TikTok, Instagram, or YouTube, there are some reputable experts who offer free education. A word of caution: Be sure to check your background and make sure the person you are following is not a salesperson masquerading as an investment educator!
Read more: Investing doesn’t have to be intimidating. Pros and Cons of Robo-Advisors
Once you’re investing, embrace automation so you never get sidetracked. Automating our retirement savings or contributions is a smart move that honestly saves us from ourselves. With money in our hands, it is much easier to spend than to save, but technology can automatically move that money to an account. We are more likely to save for our future if we are already enrolled in a company retirement plan rather than opting in with each paycheck. Start your contribution at the maximum employer-matched rate and try to increase your contribution to 10% or even 15%. That could net you thousands of dollars more each year.
Pro tip: If you’re saving for retirement, see if your plan provider will automatically increase your savings rate each year (60% of employers offer this feature, according to the American Benefits Council).
For all other types of long-term investments, such as a brokerage account or Roth IRAcreate a calendar reminder at the beginning of the year or on your birthday to increase your contributions.
Read more: Do you need to save for retirement? This is the easiest way
You can also set your portfolio to automatically rebalance to automatically adjust and pick up more stocks after a period of low market, which can give you the right balance of stocks and bonds in your portfolio.
Automatic rebalancing is a feature many banks and brokerages offer to ensure your portfolio allocation doesn’t get out of whack, says David Sekera, chief US market strategist at MorningStar. For example, let’s say you set up your portfolio to have an even mix of stocks and bonds. A bear market like the one we find ourselves in right now can take the weight off stocks and be too heavy on bonds. But an automatic rebalancing can fix that by buying more shares when prices are low again, according to Sekera.
I have seen firsthand how market volatility creates a lot of uncertainty and I know why it is difficult to have the confidence to invest. But history shows that staying on the sidelines as an investor can be riskier than participating in the market and riding out the ups and downs.
Entering the market sooner rather than later can be one of the smartest decisions on the road to building personal wealth and financial security. Along the way, be mindful of your risk tolerance, stay diversified, and rely on automation to help keep you on track.
Source: www.cnet.com