Wall Street people are hell-bent on investing in the stock market, but maybe for you, it is intimidating. This is probably a response to either not understanding how it works or from bad memories of past investments gone wrong. If you have a substantial amount of money sitting in the bank earning next to zero interest because the stock market freaks you out, read on.
Yes, the stock market goes up and down. It’s the down part that stops people from investing. But, keep in mind that although stock market crashes have occurred– recoveries have followed. In fact, The S&P 500 has been experiencing record highs in the last few months. There was a time very recently, however, when people were in a panic because pre-market trading on the night of the 2016 Presidential Election showed a tremendous drop in market prices. By the time the stock market opened in the morning, it was going up instead of down like anticipated and people couldn’t get in fast enough!
What does this all mean? It means that while the stock market does indeed go both up and down, it is a pendulum that continues to swing. You must give yourself enough time to “wait it out” in order for investing to be a wise choice for you.
An average return of 7% annually has prevailed for those investors who invest for 10 or more years. Obviously, there are years within each decade that have negative returns and then some that have substantially higher returns than 7%, but when you look at averages over the long run, 7% is a safe number to use to predict your outcome. Let’s say for instance, that you are 45 years old. You plan to work until you are 65 years old. That gives you 20 years of investing before you will begin withdrawing from your account in the form of income.
Let’s compare a beginning balance of $50,000 that you stick in the bank versus the same $50,000 invested in a moderate portfolio of stocks with an assumed return of 7% annually:
- If the bank is paying you 1% each year (even this is a stretch nowadays), then your $50,000 will be worth $61,009.50 in 20 years when you reach age 65.
- If you were to invest that money and see an average annual return of 7%, your $50,000 would be worth $193,484.22 when you retire at age 65 — more than three times the first scenario.
To calm your nerves when it comes to investing, you should have a cash reserve on hand that you keep in an FDIC-insured bank account. That way, if the market is down and you need cash, you can pull from your savings instead of pulling out of an investment account when it’s down, which would ultimately lock in losses. Trust the process and invest based on your risk tolerance. Some people can deal with higher-risk funds and others prefer a more conservative approach. Regardless, go into investing knowing that some days or months your account balance will be less than the day before or even less than where you started. Just remember that if you give it enough time, it will have the opportunity to come back (and grow exponentially).
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice. Indexes cannot be invested in directly, are unmanaged, and do not incur management fees, costs, and expenses. Past performance is not a guarantee of future results.
Examples provided do not reflect investment fees or expenses and if deducted, performance would be reduced. These hypothetical examples are for illustrative purposes only and do not represent the performance of any specific investment.