Welcoming the new year offers the opportunity to review your current money habits to look for areas for improvement and the introduction of new practices. One new money habit worth exploring is investing your surplus savings in the markets. The returns you can get from investing are usually higher than those you get from savings accounts and CDs. Higher returns, or asset growth, can create new opportunities and future possibilities for you and your loved ones. What becomes possible when financial resources are available to you? What dreams can you live into? What generosity can you express? Let’s dive a little deeper into the investment idea.
First, those of you who may be new to the idea of investing may experience a bit of fear as you think about this. Remember, investing is not gambling. With gambling, the odds are not in your favor, no matter what the ‘house’ says in its advertising. The house always wins;. Your betting makes money for them, which is good for them, not you. On the other hand, investing with a well-thought-out, broadly diversified investment portfolio focusing on risk and return increases the probability of portfolio growth over time. That means success for you, and isn’t that the goal?
First things first – think about your ‘why’. Why are you investing? What possibilities do you want to create for your future? What future doors do you want to open for yourself? Your loved ones? Before we invest, it is worth thinking about why we are investing. Focusing on our hopes and goals for the future, even if they are not fully formed thoughts, helps us stay committed to sacrificing today’s desires for tomorrow’s possibilities. For most of us, our hopes of owning a house, paying for higher education, stepping back from paid employment, or (insert your dreams here) means investing to grow our financial resources to create that opportunity. Investing is about committing to the long-term view, knowing that our future selves are worth investing in today.
Tip: As you think about your ‘why,’ talk about it with your significant other and write your thoughts down. Then, revisit them every year or so. As hopes and goals change, you can tweak your investment plan to accommodate your updated thoughts.
Get started – Contribute to your work retirement plans. Most companies offer some type of retirement savings plans for employees, with the vast majority offering a 401(k) plan. (Non-profits offer a similar type of plan, the 403(b).) This type of plan allows the employee to put aside pre-tax money toward retirement. The IRS caps the annual contribution amount the employee can make into the plan (for 2024, the cap is $23,000; if you are over 50, you can contribute an additional $7,500 as a ‘catch-up’). What is important to note is that many employers will match what you contribute up to a certain percentage, i.e., if you put in 4% of your salary, so will they. That means your employer will invest in your future if you are willing to do so. This is a great place to get a jump start on investing.
Tip: Contribute as much as you can to take full advantage of the match. When you get a raise, increase your contribution percentage. If at some point you leave the company, you will be able to roll your plan contributions and the vested portion of the company match into an IRA to keep the funds in the tax-deferred status and growing for your future.
Asset Allocation – the glamorous (read ‘nerdiest’) part of investing. Investing all our money into one company doesn’t make sense; we want to spread it across several companies to minimize risk and increase opportunities for our money to grow. We want to take that idea of diversification to a more global level and pay attention to asset classes, including stocks, bonds, and cash. Because these different asset classes bring different elements to the investment portfolio, we want to include a measure of each of them. Stocks, or ‘equities,’ bring growth potential, or return, to the mix and can add volatility. Bonds, or fixed income instruments, bring steady income and may have less volatility. Cash and money market funds bring low risk and low volatility, and, historically, lower return to the mix. By having a percentage of each of these classes in our portfolios, we can lower the overall risk in the portfolio and increase the potential for return.
A portfolio weighted heavily toward equities will have the potential for a higher return but may experience more volatility than a portfolio evenly divided between stocks and bonds. A high-equity portfolio, maybe 85-90% stock and the balance in bonds, would be appropriate for an investor with a long investment time horizon, i.e., the 20- or 30-year-olds investing for their retirement in their company plans. Because they have several decades to invest without drawing on the funds, they can withstand any volatility and can leave the portfolio to grow over the years. For the investor nearer to or in retirement, a 60% stock/40% bond portfolio, or 50/50 portfolio may be more appropriate to take some volatility off the table.
Tip: The decision on how to allocate assets among the asset classes, or ‘asset allocation’ is the biggest driver of portfolio results. It’s worth talking about with your trusted financial advisor.
Ignore the headlines, or “Don’t Just Do Something, Stand There!” At the start of this article, I said we can experience fear as we invest our hard-earned money into the markets. Even though we recognize that most of the time, the stock market goes up and that, over time, the probability is high that our investments will grow, we can experience the fear that comes from 24/7 news and headlines that are intended to grab our attention by sowing fear or growing greed. The emotions of fear and greed can drive the markets, even as the best course of action is to take emotion out of the process. As headlines and emotions vie for our attention, we must stick to the well-thought-out plan created in the light of data and knowledge.
Once you start investing, I promise you that there will be a time when fear will drive you to get out. You may even log in to your account or pick up the phone to give the direction to SELL EVERYTHING. Don’t give in to that fear. Decide today that you will not make investment decisions out of fear. Fear does not help you accomplish your goals, and your goals are too important to let go. You put an investment plan in place to create a preferred future for yourself, to create opportunities for you and your family to live the way you want to live in accordance with your values and your goals. Investment success is determined by staying committed to your goals and the plan.
The S&P 500 index is considered to be one of leading benchmarks of large company stock performance in the U.S. If you invested $100 in the S&P 500 at the beginning of 2002 and reinvested all the dividends, you would have $595.03 at the end of 2023. That is a return of 495.03%, or 8.58% per year.* As a reminder, that time period includes the Great Recession of 2008-2009 when the index fell 56%, as well as the COVID recession in 2020. You can imagine the emotions investors experienced in 2008 and early 2009 as the market fell and fear ran rampant. Some investors thought the markets would never recover until the markets did. And they grew from there. Again, investment success is determined by getting in and staying in, not getting in and out as emotions would direct you.
Tip: When fear is driving the news and the markets, staying committed to your investment plan can be the toughest part of being a long-term, successful investor. Keeping your long-term goals in focus, and knowing that volatility and downturns are to be expected, can help you stay the course.
If you need guidance from a trusted financial professional who will discuss asset allocation and tailor an investment portfolio to your circumstances, please call your Financial Services Representative. We are on your team and in your corner.