With all the volatility going on in the financial markets right now, I pulled a show from the archives with specific investing advice. The show originally aired at the end of 2018 when the markets were also going through a turbulent time.
No matter whether you're not sure if you're managing your retirement account the right way or you're hesitant about getting started investing, keep listening. I'll give you recommendations and answer a couple of listener questions about how to invest without being too risky.
The takeaway is that if you have a long-term investment objective, such as building wealth for a retirement that's likely to happen at least five years in the future, you should not be rattled by what's going on day-to-day with the stock market.
The fact is, you really shouldn't even be paying attention to it, and I'm not. There's no reason to get emotional, react, or even to consider selling your investments during market turbulence. I know that may feel counter-intuitive. But when the market drops, that's the worst time to sell because you'd be doing it at a loss. I'm continuing to make retirement account contributions, and I recommend that you do the same.
When the price of funds in your retirement account or brokerage account goes down, they're on sale. If you contribute the same amount each month or paycheck, you end up buying more shares because they cost less. When the price goes up, you have more shares with higher values, and boom, your account value rises!
But because the stock market comes with short-term risk, you shouldn't have all your money invested. You also need to maintain a cash reserve or emergency savings. Your emergency savings and investments are two completely different buckets of money that have different purposes.
As I covered in last week's show, the Fed's interest rate cut means that earnings on your bank savings will likely drop a bit. Don't let that fact keep you from building your cash reserve and keeping it in an FDIC-insured bank savings account.
It doesn't matter if your bank savings account pays a pittance because its purpose is to keep you safe in the short-term. But the money you intend to spend in retirement is for the long-term. Money that you don't need to spend in the next five years should stay invested for as long as possible, so you take advantage of higher average historical returns that are necessary to build a substantial nest egg.
The bottom line is that staying invested for the long-term has historically paid off. The market reflects the overall growth in the economy and rewards long-term investors, even though temporary dips will always occur.
8 Investing Rules to Follow Even When the Stock Market Drops
After seeing huge stock market drops, you may have wondered if you’re investing money the right way. Or you may still be on the sidelines, not sure how or when it will be a good time to get in the game.
Here’s what to know about each investing rule.
1. Clarify the purpose of your money
There’s one rule of investing that you should always remember: Never expose money to more risk than is necessary to accomplish your goals. So, take a step back and be clear about why you’re investing in the first place. Determine when you’ll need to spend the money you plan to invest, because that determines what you should do with it.
Historically, a diversified stock portfolio has earned an average of 10%. But even if you only earned an average of 7% on your investments, you’d have over $1.3 million to spend during retirement if you invested $500 a month for 40 years.
But if you save $500 a month in a bank account with an average return of 0.5% over 40 years, you’ll only accumulate about $250,000. So, if your long-term goal is to have a nest egg that allows you to pay for retirement, keeping money in a safe place—like a savings account or a low-yield CD—simply won’t get you there.
If there was no risk to getting a big return on your money, everyone would run to the highest-yielding investments. But high return investments usually bring higher risks, so they need to be used carefully.
In other words, investing means that you could possibly lose money. This risk creates a tension that keeps many people from getting started investing in the first place.
Also, consider that in the past couple of years, the inflation rate has been more than 2%. So, if you’re not earning at least that much, you’re really losing money.
Therefore, taking calculated investment risk is an important part of your financial life. Without it, your money won’t grow fast enough to achieve your long-term goals. Keeping money safe and cozy in a low-interest savings account stunts its potential and doesn’t give it the opportunity to grow.
The reality is that not taking enough investment risk can be the riskiest move of all! You could fall short of your goals or run out of money during retirement. Whether you avoid risk intentionally or have simply been procrastinating investing, the result could be devastating to your financial future.