But the risk of not investing is even greater. Most people won’t have pensions to fall back on and Social Security isn’t enough to cover the cost of living.
You don’t have to be an expert, or even work with one, to start investing for retirement. Here’s how to get over your fear of investing and gain the stock market savvy you need to invest confidently.
Table of Contents:
1. Learn the Terms
In order to get over any financial phobia, you first need to demystify it by learning the terms. There are a lot of great articles on how to start investing in all kinds of assets but you’ll only be able to understand them once you define the technical jargon.
Thankfully, these terms are merely simple concepts with intimidating names. To get you started here are some you’ll see pop up most frequently:
Individual Retirement Account (IRA)
An IRA is a shelter for your investments that protects them from certain taxation. The most common types are Roth and traditional. A Roth IRA protects your investment earnings from being taxed when you withdraw them. A traditional IRA protects your contributions from being taxed in the year you invest them.
A 401(k) is a retirement account offered by many employers to their employees. It’s named after the section of the U.S. Internal Revenue Code that defines it. Your contributions come out of your paycheck and similar to a traditional IRA, the 401(k) protects your contributions from being taxed when you invest them.
If you work for a nonprofit, religious group, school district, or governmental organization you’ll have access to a 403(b) instead of a 401(k). The only difference is these employers are exempt from certain administrative processes so the administrative costs of this plan are lower for your employer.
A mutual fund is what you put into your IRA, 401(k), or 403(b). You buy pieces of a mutual fund along with other people and a professional money manager invests that pool of money in a variety of stocks, bonds, and other assets.
An index fund is a mutual fund or exchange-traded fund (ETF) filled with stocks, bonds, etc, designed to closely follow a certain index. This allows the money manager to passively manage the fund thus lowering the fees associated with it.
Once you know the language you can dive deeper by reading books and articles about investment strategies that interest you. A great book to start with is The Simple Path to Wealth by JL Collins.
2. Start Small
If you’re still having trouble taking the leap to start investing you’re not alone. Almost half of all American families don’t have any investments in the stock market. Don’t let that fear keep you from investing. Start now with what you have.
Thanks to the power of compound interest, a little bit invested early can earn more than a lot of money invested later. Start by investing 1% of your income and increase your contribution by 1% every month for as long as you can.
Choose an online broker or app that’s easy for you to navigate. Vanguard and Fidelity are two of the biggest investment services out there but can sometimes be confusing to set up. If that’s a barrier for you, setting up an account with a robo advisor such as Betterment or Wealthfront will cost you slightly more in fees but will make the overall experience much less complicated.
And when you’re choosing your investment strategy, don’t make it complicated. You can actually have a completely diversified and managed portfolio with just one index fund! A target date fund is a mutual fund that starts out aggressive and rebalances its asset allocation to get more conservative the closer you get to retirement.
3. Set Goals
When you know it’s time to level up your investing contributions but the idea makes you uneasy, setting goals might be the motivation you need to invest more.
Use a retirement calculator to see how much your investments can earn by saving different amounts throughout the years. When you find numbers you’re excited about, write down your 5 and 10-year investment goals. Stretch them a little past what you think is possible to drive you to maintain your investing momentum.
Recommended: Personal Capital Retirement Planner
Over time you might begin to notice other funds or asset classes and see that your personal investments could be doing better. But setting up direct deposit into your 401(k) is one thing; reallocating your portfolio is uncharted territory.
Don’t worry, you can actually optimize your investments simply and quickly, especially now that you have everything set up and are in the habit of contributing regularly.
Check the fees associated with your investment accounts and the investments within them. The numbers may look small but even fees just under 3% could eat up over 30% of your potential earnings. Alternatively, keeping your fees around .6% or lower will consume less than 1%.
Based on the fees in your account you may want to buy new funds with lower fees, transfer your IRA to another investment company, or funnel your contributions away from your 401(k) and toward your well-optimized IRA. Whatever you choose to do you can call your preferred investment company and they’ll walk you through all the steps to get it done.
5. Weather the Storms
In 2009 it was hard to tell how long the stock market would take to bounce back. A lot of people got scared and pulled money out of their investment accounts. In hindsight we know that if the most unlucky individuals who invested at the height of the market in 2007 waited four and a half years, they would’ve gained everything back, without contributing another dime.
Watching the stock market go up and down can give even the calmest person anxiety. Do yourself a favor by not monitoring it too closely. If you’re investing for the long game, know that occasional dips, spikes, and even crashes are a normal part of the stock market that you’ll have to endure.
Try looking at dips and crashes like the stock market is on sale. Instead of pulling all your money out, put more in because if there’s anything history has shown us it’s that the market will rise again.
6. Play Around
When you have a solid financial foundation, you can afford to start playing around in the stock market. Trying new things will make you appreciate all the work you’ve put into overcoming your fears and make you a more confident investor all around.
Technology has made it easier than ever to buy and trade individual stocks, cryptocurrency, and other assets. You can start investing in individual stocks with as little as $5 using the Stash app or trade stocks with no commission fees using Robinhood.
When you’re overcoming your financial phobias the most important thing you can do is start now and take it one step at a time. One day you’ll look back on this time and be thankful you didn’t wait any longer.
Learn More: How To Invest With Little Money