What's Your Excuse?
The Dow and the S&P Indexes have both hit record highs this spring, but the number of Americans benefiting is at a record low. A recent Gallup poll found that stock investment (whether direct or in a mutual fund, 401K or IRA) has fallen by 10% in the last five years—a full 48% of American households don’t own any stock at all.
What’s holding us back? The crash of 2008 didn’t help. Many pulled their money out when the market went south, and have been wary to put it back in even as it’s rebounded. But financial planners say the reasons why many of us are reluctant to invest -- or to invest beyond an employee retirement account -- often go deeper than that. ESF Financial Planning Group founder Eileen Freiburger, a financial advisor with more than 20 years of experience in the field, shared some of the most common excuses she hears—and how to overcome them.
“I don’t have enough money.”
It’s true that before you invest you should have your financial house in order. “When I’m working with a starter saver, I first ask, do you have money going toward an emergency fund? Are you saving towards retirement? Do you have debt?” says Freiburger. The problem is, many of us feel we don’t have enough money to start investing, when in fact it’s our spending or simply our perception of our finances that is the problem. Sift through your last few months of expenses: Is there a premium cable channel or dinner-out per month that could be sacrificed towards your future? Then create a budget for yourself that includes establishing saving goals and putting money towards them regularly, even if it’s as little as $20 a month.
“I don't know how to get started.”
If you’re just starting to invest, keep things simple. Freiburger advises looking for a low-cost, pre-allocated, do-it-yourself index fund (meaning a mutual fund that follows a market index like the S&P 500). Vanguard, Schwab, Fidelity and T. Rowe Price all offer these, some of them based on a withdrawal target date or life-strategy plan. Overall, look for low cost (and “no-load”) and a low expense ratio. There'll be a minimum to buy in, usually at least $1,000, but then you’ll be able to decide how much to contribute every month. For the long term, a balanced blend of no-load, passively-managed stock and bond index mutual funds or exchange-traded funds can help you create a well-diversified portfolio and minimize cost.
“I don't have the time to spend investing.”
You definitely want to know what your money is up to. But you don’t need to be actively involved. With a professionally-managed starter fund, Freiburger says, you can set up a regular deposit and stay away from checking stock prices daily. In fact, getting spooked and pulling your cash when the market dips could be one of the worst things you can do, so—if you’re in for the long haul—a light hand is not a bad strategy. (Just make sure you’ve got your money in a diverse mix of investments.)
“I don’t understand it.”
The best way to remedy the situation, says Freiburger, is to start reading. (We recommend adding these classics to your reading list: the revised version of the 1949 classic, "The Intelligent Investor," by Benjamin Graham; "One Up on Wall Street" by Peter Lynch, the legendary former head of the Magellan Fund; and "The Neatest Little Guide to Stock Market Investing," now in its fifth edition.) “If it gets you thinking and saving, you’ll always be ahead of the curve,” says Freiburger.
“I’m afraid of being cheated.”
With a do-it-yourself fund, you won't have to worry about bringing a Bernie Madoff into your life. But you do want to avoid fees and commissions—which aren’t cheats, but may feel that way as you watch your money disappear. “Choose your own pre-allocated fund,” recommends Freiburger. That way you can minimize the amount you lose to commission fees and expenses.
“I don't want to risk losing money.”
We’ve all watched that scene in a movie or TV show where the stunned investor—call him Lord Downton—cries out, “It’s all gone!” The way to avoid that is to diversify your holdings. “If you put all your money into one hot stock you read about and then everyone else pulls out, you may be left holding the bag,” says Freiburger. “An all-in-one index fund that’s professionally managed may dip, but it’s not going to go to zero. So if you leave it alone for long enough and continue to add to it, it will be there in the future.” And, presumably, thanks to long-term market growth trends and compound interest, it will be a lot bigger than the pile of cash you would have had if you’d tucked it under your mattress, or into a savings account, instead.
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