How To Invest When You Are Scared of The Stock Market

There are many stories about the younger generation being scared to invest in the stock market because they started to invest at the peak of the market back in 2007 and lost almost everything. The news is that they are still saving for retirement, they are just not investing that money in the market.

I wrote that is was important for them to invest in the market because bank accounts and certificates of deposit will not grow enough to provide the return they need to afford retirement. After thinking more about this, I have come up with a more developed plan of attack. This plan works for anyone just graduating college and beginning to invest.

The Plan

When you first start out, invest the majority of your money in bonds. I would suggest a mix of 80% bonds and 20% stocks. As you are investing, you will see how the market works. You will realize that the media hypes the doom and gloom as well as the exuberant. You will need to learn to tune these out.

Additionally, you will need to learn about investing. I am not saying you need to get your MBA or get a second degree in finance. Rather, learn the basics of investing. There are some great books that are very easy to read. You can see my recommendations in my Bookstore.

As you learn about the markets, you will become more comfortable with how it works. Each year after you start investing, you should change your allocation 5-10%. You can see what I suggest in the box below.

Eventually, you will get to and keep your allocation somewhere between 60-80% stocks and 20-40% bonds. This mix will allow you to earn a return so that you will have enough for retirement (assuming you save) while keeping an eye on risk.

Some readers may question my logic here and say that you are giving up years at the start when you should be 100% in stocks. While I agree that most investors should start out 100% in stocks, some people are risk adverse, meaning they don?t like the risk. This plan allows them to get comfortable with investing and still grow their portfolio. Much of the fear comes from a lack of understanding. Once you learn more about how the market operates, you will become more comfortable with it and be willing to take on more risk through a calculated approach.

Also, when you first start out investing, you have very little money. Delaying the growth of a few thousand dollars for three years won?t be the deciding factor if you cannot afford to retire or not. Using the return of the S&P 500 Index and the Barclays Bond Index for the past 40 years shows the 100% stock portfolio would be worth just over $1.1 million (assuming a $5,000 annual investment for 40 years). A portfolio of 40% stocks, 60% bonds for three years, then switching to a 60% stock, 40% bond allocation would be worth about $1 million, a difference of $150,000.

In all, the ?cost? of $150,000 for the peace of mind of knowing you will be able to afford to retire is well worth it.

Tagged as: Investing, Personal Finance Basics, Retirement

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