Dive In: Overcome the Fear of Investing
At some stage, most of us put off investing. We know we should do it. But it seems so complicated. And sometimes the payoff feels a long way off. But don't wait. "In my first job at Working Woman magazine, I earned all of $11,000 a year," recalls Jean Chatzky, "NBC Today" show financial editor and author of "Make Money, Not Excuses."
"I was living payday to payday. Money was a nuisance, a worry, a strain." And Ms. Chatzky did a lousy job of managing it. "Not only did I neglect to pay bills, I racked up credit card debt equal to half a year's salary," she says. She let her first 401(k) retirement account wallow in low-earning money market funds. And when she left her employer, she didn't know to move the $2,000 that had accumulated into another retirement account - an IRA - or she'd be penalized and taxed. She cashed out and paid the taxes. "I bought a few new outfits with the rest," Ms. Chatzky says. She wishes she'd invested that money: "I've run the numbers. It would be worth a significant five figures."
That doesn't have to happen to you. Frederick Kobrick, a leading money manager who wrote "The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security," says, "It can be like riding a bicycle. At first it looks almost impossible to a child. But we are all born with a sense of balance and just have to learn to use it." It's easy to start investing at any age.
1. Fear: "The jargon sounds like another language."
Overcome it: Learn the lingo. Read well-respected and balanced financial magazines - Money or Kiplinger's Personal Finance. Check out Web sites such as that of the American Association of Individual Investors (aaii.com) and investoreducation.org. The USAA Educational Foundation, a nonprofit organization, at usaaedfoundation.org also can help.
2. Fear: "I might need the money now."
Overcome it: Set goals. Jot down your reasons to save and invest, advises Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People" and a Newsweek columnist. Specify roughly when you'll need the money from your investments. For instance, keep money you'll need within five years in a money market fund or a bank certificate of deposit, or a short-term bond mutual fund. Put money you won't need for 10 years or more into broad-based mutual funds that invest primarily in stocks.
3. Fear: "I need every penny of my paycheck."
Overcome it: See how contributions to retirement funds can grow. If you're offered a 401(k) or 403(b) retirement fund at work, contribute - especially if you get matching funds from your employer. You can start with a low-percentage pre-tax pay deduction, say, 3 percent, but by age 30, most investors should try to get to 10 percent, Ms. Quinn says. "Stretch to put away as much as you can - make it 5 percent more than you originally intended," she says.
4. Fear: "I don't want to lose all of my money."
Overcome it: Diversify with mutual funds. "When I started to make a little money, I had my father's broker help me buy stocks," Ms. Quinn says. "I did whatever he said to do. After a year and a half, I realized that was crazy. I wasn't diversified, and I had no idea what I owned or why." She switched to mutual funds. One kind she favors, called target retirement funds, gradually changes the mix of investments over time between stocks and bonds. All you do is decide the year when you think you might retire. Funds invested until, say, 2040, at this point own mostly stocks for long-term growth. "The closer you get to your probable retirement date, the more conservative your fund becomes," she explains.
You can achieve similar results by wisely varying your stock and bond portfolio as the years pass; do it yourself or with the help of a financial advisor. Consider another type of mutual fund that financial advisors often recommend - asset allocation funds. Such funds spread investments across the asset classes, i.e., stocks, bonds, and cash equivalents such as treasury bills or certificates of deposit. They range from conservative funds to more aggressive funds, which emphasize asset classes that have higher risks but possibly higher rewards.
5. Fear: "I don't have time to manage a portfolio."
Overcome it: Explore index funds. Ms. Quinn recommends another category of mutual funds called index funds, which try to replicate the performance of a particular index, such as the Standard & Poor's 500. An S&P 500 index fund, for instance, owns the stocks of the companies listed on the S&P. Now, as an individual investor you could go out and purchase shares of the companies on your own. But the index fund is sort of like one-stop shopping. You won't get the thrill of buying and selling individual stocks, but index funds are a lot less work. And they're not as tricky.
"I'm not a good stock picker," Ms. Chatzky says. "Years ago, I bought two health-care stocks. They imploded." In the end, she lost about $5,000. "I don't know many people who have the time to do the homework it takes to manage a portfolio of stocks," Ms. Chatzky says. "For most busy people today, boring is better." That's why plain-old index funds are a good solution.
6. Fear: "I love the excitement of the stock market, but I'm afraid I'll make a mistake."
Overcome it: Concentrate on a handful of stocks. "Stocks have an entertainment value," Ms. Quinn admits. "If you love to play, set aside 5 percent of your investment fund and have fun. But do yourself and your family a favor and keep your long-term money in well-diversified mutual funds." Mr. Kobrick agrees: "Most people should have the bulk of their retirement money in mutual funds or with financial advisors, or both, so that they are not burdened with managing their retirement accounts."
He advises that, beyond retirement funds, investors can build wealth by owning or concentrating on just a few stocks. His method for assessing stocks looks at four critical aspects of a company: its business model, assumptions, strategy, and management. He urges investors to read company reports. "You will find that the better the company, the more specific its goals," he says.
Never too late to start
Like losing weight or going to the gym, once you decide to invest, you'll find the time. Remember five easy steps:
1. Speak the language. The more you learn about the different types of investments, the less fear you'll have about getting started.
2. Know what you're working toward. Your goals will help you pick the right asset mix for you - among stocks, bonds, and cash. It makes a difference whether you're saving money for retirement or your first home.
3. Max out your savings plan. Automatically investing through your 401(k) or 403(b) retirement plan is the fastest and easiest way to start investing. Take full advantage of these tax-deferred investments.
4. Stay diversified. Three kinds of mutual funds - target, asset allocation, and index - are great places to keep the proper balance between stocks and bonds as you near retirement.
5. Go easy on individual stocks. Stocks may sound sexy, but limit the number you own unless you have plenty of time to research and monitor your holdings on a regular basis.
What's your type?
To assess your investing personality, go to usaa.com, enter keyword MagazineLinks, and click on "What kind of investor are you?"
Although none of the investment instruments mentioned are guaranteed or insured, government bonds and treasury bills are backed by the full faith and credit of the U.S. government. Common stocks are considered to have the most risk, followed by corporate bonds, government bonds, and treasury bills.
Treasury bills are exempt from state taxes; otherwise, all of these vehicles are subject to tax. If held to maturity, bonds offer a fixed rate of return and fixed principal value. Return and principal value of an investment in stocks will fluctuate with changes in market conditions so that shares, when redeemed, may be worth more or less than original cost.
Mutual funds consist of pooled money managed by investment professionals. The objective, risks, and types of investments made by a mutual fund are stated in the mutual fund prospectus. The USAA Educational Foundation, a nonprofit organization, does not endorse or promote any commercial products or services
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