Is It Too Late To Invest In Stocks?

How much you invest now really depends on when you need the money

Let’s face it. Most of us will never inherit millions from a rich relative, win the power-ball or strike crude oil in the backyard. If you can stomach some risk and have time to spare, though, there is another way to dramatically increase your net worth.

Owning stocks can be one of the best ways to grow wealth in the United States with a historic return on investment hovering between 8% and 12% for the S&P 500. And consider this: Federal Reserve data shows the richest 10% of Americans owned more than 85% of all stock in 2020.

Where does that leave you? While only a small number of Americans, less than 15%, are directly invested in individual stocks, a majority, or about 52%, have some level of investment in the stock market, mainly from retirement accounts, a Pew Research Center study found.

Here are six questions and strategies to consider before and while investing:

What’s your current situation?

Do you have at least three to six months of living expenses saved in an emergency fund? Is your high-interest (credit card) debt paid off? If the answers to these questions are yes, you can consider putting extra money into a retirement account such as a 401(k) where the money can grow tax-deferred until retirement — if you have one at work — or a Roth IRA where the money can grow tax free forever.

Don’t want to go it alone?

If you are uncertain about how to start investing or how much you can safely set aside, seek guidance from a certified financial planner or financial advisor who can help you create an overall financial plan that includes eliminating debt, if needed, increasing your savings rate and moving closer to meeting all of your money goals.

Do you have 20 or 30 years before retirement?

When you need the money back you plan to invest is important. If you need it within three years, the stock market is a no-no. Within five or 10 years, it’s appropriate, but you have to manage your risk. If you don’t need it for say, 20 or 30 years, a target-date retirement fund can be a good choice. This is a mutual fund managed based on your retirement date (choose a fund with the date in the title that is roughly when you are going to retire, 2041 or 2051, for example). Then, the manager of the fund takes fewer risks as you get older, so if the market plunges right before you retire, you’re not in a terrible position. For most folks, this works better than trying to pick a few stocks yourself.

Pay down debt

Another way to eventually increase the amount you can place in savings is to pay off debt as soon as you can. Remember, carrying more than 30% of a credit limit from month-to-month on a credit card will likely lower your credit score, which makes it harder to get the best rates on many loans. Sometimes, people are forced to work longer than they planned because they have to pay off high-interest debt before retiring.

Diversify your portfolio

Ideally, having a diversified portfolio for retirement planning is best. Diversification helps ensure you don’t put all of your risk in one place. Having a healthy mix of investments, including hedge funds, real estate, stocks, bonds and annuities, should help reduce risk and prove to be a solid strategy over time.

Make small increases

Slow and steady can win the race when it comes to saving more for your retirement years. At least once a year, maybe on your birthday, log into your retirement accounts or ask your financial planner to increase your deduction into savings by a small amount. Start out with a 1% or 2% bump and you may not even notice. Soon, though, small increases add up over time.

With reporting by Casandra Andrews

Jean Chatzky

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