If you don’t invest money, you’re not alone, and you probably have a good reason.
At least 37% of adults in the United States do not own any form of stocks, according to a Gallup poll. Other surveys estimate the number is closer to half of all Americans.
This split in the general population points to several things, including specifically the racial and class-based barriers to investing. Most of the time, the people with money in the stock market are older white men or couples who have college degrees and earn at least six figures, Gallup found.
If your family is just trying to manage everyday expenses, stock market fluctuations are likely the last thing on your mind. Many people who could afford to invest do not participate either. The association with Wall Street culture may dissuade them, or the perception and fear of needing to take risks to make money. Another common concern is that investments could benefit corporations that people don’t want to support for ethical reasons.
Yet for better or worse, investing is one of the most effective ways to build wealth in this world. While there are plenty of valid reasons to pass on the stock market, it can take your finances to the next level. Plus, there are easy ways to do it without breaking the bank, taking unnecessary risks, or double-crossing your values.
You do not need to be rich, or a daredevil
Of course, rich people do invest large sums, and many make extreme bets, but you can truly get started with any amount of money.
One common safe strategy that works with all incomes is dollar-cost averaging. All you have to do is pick the amount you are comfortable spending and choose a regular frequency to do so. Then, the key ingredient is time. That’s because the way you profit from an investment is via the compound interest your money builds up while it’s invested.
The average interest rate for stocks is around 6%, which is a pretty good deal. So, let’s say you invested $5 a month in some stocks. After five years, you’d have over $350, instead of just $300 if you had held onto those funds but not invested them. After 15 years, you’d have almost $1,450 instead of $900, and after 30 years, you’d have nearly $5,000 instead of $1,800.
That’s the power of exponential growth. Even just $5 a month can grow into something real. Making a larger initial investment or upping your regular contribution will increase those earnings.
Granted, there are plenty of ups and downs in the market. The “set it and forget it” attitude is far more stable than attempting to time these volatile swings, but it does not always make sense to spend money on investing when your needs in the short term take priority.
Still, the long term trajectory of the market has proven to be upward, which means leaving money in the stock market is highly likely to result in growth over time. Even after economic recessions, such as the housing crisis in 2008 and the Covid crash in 2020, markets showed strong rebounds.
Don’t put your eggs in one basket
Sticking to a gameplan like dollar-cost averaging is a great way to limit your risk. So is having the patience and calmness to leave money in the market.
But where you actually put your investments is just as important. The concept of “diversification” can save you from overinvesting in one place and exposing yourself to risk. In the event of market volatility, you’ll be better off if your money is spread out between different types of assets. Maybe one of them performs worse than the others, but that’s okay if you diversified.
The easiest way to start is by investing in both stocks and bonds. While stocks give you a stake of ownership in a company, bonds are like a loan you give to the government with interest. Stocks can make you more money, but bonds are a safer choice, so it’s wise to have some of both.
You can further diversify in each asset by varying which industries your money supports. For example, some money in health care, some in technology, and some in energy would be safer than all your money staked on just one of those sectors.
Mutual funds and ETFs are common ways to manage all of this without needing expert knowledge. With the help of a professional, you can select what kinds of assets you want money in and how safe you want to play it, and they’ll handle the actual investing for you.
Owning material assets that grow in value over time, such as a home, is another way to diversify your investments. So is contributing to a retirement account like a 401(k) or Roth IRA.
Keeping a clear conscience
Even if you have the fundamentals down and are ready to give the market a try, where to actually put your funds can get tricky, especially if you care about the impact of your investment.
There are plenty of unethical companies out there, but there are also tons of companies that you can feel good about supporting. This style of investing is known by many names, including ESG investing, or environmental, social, and governance.
There is still a spectrum, but in general, these companies pursue goals you might be able to get more behind, be it something socially responsible, eco-friendly, or another personal passion like supporting Black- or women-owned businesses. You don’t have to sacrifice value either; more ethical investments often outperform traditional ones, NerdWallet reported.
Whether you want to make a positive impact or just want to try out the market in general, consider using an automated portfolio manager such as Acorns or Betterment. They offer the same hands-off investing that a mutual fund manager would do for you, but for a fraction of the price.
And if the world of investing is one aspect of capitalism that you just want to skip, that makes sense too.
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