A host of worries -- inflation and interest rates, global conflicts and a looming recession, as well as the roller coaster ride that's inherent in stock investing -- can make it easy to question the safety of trusting much of your nest egg in the public markets.
So, when asking yourself if it's safe to invest today, perhaps the better question is to ask instead: Is it safe not to? We're talking here about opportunity cost. In today's parlance, that might be put as FOMO -- fear of missing out -- and it's a legitimate concern. Opportunity cost at its simplest means what you're costing yourself by choosing one option over another. In the case of smart investing over simply saving, it can be considerable.
Check out this chart for a graphic example. It compares the total return -- comprised of share price movement and reinvesting all dividends -- for three key benchmarks.
The Fidelity Government Market Money Market Fund invests in short-term government securities, while the S&P 500 is an index of the largest U.S. public companies, and the Nasdaq-100 is a collection of the largest players on that tech-heavy platform.
You can see there that the money market fund, which is managed to keep shares at $1 each, trails both indexes badly. Savings accounts in banks and credit unions typically trail even more.
Of course, while nothing is guaranteed, these indexes reflect how well the market has done since the turn of the century through market convulsions that included the dot-com implosion, the Great Recession and, most recently, the COVID-19 pandemic.
Beating inflation takes more than a savings account
You don't want to put all your eggs in one basket, of course. The money you put aside for emergencies, for instance, might best be held in a guaranteed savings account at a credit union or bank.
But it's important to understand that while such savings are as safe and secure as the government's guarantee (up to $250,000 per account, for example, by the FDIC and NCUA), stock market investing has a history of yielding much larger returns over the long term.
And, of course, even at today's higher interest rates for savings instruments, they remain below inflation. That means your ultra-safe savings are actually losing spending power over time. That's the cost of that opportunity.
Taking advantage of diverse opportunities
Wise investing in such assets as stocks, bonds, or real estate allows your money to grow faster than inflation, adding a measure of safety to your long-term investments.
That said, investing is always going to include risk, but that risk can be managed through clear-eyed analysis and understanding of your investments and the time windows you have for each of your goals, including funding someone's education, your own retirement, and what you'll leave for your heirs.
The more time you have, the more ability you have to absorb the ups and downs of more volatile growth stocks, for instance. Consider moving that part of your portfolio to safe, low-volatility stocks or even to cash.
Keep in mind that it's best to diversify your investments across different asset classes and sectors, whether you buy individual stocks in great companies or baskets of stocks through such instruments as exchange-traded funds. Diversification provides a level of protection against market volatility and boosts your likelihood of achieving consistent returns over time.
While you may not want to monitor your investments daily or even weekly, remember to check regularly on how you're doing, and to consider whether it's time to change any investments to reflect how close you are to any of your financial goals. For example, if college looms, you might want to move that part of your nest egg to more conservative holdings.
Safe is in the eye of the beholder, and where you are on your wealth-building journey
So, is it safe to invest now? It is, if you go into it with a clear understanding of your risk tolerance and goals. In fact, by not investing, you're costing yourself the opportunity to grow your wealth in ways that only investing can provide. Just keep in mind that it's a journey which requires patience and discipline as you reevaluate your positions, progress, and goals along the way.
