Setting aside money from each paycheck on a monthly basis isn't enough to build a solid nest egg. Rather, you'll need to grow that money to ensure that it manages to keep up with or, ideally, outpace inflation. It's therefore encouraging to see that 35% of Americans are willing to start investing their savings, as per a new study by Allianz Life. Specifically, that many Americans say they're comfortable enough with current market conditions to take on the risks associated with investing. That said, 37% admit that recent volatility does make them anxious about putting money into the market, while 38% say they don't know how they'd recover if the market were to take a significant tumble.
Now let's be clear: To fear the stock market is a very normal thing, especially if you're new to investing. But if you're ready to push past that fear and grow some wealth in time for retirement, here's a quick guide on how to get started without exposing yourself to undue risk.
If you're 10 years or more away from retirement
The benefit of having a long investment horizon is that you have time to ride out the market's downturns. And make no mistake about it -- there will be downturns. But one thing you need to know about the stock market is that it's historically spent more time up than down, so if you're in it for the long haul, you stand to come out ahead. Therefore, it pays to load up on stocks in your 20s, 30s, 40s, and even 50s.
Additionally, having a diversified portfolio is a good way to protect yourself from losses, so in that regard, you'll want to choose stocks from a variety of industries. Better yet, fill your portfolio with index funds, which charge lower fees than actively managed mutual funds and therefore won't eat away quite as much at your profits. The beauty of index funds is that they offer instant diversification, and while you should always do your research before choosing investments, it's generally a lot easier to vet an index fund than an individual company.
Finally, don't put your entire nest egg into stocks. Rather, keep a portion of your savings in bonds, which are generally safer and far less volatile. As a general rule, subtracting your age from 110 will tell you what percentage of your portfolio should be in stocks. Therefore, if you're in your early 40s, you should have about 70% of your portfolio in stocks, and 30% in bonds. Of course, this isn't a perfect formula, and you can adjust it based on your personal risk tolerance, but it's a good place to start.
If you're within 10 years of retirement
The fear of not managing to recover from a major market downturn tends to escalate among older savers who don't have much time to ride out the market's waves. If you're in this situation, diversification will truly be your friend, so be sure your stock investments are spread out across a wide range of industries, and aim to include dividend stocks in your portfolio, which often manage to generate income even when market conditions aren't favorable.
Furthermore, you'll want to aim for a more even stock-bond split if you're close to retirement so you're not overly exposed to volatility. If you're in your early 60s with the goal of retiring in five years, for example, you might put 50% of your assets into stocks and the other 50% into bonds. Though your bonds won't generate the same level of growth as your stocks, the interest payments you collect from them will automatically generate income for your nest egg -- income you can then reinvest and grow. And as long as you choose highly rated bonds, your principal will be fairly protected.
The fact that a large number of American are ready to invest is a good thing, even if that sentiment is based heavily on market conditions at present -- conditions that are subject to change. If you're nervous about investing, just remember that while there are risks involved, by keeping your savings in cash, you're running the risk that your nest egg won't allow you to cover your living costs in retirement once inflation rears its ugly head. And in many ways, that's a much greater risk than the stock market could ever expose you to.