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Don’t Be Afraid To Invest

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Until a few months ago, all of my investing was done in either a Roth IRA or a 401(k) – I never put a penny of “real” non-retirement money into any sort of investment and part of the reason was fear. I easily dumped money into a Roth IRA or a 401(k) because it was the responsible thing to do, it was safe, and it was what I was supposed to do. Earlier in my career, after putting all that money away into retirement vehicles, I really didn’t really have much else left I could put into investments. I also didn’t want to deal with all the tax headaches of short term and long term capital gains and blah blah blah – I’d rather avoid all that by investing via retirement accounts. Now, with essentially two incomes, it’s no longer “correct” for us to just put the savings into a high yield savings account so it looks as though investing in whirlwind Wall Street is inevitable.

Ultimately, I believe all those excuses only served to mask the true reason I didn’t invest my real dollars in the stock market: I was afraid. It’s one thing to save $100 and earn a guaranteed 5%, it’s another to have to handle either a 30% gain or a 30% loss – especially since that money can be spent on something tangible. Honestly, it’s like gambling and while I do enjoy gambling, I don’t see gambling as a money making venture… I see it as entertainment and I’m not investing for fun.

So, what have we done? Well, we’ve put a little bit away into a Vanguard Target Retirement fund that we don’t intend to touch for a little while (our emergency fund sits in a high yield savings account) and it represents our third tier of funding (first is our regular checking accounts, second is our emergency fund). It’s not a full foray into stocks, it’s a little better than a high yield savings account.

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14 Responses to “Don’t Be Afraid To Invest”

  1. Jeremy says:

    Interesting you just posted this as I just posted a topic on an investment option that many people still saving for retirement don’t consider. It also has to do with those who may be already contributing the max to their Roth and other retirement accounts and may be shying away from taxable investments. It can be an effective way to earn some tax free income that is relatively safe to boot. Clicking on my name will take you to it.

  2. eROCK says:

    I’m guessing the Vanguard Target Retirement fund is a loaded fund? The fees for funds that are managed can be a killer to profits. Not only that, but many of these funds don’t even beat the market and you’re paying for this performance!

    If I was in your position, I’d probably invest in a no load fund. Such a fund could be QQQQ or any other index fund. There are normally little to no fees and the results are normally the same if not better!

    I’d look into asset allocation index funds.

  3. Erich says:

    The Vanguard Target Retirement funds are not loaded funds. They are no-load and have a low expense ratio (around 0.20-0.25% from what I’ve seen) like most Vanguard funds.

  4. I’m thinking that 5% high yield savings account are too risky for me. Too much of an opportunity risk that is. With inflation at 3.5-4% and taxes on top of it, it seems like the money earns a real rate of return of 1%. Compare that with Wall Street’s 8-9% and you could be seeing a real rate of return (after inflation and taxes) at 4%. Compound that over 30 years (as we have until retirement money begins to kick in) and you’ll make about 2.5 times more in the Wall Street investment over the savings account.

  5. Mike says:

    Knowing yourself is an important part of your investment strategy. You spoke about your fear of stock market investing–I’ve most often heard this referred to as your risk tolerance. I think it’s important for you to match your investment portfolio to your risk tolerance, so that you don’t end up sabotaging yourself when the chips are down.

    The stock market has recently seen a relatively strong bull run. Over the past 4 years, the S&P500 is up about 55%. There was a relatively steady climb over the last 6 months, from 1225 to the current level, a gain of about 14% (28% annualized if things kept up at that rate).

    What I think you should consider is whether you’re making this change simply because of this recent good performance. Personally I have most of my money, retirement and otherwise, invested in the stock market right now. I think it makes sense for me based on my age and circumstances, but I would also classify myself as having a relatively high risk tolerance–if the market had a correction, dropping 10% or even 20% next week, it wouldn’t bother me much at all, and I’d leave my investments where they were (I might even put more in). How would you feel if that happened? Would you pull your money out at that point?

    The situation you want to avoid is chasing past performance, and exceeding your risk tolerance. A lot of people look at a big run up in the stock market, say to themselves “I can’t afford not to get those returns!”, and end up putting their money in at that point, expecting the big returns to continue. Too often that ends up being near a market “top”, and they see much lower or even negative returns after that, and if they’re not able to tolerate that downside risk, they end up pulling their money out after the market has dropped, even though it very well may be close to a market “bottom”.

    I’m not trying to scare you or advise you not to invest in stocks–I’m just saying it’s good to know yourself and choose an investment strategy that will work for you. Buy and hold is a perfectly valid strategy, but if you won’t be able to stomach that strategy emotionally, you might want to diversify some of that money into other asset classes so that a stock market swing won’t tempt you to abandon your strategy at the worst possible time.

  6. You may have already read it but I would recommend the Intelligent Investor by Benjamin Graham to anyone getting started buying and selling stocks. What stuck with me was the differentiation he made between being a speculator and an investor.

    The way I read it, anyone that doesn’t have the time and commitment to appropriately analyze the investments they make is speculating, not investing, and would be better off in the long term putting their money in an index fund.

  7. Loi Tran says:

    Like Moneysmart said, you can be speculating or investing depending on your risk tolerance and due diligence. Investing is not like gambling because your expected rate of return is positive compared to the gambling, which is a negative value.

    I think the most important thing is to understand your investments. Start off with a small amount of money until you are comfortable, then gradually increase your investments.

  8. “The way I read it, anyone that doesn’t have the time and commitment to appropriately analyze the investments they make is speculating, not investing, and would be better off in the long term putting their money in an index fund.”

    I think the index fund is largely what Jim is looking to do. From the the tone of the post, it doesn’t seem like his risk tolerance is near ready to invest in individual stocks.

  9. jim says:

    I’m perfectly content investing in stocks in my Roth IRA but I feel differently about the money in my 401K and my “taxed” dollars. I do research companies before I buy them but I don’t really want to do that much because I don’t really enjoy it, I’d rather be doing something else (like blogging) and so index funds are the right choice for me.

    Honestly, I don’t think investing in stocks is gambling (in the long term, it certainly is in the short term regardless of how much you research and how much due diligence you do, you can’t account for irrational behavior) and in a sense I do invest in them anyway (that’s what a mutual fund is), I’m just not into single stock investments outside of my Roth… yet. :)

  10. samerwriter says:

    I think the Target Retirement funds are a great choice for your purposes. Like most Vanguard funds, they are high quality and low cost.

    We’ve done the same thing; our checking account is with a local institution, but our emergency fund is at Vanguard in the tax exempt money market fund. We deposit money there every month, and I have an automatic transfer set up from the emergency fund into our “longer term” savings in a Target Retirement fund.

    The Target Retirement funds give us the security of a reasonable asset allocation, and automatic rebalancing. We can adjust the allocation to our risk tolerance by picking among the different retirement dates.

  11. Jay says:

    Target Retirement funds aren’t designed for taxable accounts. You need to keep your bonds in your Roth/401k and stock index funds in your taxable account.

  12. Khyron says:

    I say go for it! And not because I’m a gambler (though I probably appear that way). Don’t be afraid to stretch yourself. Start simple and work your way up. You don’t have to jump in to futures options like I did. :)

    I think Single Ma said something similar on her blog in the last day or two, but here goes. I was told this by one of the resident assistants when I was a freshman in college, and it stay with me today.

    “If you want something you’ve never had before, you have to do something you’ve never done before.”

    You’ve covered the basics, and clearly you’ll continue growing that foundation. But it is a foundation. At some point, you have to build the rest of the house, right? Additional income streams, whether passive business income, passive investment income, and whatever else works for you.

    I do agree with Mike that you must know yourself. But that foundation should help steady you. As long as you are doing that aggressively, it should take some of the edge off your fears. Everything else about that foundation is basically gravy.

    If this post makes no sense, don’t worry, I don’t quite get it either. I think I’m sleep deprived. But I think you see where I’m going with this.

  13. Debt Hater says:

    It’s just nice to know I’m not alone when it comes to that “fear.” I’m not afraid to be wealthy. I’m not afraid to do the work necessary, but, like you, I don’t want to spend precious moments researching stocks and markets. And since I know I don’t want to do that, I was afraid to mess with it at all. I do save in my 401k, it’s be dumb not to, but I still need to get out of debt before I can take these next steps!

  14. I usually stick my “investment money” into a no load mutual fund with automatic deposits over the course of a few months. Once I have built up a significant amount of money in the fund, I pull it all out and split it up between 2-3 stocks. I do this every quarter or so and over the course of 2-3 years, I have built a nice portfolio of 8-10 high-quality, mid-large cap stocks, that pay excellent dividends (2%+).

    I think that this may SEEM aggressive, but if one chooses solid companies, with good dividends, and diversifies by industry and perhaps geography, etc you’ll end up with an aggressive but relatively safe (for equities) portfolio. I am young, so this aggression is for the purposes of building value over time.

    Of course, this is above and beyond the Max 401k and Roth IRA contribution.

    -William
    A Financial Revolution


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