Dear Carrie: I'm 27 and finally in a situation where I can save some money. Last year, I was even able to put $5,000 in a Roth IRA. But now what? Everyone tells me to start investing, but I have to confess I'm kind of scared. I think what's been happening in the last few years has really shaken me up. How can I invest and not lose money? --A Reader
Dear Reader: First, major kudos for getting an early start on retirement saving. By starting in your twenties, you give yourself a huge advantage; in fact, if you continue to save just ten percent of your salary each year, you should be in pretty good shape come retirement time. But the people urging you to invest are absolutely right. Saving is only half the story. (set ital) Growing (end ital) your money is the real key to setting yourself up for the future.
Looking at your age alone, the standard advice would be to put the majority of your savings in stocks. However, given the market ups and downs you've seen, I completely understand your reluctance to jump in. Let's try to put some things in perspective.
YOU HAVE TO ACCEPT SOME RISK
There's no way around it: when you invest, the risk of loss goes hand in hand with the potential for gain. And while stocks have a greater potential for gain than bonds or cash over the long term, they also are the most volatile. So before you make any decisions, I recommend that you take some time to think carefully about how much risk you're willing to take. Are you willing to accept a loss in one year knowing that you also have the potential for gain in the future? Also realize that at your age, you do have the time to ride out the market's downs more than say a 40- or 50-year-old would.
YOU NEED A PLAN YOU CAN STICK WITH
That said, if you're really not comfortable taking on much investment risk, go with it. When you invest against your feelings, you'll be tempted to bail the first time the market goes through a rough spot. So it's important to come up with an investment approach you can stick with over time.
What might this mean for you? A conservative portfolio might have 20 or 25 percent in stocks and the rest divided into fixed income investments, such as bonds or certificate of deposits and cash. In my opinion, that would be extremely conservative for someone of your age, but it may be appropriate for you -- at least as a starting point. A more moderate approach might be along the lines of 60 percent in stocks divided among large, small and international companies.
Funds can be a good choice for getting started because they can give you a lot of diversification for a small investment -- and diversification helps balance risk, though it cannot eliminate the risk of market losses. But you need to do some research. For starters, look for funds with low expenses. There are a number of easy-to-use online screeners that will help you compare your choices. You might find it fascinating once you get started. And the more you know, the more comfortable you'll feel investing.
Another tool that can be helpful, is what's called a target date fund. You choose a fund according to the date you plan to retire, which in your case might be 2040. The fund invests more aggressively to begin with but automatically adjusts to a more conservative approach as you get closer to retirement. Please keep in mind, though, that neither the principal nor the return of a target date fund is guaranteed on the target date (or any other date, for that matter).
YOU CAN EASE YOUR WAY IN
Another thing to realize is that if you're feeling tentative, you don't have to jump into investing all at once. To ease your way in, you can use a gradual but systematic approach known as dollar-cost averaging: Once you have identified appropriate stocks or funds, you then invest a set amount each month (or at any set interval) -- whatever the market is doing. If prices are low, you'll be able to buy more shares. If prices are high, you'll buy fewer. Over time your cost basis will even out -- and in the meantime, you'll be poised for growth. Of course dollar cost averaging cannot ensure a profit or protect you against losses, so think carefully about your ability to continue investing during declining markets.
THINK LONG TERM
Once you've made your initial investments, keep adding to them as you get more comfortable. Keep an eye on your investments, but try not to worry too much about short-term fluctuations. Remember, it's growth over time that's important. And the sooner you get started, the more time you'll have to make the most of it.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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