Some of us may have learned more about shoe shopping than we have about investing. And that can leave us missing out on opportunities to grow our money.
I remember briefly playing the stock market game in middle school, where we chose stocks to “pretend” buy and followed the results. Had I actually invested in the pharmaceutical company I chose back then, I’d probably be writing this from a Parisian chateau. But I didn’t invest in the stock market (via a workplace retirement fund) until years later.
That said, I did eventually start. And I’m in a great place since I dedicated myself to learning about investing over the years. Even now, as the stock market has suddenly declined, I feel fine about my investments because I have long-term goals. But people can miss out on the potential rewards of investing because they’re afraid to start or continue. Or because they don’t have an understanding of the market. For instance, only 30 percent of those surveyed in a 2019 investing quiz understood that the main advantage of index funds over actively managed funds is “generally lower fees and expenses,” according to FINRA, a government-authorized not-for-profit organization that oversees U.S. broker-dealers. And, for Black women, missing out on potential gains isn’t ideal when we’re already trying to bridge the wealth gap between Black and White households.
I know the headlines about the falling market can be scary. But if you’re not investing, whether through after-tax accounts or pre-tax retirement accounts, you can miss out on potential gains that can come via compounding (when an asset earns interest on interest, over time).
Want to get started investing or up your game? Read reputable materials on the topic, and consult a certified financial planner or other certified professional for questions about your specific situation. Community groups, church groups and investment clubs also can be places to talk strategy and compare investment notes, says Jina Etienne, CPA, a member of the American Institute of CPAs Financial Literacy Commission.
Then consider these points, whether you’re a beginner or a pro.
Build an emergency fund. Equities can move up and down — as we’ve seen recently —and no one can time their performance. So you shouldn’t invest money you’ll soon need in the stock market. For funds that need to be immediately accessible, consider a separate and insured high-yield savings account. If you have an emergency fund, you can be less likely to flip out if the market takes a hit.
Just get started — even with small amounts. Many people may think of the homes they own as investments, but this can have drawbacks. Real estate can tie up lots of money, and there’s no guarantee that it will appreciate, notes Etienne. This isn’t to say that you shouldn’t own real estate. But consider diversifying your investments. The stock market, though it fluctuates, can be another way to accumulate wealth over time.
If you’re scared of potential market volatility, consider investing small amounts to get comfortable. As you look at how smaller investments perform, it can help you develop your investing instincts, says Deborah Owens, CEO and founder of WealthyU, a program that teaches women about financial success principles.
You may decide to open a commission-free brokerage account, like one with Robinhood or E*TRADE, and make stock trades yourself with no fees. Index funds, a mix of diversified funds that follow the stock market, can be a good bet for single buys or automatic buys over time. Whatever you choose, know that you can start with just a few dollars (even $5 or $10, depending on what you buy).
Leave your emotions at the door. Many of us may not want to see our investments go up and down, says Owens. But fluctuations will happen in the market. The key is to not react to finances based on feelings. And to have a regular system of diversified investing so you don’t have to try to time the market. Because timing the market is impossible. For instance, even though the S&P 500 had a return of 5.6 percent in the 20-year period from 1998 to 2018, the average investor had a return of just 1.9 percent in that same period, according to a 2020 report from J.P. Morgan Asset Management . The reason for the lag can relate to when investors buy high and sell low, unsuccessfully trying to time the market instead of staying consistently invested during dips.
To stay consistent for long-term goals, and avoid panic, you can use dollar-cost averaging, a strategy where you invest a fixed amount of money in the same investment, at the same intervals over a long period of time. (Like what you’d do with a 401(k) plan, the type of company-sponsored account that lets you save for retirement with pre-tax dollars.)
Have one or more retirement accounts. Saving for retirement is key. But if you’re keeping your retirement investments in one place, you may want to mix things up. For instance, it can be helpful to have a mix of pre-tax and after-tax funds, especially when you’re required to make withdrawals at age 72 (or 70½ if you reached that age by the end of 2019). If you already have a traditional 401(k), that’s great! You can contribute now and be eligible for matching funds (if provided by your employer). But when you withdraw the funds, you will pay taxes on them. That’s why a Roth Individual Retirement Account (IRA), if you qualify, might be another account to consider. You contribute to a Roth IRA with after-tax dollars, which means you don’t pay taxes on withdrawals. And since 401(k) plans have annual contribution limits (increasing to $19,500 in 2020), IRAs let you put away up to $6,000 more.
Understand your investments and your power. If you don’t understand a company or how it works, or if you don’t understand a particular kind of investment, take note of that. And know you are capable of learning about the market. Financial professionals can offer help along the way.
“We are wired to invest,” says Owens of Black women. “The reason we are is because we influence so many trends,” she continues, pointing to fashion, technology (think mobile phones) and more.
Take care of you. Finally, remember your own goals. And invest for your own needs, whether retirement is coming soon or you have other financial goals. If you have questions about your specific situation, speak with a certified financial professional. And if you’re used to taking care of other people, understand that it’s OK to focus on your finances first. As Owens notes, “We’ve got to save ourselves.”
Adam Voorhes/Gallery Stock
