Some people still aren’t getting the message when it comes to saving for retirement.
They are avoiding the stock market like it’s the plague. Sure, stocks can go down as well as up and that might make you nervous. But now is the time to get over the anxiety.
Data shows that on average people know that stocks are a better investment over long periods of time. But averages hide the behavior of some people that is detrimental to long-term investing.
[See: 10 Tips to Boost Your IRA Balance.]
For instance, the average allocation of stocks held in individual retirement accounts was 55.7 percent in 2014, according to a January-dated report from the Employee Benefit Research Institute. On the face of it that would be a fairly good helping of stocks in a portfolio designed to grow over decades.
Yet, what the research also shows is that 27.5 percent of IRA owners held zero allocation to stocks in both 2014 and 2010. The proportion of accounts with no stocks was higher for those with lower balances. For instance, 58.3 percent of those accounts with less than $5,000 held zero stocks in both years.
It’s easy to see how that might happen. When your account balance is relatively low, preserving what you have might seem important. Or it might be that people see the low balance as a trivial amount. Either way, it usually doesn’t make sense for people to avoid stocks.
When looked at over time periods that last many decades, stocks have consistently outperformed cash and bonds.
“Over any long-term periods stocks will be volatile, but they generate higher returns,” says Sinead Colton, head of investment strategy at Mellon Capital in San Francisco. “This is also an environment where taking more risk would be good.”
She understands the need for holding some investments that are more stable than stocks, but not too much.
“If the capital you want to invest isn’t what you need for day-to-day living, then investing in stocks makes sense in order to grow your capital,” Colton says.
If you need some cash for emergencies and for living expenses, then keep some. But for the future, stocks will grow more.
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Many people were shaken by the stock market meltdown during the financial crisis. It has made them wary of investing in the market. As the data above shows, some have been too scared to get back into stocks.
“Unfortunately, a lot of the damage has been done by staying on the sidelines for an eight-year rally,” says Jay Jacobs, director of research at fund management firm Global X in New York.
Anyone who didn’t invest in stocks over that period has lost out. While the past cannot be changed, the future of your investing can put on a more beneficial course. If you are about to rectify the problem of not having enough stocks in your portfolio, then there are a few things to remember.
Balance your portfolio. The expectation is still that equities will outperform, says Stephen Wood, chief market strategist at Russell Investments in New York. For most people, holding 30 percent of assets in bonds with the rest in stocks and other asset classes is a good starting point, with more bonds for older people.
You also probably want to minimize the amount of cash held in a portfolio. Fidelity says that the average portion of cash or cash equivalents held in its corporate defined contribution plans, such as 401(k) accounts, was 2.3 percent at the end of last year. On average, millennials held less than 1 percent in such investments.
The reason that little or no cash makes sense is because inflation tends to eat away at the purchasing power over time.
Use dollar-cost averaging. It is best not to reallocate funds in one move. Instead, use a technique that investment professionals call dollar-cost averaging, which rebalances a portfolio over a period of time by transferring equal portions over a few months.
For instance, if you have $10,000 to reallocate from cash to stocks, then transferring $2,000, each month for five months would be safer than just moving it all at once. This will minimize the risk of buying stocks at the worst prices.
You won’t get the very lowest prices, but then again, you also won’t get the most expensive. You’ll get more of an average of stock prices over the period.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Finally, remember that when you make further contributions to your investing portfolio to use the same techniques of dollar-cost averaging and keep your portfolio balanced.
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Embrace Anxiety and Invest in Stocks originally appeared on usnews.com
