The stock market kicked off 2020 in the red, but that doesn’t mean you should shy away from investing.
Major stock indexes ended 2019 on a strong note — the S&P 500 was up 28.9% for the year.
However, stocks tumbled into the red during the first few days of 2020 after a U.S. airstrike on Jan. 3 killed Iranian military leader Qassem Soleimani. Analysts raised concerns that geopolitical tensions could affect the market.
Short-term market dips might be enough to worry even the most seasoned investor, but if you’re investing for the long term, it just might be time to remain in the game.
Consider that the average 401(k) plan account balance was $105,200 as of the third quarter of 2019, according to data from Fidelity Investments.
Back in 2009, the average 401(k) balance was $59,100, Fidelity found, showing the benefit of compounding interest and a strong bull market.
Even falling markets come with a silver lining: They give investors the opportunity to snap up stocks on the cheap.
“Sound investments in stocks and bonds are important because they help you grow your money faster versus if the money was in cash or in a savings account,” said Robert Westley, CPA member of the American Institute of CPAs’ financial literacy commission.
“Over time you need to grow your money at a rate that beats inflation,” he said. “If you don’t, you’re losing purchasing power.”
Here’s where to begin.
Understand time and risk
Time might be the greatest asset you can have.
That’s because longer time horizons give you years of compounding returns from stocks. It also means you’re better prepared to stomach short-term market volatility.
“You can withstand that drop in market value because you won’t need to sell those investments,” said Westley.
Remember that stocks hit their lowest point during the Great Recession on March 9, 2009.
On that day, the S&P 500 closed at 676.53. Investors who were able to stay in the game have enjoyed a decade-long bull market since then, including record highs in 2019.
Do your homework
RichVintage | E+ | Getty Images
Kick off your own due diligence as you decide which investments to buy.
Rather than focusing on one or two stocks, consider having broad market exposure through an index fund. “It could be a fund that invests in the entire market, so that you don’t have to make too many decisions,” said Westley. “You’ll still capture market returns over time.”
Get to know your investments.
Mutual funds and exchange-traded funds come with prospectuses, informative booklets with everything you need to know about your investment’s fees and objectives.
In all, fees have been coming down. Back in 2000, the average cost of a stock mutual fund was 0.99%, according to the Investment Company Institute, a trade organization that represents mutual fund companies. As of 2018, that cost has fallen to 0.55%.
You can find the prospectus on the asset management company’s website or on the U.S. Securities and Exchange Commission’s site.
Dig into additional data points, including fund ratings and historical performance information from financial services and research firm Morningstar.
Fees ebb away at your returns, so get to know the charges you might see as you invest.
Aside from fund fees, think about trading commissions, account service or maintenance expenses and record-keeping fees. These expenses apply to most investment accounts.
Even your 401(k) plan has expenses. Find out more about them in your retirement plan fee disclosure, a document that your plan’s administrator is required to provide.
“The extent to which you can keep your fees low, that’s a net positive for you,” said Westley.
Know when to get help
Cristian Baitg Schreiweis/aluxum | Getty Images