Mar 22, 2008

Conquer Your Fear of Investing

Afraid to start investing? Here are five tricks to help you succeed. - By Erin Burt - Kplinger

Many of the most worthwhile things in life are scary at first. Consider, for example, going to school for the first time, falling in love, learning to drive, starting a family, figuring out your new Tivo...

Investing is no exception. The thought of possibly losing any money is a terrifying prospect. And the fact that today's economy has seen better days probably isn't helping those fears. Investing in the stock market has its risks. But if you give in to fear, you'll pass up some incredible opportunities -- ones that come with big dollar signs attached.

Now is actually a good time for young adults to bite the bullet and get started investing. Think of the market downturn as a clearance sale: It's a good idea to go shopping before prices climb again.

Bottom line: Surrendering to fear only holds you back. If you want to get ahead financially, you've got to invest in your future. Below are five common excuses and the strategies you'll need to overcome them.

 

FEAR: I don't want to lose all my money.

CONQUER IT: Diversify.

If your investments are too heavily weighted in one stock or even one particular kind of stock, you can deep-six your savings goal. (Remember the tech bubble?) Mutual funds are a good way to achieve instant diversification because they allow you to invest in dozens of stocks within a single fund.

One of the quickest ways to diversify if you're new to investing is with a fund of funds such as T. Rowe Price's Spectrum Growth (symbol PRSGX). It invests in ten T. Rowe Price stock funds. The Fidelity, T. Rowe Price and Vanguard target retirement funds are also fine choices. Or, if you'd like something a little more conservative in this uncertain market, go for a so-called "balanced" fund that owns stocks as well as bonds, such as Fidelity Balanced (FBALX). But bear in mind that, for long-term goals, stocks should earn you the highest return. (See The Beauty of Balance to learn more about balanced funds.)

 

FEAR: How will I know the best time to invest?

CONQUER IT: Dollar-cost-average.

There's no crystal ball that tells you exactly when the market will rise and fall. The trick is to invest regularly no matter what the market is doing. A simple strategy called dollar-cost averaging eliminates the guesswork. By investing a fixed dollar amount at regular intervals, such as every month or every quarter, you smooth out the ups and downs of the market. This trick takes out all the emotion -- it's scary to invest when the market's falling, for example -- and investing becomes much less daunting.

Mutual funds are, again, a great investment for dollar-cost averaging because you aren't charged a commission each time you buy (like you are for individual stocks).

 

FEAR: I'm too queasy for the ups and downs of investing.

CONQUER IT: Ignore your investments.

When you obsess over how your investment is doing from day to day or week to week, you could be more tempted to tinker with it instead of sticking to your long-term diversified plan. Not to mention, you'll probably lose sleep.

That's not to say you shouldn't ever reevaluate your investment choices. Just don't fixate on them. See When to Make a Clean Break From Your Funds to learn when it's time to say goodbye.

 

FEAR: I don't have the time or knowledge to manage a portfolio well.

CONQUER IT: All-in-one funds or index funds.

Think simple. When you start investing and aren't sure what you're doing, don't pretend you do. Truth is, most actively managed mutual funds don't beat their market benchmarks. If those fund managers have the time, the education and the motivating paycheck and they can't pull it off, don't worry if you're afraid you can't either.

Go with one of the aforementioned target funds or funds of funds to achieve instant diversification. Or assemble a simple index fund portfolio. Index funds don't try to beat the market benchmarks, they match them. Put 75% of your money into a fund that tracks the overall U.S. stock market, such as Fidelity Total Market Index Fund (FSTMX) and 25% into one that tracks international stocks, such as Fidelity Spartan International Index (FSIIX). Then let 'em ride. As your investments rise and fall, all you'll have to do is realign your money every year or so to maintain the proper weighting in each fund. See Do It Yourself Portfolios for more index fund strategies.

One more way to set it and forget it: Sign up with your broker or fund company to have your regular contributions automatically withdrawn from your bank account.

 

FEAR: What if I need the money?

CONQUER IT: Set clear goals and choose your investments accordingly.

Before you start investing, write down what you're investing for and when you think you'll need the money.

If you'll need the money within the next three to five years, preservation is your number-one aim. Put that money somewhere safe and accessible such as a money-market mutual fund or a high-yield online savings account. You could also opt for a bank certificate of deposit. But bear in mind your money is locked in for the term of the CD, and you'll pay a hefty penalty if you need to cash out early.

If you're investing for the long term, growth is your goal. Invest that money in a broad-based mutual fund that holds mostly stocks. If disaster strikes and you really need the money, you can cash out at any time -- but you'll have to pay taxes on the money you made.


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