By: Pamela Martinez, JBS Corp. & Rob Aquino, JBS Corp.
Investing in the stock market; Sounds scary, I know. The U.S. unemployment rate rose to 14.7 percent in April 2020, and the last thing anyone is considering right now is investing. But it doesn’t have to be that way. Investing in the stock market isn’t a luxury attainable only by the wealthy and the financially savvy. Anyone with a bank account can begin investing, and in times of a recession, investing in the stock market may be the easiest way to build long-term wealth; and it does not have to be difficult. There are numerous long-term investment strategies at one’s disposal, such as Dollar-Cost Averaging (DCA), that make it easy to begin investing. DCA is an investment strategy that allows the investor (you) to set up a fixed dollar amount and time period, or frequency (e.g., every 15th of the month, $100 goes into your investment account). In other words, set it and forget it.
A perfect example of using DCA to invest in the stock market is a 401(k) plan. Simplified, a 401(k) plan is a retirement savings account, offered by an employer, which takes a portion of an employee’s paycheck, usually providing tax savings, and invests the money in a selection of mutual funds or index funds. Ideally, this is done over a long period, enabling the stock values to gradually increase until it is time to retire. Even so, investing in a 401(k) plan isn’t the only account in which one can utilize the DCA strategy. Many individuals do so using non-qualified brokerage accounts, college savings plans, health savings plans, etc.
Learn more about Mutual funds & index funds.
Moreover, in the Digital Age, one can rely on mobile devices to be equipped with the necessary apps to fulfill their day-to-day needs, including investing. So, if you’re still feeling uneasy about investing in the stock market, or if your employer doesn’t offer a 401(k) plan, don’t worry—there’s an app for that! Betterment and Wealthfront are examples of “robo-advisors;” These apps make investing easy by automatically generating an investment portfolio on your behalf based on your goals and risk tolerance. All you do is set up an account, fixed dollar amount and frequency, and the app does all the hard work for you. M1 Finance is another user-friendly app that makes investing in the stock market easy. However, a notable difference is that unlike Betterment and Wealthfront, M1 is more of a DIY tool and requires you to build out your own portfolio consisting of your favorite stock and funds.
Achieving financial security does not have to be a complex process and investing in the stock market is a profitable first step in proving that. Most know compound interest is the key to wealth. The stock market just so happens to be one of the easiest tools to benefit from compound interest. The chart below shows us how much we must invest and how our investment would hypothetically perform over 25 years.
We highly recommend diving deeper into dollar-cost averaging, as it can be one of the most effective methods of investing during volatile times like this. As you may know, there is no way to predict what the markets will do over a short period of time. There has never been a 15-year period where the U.S. general stock market (using the S&P or Dow Jones as an index) has lost money! In shorter time horizons (a few months or years) the markets can be unpredictable. Some months you may buy high, others low. DCA allows us to benefit from the ups & downs on a month-to-month basis in the markets, and in theory, provide us with a better average price. Generally, to achieve the best performance using the DCA method, one should plan to make frequent investments over a minimum of 12 to 24 months.
Disclosures:
- Before you begin your investment journey, it is paramount that your finances are in order. This means that you should establish an emergency fund (recommended 3-6 months of fixed expenses) and have cleared any lingering high interest-bearing credit card debt.
- Please remember that this is not legally binding financial advice. Should you have more questions or concerns, please reach out to us directly or consult your financial advisor.
Happy investing!
