I’m afraid of the stock market. With my first investment I lost 60% of my money. So I strictly like bonds. What is your advice now that interest rates are low? Should I stay or try something else?
-Jerold
It’s reasonable to be nervous about the stock market, especially given the ups and downs of recent years. And it’s even more understandable if you’ve had a bad experience and lost money.
Still, you want your money to work for you, and the prospect of big returns is tempting. So should you play it safe and accept the slow and steady pace of bonds? Or should you take some risk in the hope of better returns in the stock market? Here’s how to think about this decision. (And if you need help managing your investment portfolio, consider working with a financial advisor.)
No one can time the market
I can’t tell you if it’s worth putting your money in the stock market today.
In the short term, the stock market is unpredictable. Anyone who tells you he knows the future is not someone you should trust.
The only way to make these decisions is to research what the data shows will pay off the most in the long run. And if you take a diversified approach to investing in the stock market and stick with it, the data shows you’re likely to be rewarded in the long run.
From 1926 through 2023, the S&P 500 experienced only a handful of ten-year periods of negative returns. All of these periods include either the Great Depression or both the Internet bubble of 2000-2002 and the global financial crisis of 2007-2008. Every other ten-year period produced positive returns.
And the results are even better when you look at longer time frames.
Every twenty-year period from 1926 through 2023 saw positive returns from the S&P 500, with nearly 90% of those periods delivering annual returns of 7% or higher. For thirty-year periods, the lowest average annual return was 7.8%. (If you need help managing your investment portfolio, consider working with a financial advisor.)
If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
Focus on your goals and comfort level
Before you decide to invest in the stock market, it is important to remember what you are trying to achieve.
If this money is for an emergency fund, a home purchase, or a short-term goal, the stock market may not be the right vehicle. It is generally too unpredictable for short periods of time.
If this money is intended to support a long-term goal such as retirement, the stock market can be a great tool. Even in retirement, when your time horizon is shorter, stock market returns often play an important role in ensuring your money lasts a lifetime.
Your personal preferences are important here. Some people are comfortable riding intense market swings, while others are not. Your comfort level should be part of your decision-making process. (If you need help managing your investment portfolio, consider working with a financial advisor.)
The key is to find the right balance. The question is rarely whether you should put all your money in the stock market or keep it all out of the stock market. Instead, it’s about finding the right balance between stock market returns and the stability that bonds and cash provide.
Finding a suitable asset allocation
Your asset allocation is the percentage of investments you hold in stocks, bonds and cash. For example, you can invest 60% of your investments in the stock market and 40% in bonds, as well as an emergency fund. That type of portfolio allows you to benefit from the stock market’s growth while maintaining stability during downturns.
There is no one perfect asset allocation. I tell my clients that there is typically a range of “good enough” and that our job is to choose a portfolio that falls within that range.
Here are the steps to determine the right asset allocation for you:
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Accept that there is no way to know if now is the best time to invest in the stock market. It can be a great time, but you can also lose money temporarily.
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Write down your financial goals. Let these goals guide your decision about pursuing a specific return.
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Be honest about your comfort level with risks. It can be good to push yourself a little outside your comfort zone to overcome some of the anxiety you feel. But it’s also smart not to push yourself too far and risk selling out the next time the market starts to drop.
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Choose an asset allocation that provides the right balance of risk and return based on your goals and comfort level.
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Implement that asset allocation, stick with it through the ups and downs, and trust that your patience will be rewarded.
Next steps
Investing in the stock market doesn’t have to be an all-or-nothing proposition. Review your financial goals, risk tolerance and time horizon to help you determine the right asset allocation.
Tips for finding a financial advisor
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
Matt Becker, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
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The post Ask an Advisor: ‘I Absolutely Love Bonds’ and I’m Afraid of the Stock Market. Is this a strategy I should stick to? appeared first on SmartAsset Blog.
