The stock market tanked in 2008-2009 and the result is that 20-30 somethings are afraid of the stock market. CNBC reported that 77% of millennials prefer putting money long-term in cash versus investing.
Is now a good time to invest?
Claire, a 25-year-old, Assistant Band Director in Austin wanted to know. She emailed:
“Hi Carly! I really enjoyed your class and am making big strides. I’m happy to say I have $1,000 (to open a retirement account), but I am concerned with the really high stock values. I realize that the nature of investing means that the values will go up and down, but should one invest when the values are this high?”
For new-be investors when setting up your retirement account you typically need a minimum investment of $1,000. It can seem like a lot of money to invest all at once. What if you invest now and the value sinks?
First off, congratulations to Claire, to be 25 and have $1,000 set aside to invest. According to bankrate.com a survey found that 52% of Americans do not own stocks. Those that do own stocks, the median retirement account balance in the U.S. for households near retirement age is $12,000.
Claire completed Best Money Class Ever, a four-week class that’s like CrossFit, but with money, “I am getting excited about being more organized; it becomes a game almost! How much money can I put away this month?”
Well in just over two months she has paid off her credit card and line of credit completely ($2,727!), started her emergency fund, and set aside $1,000 to open her retirement account. The best part is, even though she is making big grounds financially, she isn’t sitting at home with no social life.
“I want to go out, be with friends, I (previously) didn’t know how to do that and still be responsible with money,” she said.
Here’s two investing strategies that show why now is a good time to invest.
1. The Random Walk Theory
Burton Malkiel, an economist and professor from Princeton University, wrote about the Random Walk Theory. He states that you can analyze past performance of stocks, but that can’t be used to predict its future movement.
In Malkiel’s best-selling book, A Random Walk Down Wall Street, he explains that the market is random. You can’t time the market. Instead you should, “trust in time rather than timing, start saving early and save regularly.”
There are risks involved with owning stock, but Claire has time on her side with 40 plus years to see her investment grow and compound.
- How Much Should You Save for Retirement?
- Debate! Should You Stop Investing for Retirement Until You’re Debt-Free?
2. Dollar Cost Averaging
Full-time fund analyst still can’t predict exactly if the market has reached a bottom or top. Dollar cost averaging is an investing strategy where you invest, regardless of the stock’s price, a set amount on a regular schedule. The result is then the cost per stock averages out as more shares are purchased when stock prices are low, and fewer are purchased when stock prices are high.
After you have the minimum to open an account you can then invest a percentage of your pay monthly to utilize the dollar cost averaging strategy. This reduces the risk of investing a large amount at the wrong time.
Congrats again, Claire on your progress towards gaining financial independence. It is official: you can be a 20-something that has fun and is financially responsible.