Recently, the stock market suffered a large downturn. Indeed, the DOW Jones Industrial Average is down over 30% from its record high in February. There is a lot of fear out there today, but there is also a tremendous opportunity. While the stock market decline news is devastating to the market, it presents a substantial opportunity for young investors looking to break into equities. Even with this large decrease in the stock market's value, stocks remain historically overvalued.
What does this all mean for younger investors? The stock market is on sale and should be a part of your financial plans for the future!
Index Fund Investing
A good rule of thumb is to allocate 10% to 15% of your pre-tax income to savings. One of the best places for young investors to start saving is in a ROTH Individual Retirement Account (IRA) or your work's 401(K) Retirement Savings Account.
Almost all ROTH IRA and ROTH 401 (K) funds offer investments into index funds. Index funds are a group of stocks that follow a particular stock index, such as the DOW or the S&P 500. These index funds reduce risk and allow for diversification. What's more, these ROTH retirement funds grow tax-free! This means you pay no taxes on them now or when you withdraw them in retirement. With the large drop in the market, these index funds, available from online brokers, are selling at a discount. There are several online ROTH calculators that can help you estimate your retirement savings over time. Simply open a ROTH IRA online or a ROTH 401(K) at work and begin buying these funds on sale.
Most stocks have now come down off of their historic highs. Companies that were once overvalued are now entering the price range for many to purchase. Think about the things you purchase or enjoy doing in your life. Do you enjoy woodworking, computers, or travel? There are quality companies with healthy balance sheets for every interest. Young investors can purchase shares of quality companies now at a discount and reap the rewards down the road for the payment
Many are scared away from picking individual stocks. While there is an additional risk, there is also an additional reward. If you are risk-averse, stick to the index funds mentioned previously. Risk is a major factor, and if you are investing for the short term, the odds of a loss increase. However, if your investment horizon is longer than five years, selecting quality stocks can pay off big time. Over the long term, the stock market provides much greater return for your investment over a traditional bank savings account. By delaying stock market investment as part of your financial plan, you are actually taking more risk in retirement by not investing in the stock market.
The market crash seems like it is all doom and gloom to the unsavvy investor. However, this is exactly when to be open to new ideas. Take some of your income and put it to work in the stock market today as part of your financial planning! Talk to a financial planning advisor to figure out the best way to get started.Share