I was having a conversation the other day with my wife about our finances and was telling her about how I’d just opened a high yield savings account from American Express. Granted her enthusiasm was much smaller than mine, she nonetheless was excited to have increased the interest rate we would get on our savings. She then commented that perhaps we should stop putting money into the stock market and put it into the new savings account. Gasp! Did she not trust my ability to gain a nice return for our savings in the stock market? Her statement was one that I believe a lot of us young professionals struggle with: dealing with risk.

The benefits of investing

My retirement fund has returned 6.5% this year and personal investment fund has returned something similar. This means for $10,000 in January, I now have $10,650. Had I stashed that money away in my AmEx savings account, I would currently have $10,040 (0.8% annual yield). That’s quite the difference. I actually consider myself a pretty conservative investor, and only have about 40% of our ‘savings’ in the stock market, with the rest in a savings account. Even if you had out your money in an index fund (considered the most conservative type of mutual funds) like the Schwab Total Market Index (SWTSX), you could have returned 8% year to date (perhaps I need to rethink my investments!).

For most good years, the stock market will beat any amount of interest you can get from a savings account. Let’s be real; you’re not going to get rich off of 0.8% interest from a savings account. To succeed in this world, you have to take risks.

The risks of investing

I think a lot of us are afraid of investing. We’re all old enough to remember 2008, when the market fell like 30%. It was tough seeing parents and grandparents realize that their entire life savings and retirement had fallen 30%. Couple that fear with our debt levels and our lack of knowledge of the market, a lot of us are staying away from the markets.

I admit; investing in the market is risky. You could lose money, money that you’ve worked hard to save up. That could be house, car or ring money right there. None of us want to see our investments lose money. There’s an old saying we’ve probably all heard: no risk, no reward. It’s still true to this day, just like it was true in 2008. You can play it safe by putting your money in a savings account, or hey even safer under a mattress, but you won’t experience the full reward of having your money work for you.

The effective strategy

I’ll be the first to tell you that investing scares even a financial blogger like me. I keep a budget, forgo buying my lunch and try to live a frugal lifestyle, all to put a little money in the bank each month. Seeing that amount go down is painful. However, I realize that to get ahead in this world, I must invest. Inflation is like 1-2% right now, so that means my money in a savings account is in theory losing value. What’s the best way to invest then?

1) Don’t invest it all. As stated earlier, I only invest about 40% of my ‘savings’ money. I do ‘invest’ my retirement money, but that should be a no brainer. I’m talking about money leftover each month that I put in the bank. Don’t be too risky with your money. If you’re risk averse and really fear the market, try just putting 10-20% in the market. Invest what feels right and helps you sleep at night.

2) Once in the market, play it safe. Pick a good index fund, like the one mentioned above. Don’t stress out over picking one stock or another, or even picking a specialized mutual fund. An index fund keeps no more than 2% or so of its holdings in one stock and invests in dozens of stocks. This way, all your eggs aren’t in one or even a few baskets and you should grow with the overall market. Expect 2-10% returns, aside from really bad or really good years.

Risk is a part of life and not something we can avoid. You have to take chances to get ahead in this life and in our society; it involves putting money in the stock market. You won’t always make money, sometimes you’ll lose some, but on the whole you should be gaining money. Be smart about it and keep it at a level in which you feel comfortable. By doing so, you’ll be setting your own portfolio up for solid gains and will start setting yourself up for financial success!

Thanks for reading! Here’s another (or two!) you might enjoy:

Stocks vs Mutual Funds

Dealing with risk

What to do with an extra $2k laying around

Still haven’t cut the cord yet?