- Investing in the stock market is crucial for maintaining spending power and hedging against inflation.
- A diversified portfolio is a better long-term strategy for preserving wealth than holding cash.
- Extreme highs and lows in your portfolio and fixating on the short-term are signs you may be underinvesting.
The US stock market continues to soar through the final quarter of the year, with major indexes like the Dow Jones, Nasdaq, and S&P 500 hitting record closes on Wednesday. Investors remain optimistic following Federal Reserve Chair Jerome Powell's comment that the US economy seems to be in "remarkably good shape."
Now is a better time than ever to invest in the market.
Here are four signs you're not investing enough in the stock market, according to financial advisors.
1. You keep everything in cash
Holding onto your cash may seem like the safer option compared to risking it on the market. But in actuality, your money is losing value due to inflation diminishing the purchasing power of the US dollar.
"Even though cash yields are better than five or six years ago, they're still low compared to inflation," Tom Graff, chief investment officer at Facet, told Business Insider. "By holding onto cash, you're functionally not making any money."
The best way to combat inflation and preserve wealth is by investing in a diversified portfolio of stocks, bonds, and other securities. The S&P 500 index, a popular stock market benchmark, has a historic average annual return of 10% that far outperforms the US inflation rate of 2.6%. Savings accounts, on the other hand, only have an average return of 0.43% APY.
That said, your bank account is still the right place for money you know you need to pay off short-term expenses like rent, groceries, and debt. Only invest money you won't need access to for at least several years.
"We've all felt inflation over the last several years eat away at our earnings and our spending power," Corbin Blackwell, senior financial planner at Betterment, told BI. "You aren't getting anything from your savings account, but investing keeps pace with inflation."
2. You're experiencing extreme highs and lows in your portfolio
"One sign that you're not investing enough in the stock market is if you're experiencing extreme highs and lows every time you look at your portfolio's performance," said Blackwell.
Being thoroughly invested in the market doesn't necessarily mean buying more stocks or increasing the size of your portfolio, she says. Rather, it refers to diversifying your assets to gain exposure from multiple areas of the market.Someone who owns 100 shares of different technology companies is less diversified than someone who owns half that amount of shares but has exposure to a mix of market sectors like health care, real estate, financials, tech, and communication services.
Similar to a roller coaster, an investment portfolio that lacks proper diversification is vulnerable to frequent market swings. These extreme highs, although thrilling, prevent your portfolio from growing at a steady and reliable pace. Instead, you're at greater risk of a major loss.
Diversifying your investments across various market sectors is a proven strategy to mitigate risk and enhance your portfolio's performance. By spreading your investments, you can better weather market fluctuations and capitalize on opportunities in different sectors.
"You don't need to spend a lot of money to have a diversified portfolio," said Blackwell. "You can buy a share of an ETF, which is already diversified in and of itself. But you shouldn't just buy one ETF, either."
3. You never increase your retirement contributions
At the beginning of your working career, you likely could only contribute a small percentage of your paycheck to your 401(k) or another of the best retirement plans. But did you increase your contributions the last time you got a raise?
As you make more money, contribute more toward your retirement plan to make up for the years you could only contribute a little. This is especially important if your employer offers a match, as this is essentially free money.
Although retirement may feel light years away, time is paramount as retirement savings steadily grow with compound interest and long-term investment opportunities. As mentioned before, holding onto loads of cash diminishes its spending power.
Blackwell noted that investing is a crucial step in securing retirement as you can't get back that time that you missed, and relying on Social Security alone isn't recommended.
"If you don't have any help in the form of investment gains and compound interest, you're going to have a really hard time affording that retirement, especially when life expectancy is so long," said Blackwell
4. You're focused on short-term volatility rather than long-term gains
Another sign of underinvesting is if you find yourself holding back from participating in the current market due to its short-term volatility. The market's daily fluctuations can look intimidating, especially if you're new to stock investing, but not all volatility is bad.
Blackwell explains that financial advisors prefer people to invest long-term as many opportunities need time in the market to accumulate gains. "Investing isn't about the big wins," She said. "There's not enough certainty in any portfolio to only benefit from the upside. It's always a risk, return trade-off."
Graff notes that current economic and political factors impact people's perspective and optimism about the market and the US economy as a whole. However, those circumstances generally impact the short-term rather than the actual long-term potential of the average investor's portfolio.
"There's always something, and when the market has been up a lot, anything that goes wrong could be a downturn," said Graff. "At some point there's going to be a bear market again, but timing that is so difficult."
At the end of the day, there's no better time to invest in the market than the present, as you risk missing out on growth opportunities by focusing on the short term instead of having a long-term perspective. Moreover, long-term investing is generally less risky and provides opportunities for recovery from market downturns.
"It's not fair to tell investors not to worry about problems like inflation. Instead, the real advice is to use that time to your advantage," said Graff.