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The stock market right now, while hardly the only indicator of the overall performance of the US economy, is naturally worrying. Despite the rally over the past few days, the S&P 500 is still about 18% below the high it hit in mid-February, before the coronavirus pandemic put the U.S. economy into a stranglehold.
It’s clear that the virus will not only mean devastation to public health, but it will also wreak havoc on the economy. But if you’re interested in investing in the stock market, there is a potential upside, if only financial. The US economy and stocks have seen significant growth in recent years. It was great news for investors that already owned stocks, but meant anyone buying in for the first time had to do so at elevated prices. The market’s big, recent decline changes all that.
Financial concerns can be especially worrying for a massive number of Americans during this crisis, including basic expenses. So investing in the stock market, which is generally a long game, certainly isn’t for everyone, nor necessarily top of mind. But if you have the means to do so, here are strategies for investing in stocks during what (hopefully) will be temporary downward trend.
For most investors, even experienced ones, mutual funds are the simplest and most convenient way to invest in the stock market. Essentially baskets of hundreds or even thousands of individual stocks, you can buy mutual funds directly from brand-name fund companies like T. Rowe Price, Vanguard, Fidelity, and Charles Schwab.
You can typically do this either by logging onto the firms’ websites and/or by downloading a mobile app. Vanguard’s app, for instance, allows you to buy mutual fund shares by taking a photo of the front and back of a paper check (although Vanguard says you cannot fund a new account this way).
There are two basic flavors of mutual funds: Active funds, which employ a portfolio manager to try to pick winning stocks (or bonds, for that matter) and passive index funds, where the portfolio manager merely purchases every stock on the market, so that your returns matches those of an index like the S&P 500.
While it can be tempting to sign up with a fund manager who will give you the chance to outperform, years of research show only a small minority of fund managers do this on a consistent basis. One big reason is cost. Mutual funds typically charge investors fees calculated as a percentage of assets. Broad stock-market index funds might charge a fee as small as 0.02% of your investment balance a year, or $2 for every $10,000 invested. While active funds can charge 1%, or $100, per $10,000 invested.
If you want to trade stocks on the open market, you will have to open an account at a brokerage like Charles Schwab, Fidelity or Merrill Lynch, among many others. These typically also offer mutual funds (which is why you see some of the same names as above). In addition to stocks of individual companies, a brokerage account will let you trade exchange-traded funds, which are mutual funds you buy and sell throughout the day on the open market.
Historically brokerages have charged commissions — fees you pay every time you make a stock or ETF trade. In the past several years, however, a price war among brokerages has led most to eliminate commissions for U.S. stock and ETF trades. Trading individual stocks allows you to own slivers of your favorite companies, which may have a certain appeal, but you’ll still want to own shares of enough different individual companies to make sure your portfolio is diversified. That can require a hefty sum, which is why most small investors stick with mutual funds or ETFs.
Stock trading apps
Like mutual fund companies, big brokerages have invested heavily in their mobile apps, making it more convenient to trade than ever. Recent years have also seen a number of app-first brokerage start ups. Some of these have faced hiccups in recent weeks, however. Robinhood, which helped pioneer free stock trades and won a cult following among the sub-culture of rapid-fire young traders, was widely criticized after it was forced to shutdown for technical reasons when trading volume surged last month. Robinhood says it has since solved the issues. Last week it offered investors new resources to help navigate turbulent markets.
It may sound a bit sci-fi in the vein of Black Mirror, but AI-based robotic financial advisors (aka robo-advisors) are actually hitting their stride. As Money reported in its 2018 compilation of the best robo-advisors, these tech-oriented financial products use algorithms to help you pick a slate of stocks and bond investments (typically using exchange-traded funds) that match your age and investing goals.
While this space is known for its upstarts like Betterment and Wealthfront, major players like Fidelity, Vanguard, and Morgan Stanley have also started offering them as alternatives to more traditional methods (some also offer select human advising as a complement).
Perhaps more importantly, robo-advisors are way cheaper than a dedicated personal financial advisor. Investors can expect to pay 0.2% to 0.4% ($20 to $40 per $10,000) of the amount they have invested per year, as opposed to 1% or more with a traditional flesh-and-blood advisor. (Both sets of fees are on top of fees you will pay for ETFs or mutual funds.) That means robo-advisors can be a particularly good option for people who don’t have a ton of money to invest, but still want a little extra help navigating the market.
Saving and investing apps
Not all robo-advisors pitch themselves as alternatives to fancy white-shoe Wall Street firms. Some, like Acorns and Stash, are designed specifically to help you get started saving and investing. Acorns, for instance, links to your credit card and rounds purchases up to the next dollar, then invests that spare change into ETFs.
These services can make sense, if help saving is what you need. But you should be aware that their monthly fees — Acorns costs $1, $2, or $3 a month, depending on the service — can be higher than similar robo-adivsors or other investing options, especially for customers with small balances.
Of course, if you have a 401(k) plan at work, chances are you already invest in the stock market. Since 2006, most retirement plans at large employers automatically enroll workers, typically at a contribution rate of 3% of your pretax salary, plus any match your employer may offer.
Chances are the money is being put into a target-date fund, a mutual fund that offers a broad mix of stocks and bonds pegged to your age (much like a robo-advisor would do.) With stock prices down, now might be a good time to increase that 3% contribution. Most retirement experts suggest you need to save 10% of your salary or more if you want to fund a comfortable retirement. But even if you do nothing, your retirement plan means you should benefit from the stock market’s wealth creating power in the long run.