One of the biggest roadblocks to building wealth is harboring a fear of risk.
“The great irony of that invisible script is that you’re worried about losing money investing, but every day you are not investing, you’re actually invisibly losing money,” Ramit Sethi, a financial expert who has been writing about money for 15 years, told Business Insider.
In the second edition of his bestselling book ” I Will Teach You To Be Rich,” Sethi writes that risk is essential to building wealth. Sitting on the sidelines of the stock market all but ensures your money won’t multiply.
“You’re worried about maybe losing money, you are losing money — and that’s the great irony,” he told Business Insider. “The worst mistake you could make is to wait, is to say somebody is going to come save me. It’s not going to happen. And every day you wait, you’re actually losing.”
Most importantly, you don’t need expert-level knowledge of individual stocks or markets to invest. Sethi says most people can, and should, start with automatic contributions to retirement accounts. In his book, Sethi outlines his six steps to effective investing:
- If you have a 401(k), contribute enough to get the company match
- Pay off high-interest debt
- Open up a Roth IRA and contribute as much as possible (the annual limit is $6,000 in 2019)
- Go back to your 401(k) and contribute as much as possible (the annual limit is $19,000 in 2019)
- If you have a Health Savings Account, contribute as much as possible (the annual limit is $3,500, or $7,000 for a family, in 2019)
- With any leftover money, open up a taxable investment account, pay off extra mortgage debt, or consider investing in yourself (e.g. start a company or obtain an additional degree)
Whether you’re at step one or step six, remember that “it’s not about timing the market, it’s time in the market,” Sethi told Business Insider.
Historically, the S&P 500 has returned an average of 7% to 8% per year after inflation. While past returns can’t predict future returns, your money is much better off rising and falling in the market over a long period of time than sitting dormant in a savings or checking account. With a diversified and well-balanced portfolio, your risk level falls dramatically, Sethi writes.
“The market will go up, the market will go down. Nobody knows. Nobody can tell you. It doesn’t matter if they’re on some TV show or anything. It’s all bullsh–. No one can tell you,” Sethi said.
He continued: “What matters is, there’s a great study in the book, and it shows that if you were in the market over 20-year period on its best days, you get about 8%. If you miss the five best days, your return drops to like 5%. That’s hundreds of thousands of dollars over the course of your life. How many lattes is that worth? And if you missed the best 10, 15 years, you actually went to a negative rate. So what’s the implication? Don’t try to guess. Just keep investing.”
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