2019 was a year that saw record growth in the stock market. Some experts believe that the outlook for 2020 is not nearly as positive. A Bloomberg article concluded that the double-digit gains of 2019 would not repeat in 2020, and that overall growth will be slow.
With many of our Addition Financial members coming to us for investment and retirement advice, we thought we’d take a look at the coming year and make some recommendations based on the financial projections in the news. Here’s what you need to know.
Wall Street Predictions
The prediction that Wall Street growth will be slow compared to 2019 doesn’t necessarily mean that the economic news is bad. The ongoing trade war has impacted the market and will continue to do so, but most experts still think there are investment opportunities to be had in 2020.
Manufacturing companies have paid the highest price for the trade war with tariffs on Chinese materials driving up prices and contributing to layoffs. Although the US signed an agreement with China in mid-January, skeptics believe that Beijing is unlikely to keep its promises.
There’s always a possibility of a market correction, which is a nice way of saying that the Dow Jones Industrial Average may take a hit in 2020. Most experts believe a big correction is unlikely. That means there’s plenty of room to see your investments grow in 2020, although the growth is unlikely to be as rapid as it was in 2019.
Investment Strategy in Times of Slow Growth
While it’s impossible to predict with any degree of certainty what the coming year holds for investors, we do think that investing in the stock market is something that makes sense – especially for young people.
The guideline we recommend is the 120 rule – which used to be the 100 rule. It says that you should subtract your age from 120 to determine what percentage of your investments should be in the stock market. For a 30-year-old, that would mean investing 90% of your retirement in the stock market and the other 10% in bonds and other “safe” investments.
Of course, we recognize that not everybody has the same risk tolerance. If the idea of having 90% of your retirement in the stock market is anxiety-inducing, you can reduce the percentage accordingly. We don’t recommend investing less than 70% unless you are close to retirement age.
One way to mitigate the risk in buying stocks is to invest in exchange-traded funds, or ETFs. ETFs are securities that span a broad range of investments, including stocks. The S & P 500 ETF is an example. Investing in ETFs carries a lower risk than investing in individual stocks because the risk is spread out across many companies and sectors.
The Best Way to Invest in 2020
Whether you’re new to the stock market or you’ve been investing for a while, we suggest putting a line item in your household budget for retirement and investing. Including investments in your budget is the best way to prioritize your savings and retirement.
The key is to create automaticity around saving and investing your money. If you know that 10% of your income (or more if you can afford it) is going to be invested, then you can pay yourself first every month.
While we do recommend the 120 rule, you can use the 100 rule if you have a low tolerance for risk. For someone who’s 25 years old, that would mean investing a minimum of 75% and a maximum of 95% in the stock market.
Many young people use robo-investors to evaluate and buy stocks, but some still prefer a personal relationship. Addition Financial has two experienced financial advisors available to meet with members. Click here to read their bios and learn about the program.
We also offer an array of retirement accounts to members, including:
- Traditional IRAs
- Roth IRAs
- Term Share Certificate IRAs
Click here to learn more about our retirement accounts and how they can help you navigate the financial landscape in 2020 and beyond.
Posted on Jan 22, 2020
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