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The recession has scared so many investors from the market that a lot are still sitting on cash. “Some of them are in their 50s and in their late 30s and 40s went through the Dot Com crash,” Nick Olesen, a Pennsylvania-based financial planner, tells Business Insider.
“The market crashed so much that a lot of them said it’s not worth it. So they went into CDs and other fixed-interest types of things, or they went all in bonds.”
Still, Olesen says he’s noticed a dramatic shift in recent months. “Those people are starting to realise they just missed out on a 100% rally in the market, or they’re just wanting to get back in after seeing they can’t keep up with inflation,” he says.
Moving your cash to an investment portfolio can be done overnight, but it’s better to do it over the course of a year, so the status quo doesn’t “shock your system too much,” Olesen says. “It’s not something you jump into with both feet and say, ‘Whatever happens, happens.'”
We asked the planner, who’s been featured in SmartMoney and Wall Street Journal, to break down how he helps wary clients move into the market.
First, you’ll need to assess your risk tolerance, says Olesen. Are you willing to bet more on stocks for larger returns, or would you prefer to play it safe and stay in bonds? Find out by punching in “risk tolerance quiz” to take some from Fidelity, SmartMoney, etc. to see where you stand.
“Let’s say you’re moderate,” Olesen says, “you’ll want 50% in stocks, 40% in bonds and 10% in commodities. That should be your goal for 6 to 12 months from now. It’s not your goal today.”
Where to find your portfolio
Short of seeking help from an advisor, self-disciplined investors can visit “the Charles Schwabs, Fidelities or Vanguards” to see what mutual funds are available, says our expert.
“Some people get tripped up on the language, but all these places can hold whatever you need except for a 401(K),” Olesen says. “Go to one of their sites, see which one you like the best, which feels more ‘you,’ and user friendly,” and then dive in.
From there, research the products you’re considering to gauge their performance. “That’s honestly how you’d debate which one to invest in,” adds Olsen, knowing “whether it’s beating its benchmark.”
Braving the waters
Now that you’ve determined your risk tolerance and what type of funds you’d like, it’s time to start moving your cash.
“If you’re starting in cash, take half of what should be in bonds and put it in the bond market, municipals, conservative investments, etc.,” Olesen says. “Next month, add another 20% to finish what you need in bonds, then add large cap stocks, and so on … Normally, I’d go from short-term bonds to longer-term bonds, large cap stocks (high dividend paying) to small cap stocks, international to emerging markets, then alternative investments.”
The idea is to gradually move from the most conservative type of investment to the most risky over a long stretch of time. Yes, it’ll take time to implement it fully and you might miss out on a gain or two, but “you have to go into it from the portfolio earning zero or 1% to having the potential to earn much more,” says Olesen. “This strategy will get you there eventually.”