If You've Been Able to Save Up $100K and Are Scared of Investing, Suze Orman Will Set You Straight

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Consistent saving and investing is the key to building up a sizeable retirement nest egg over time. By automating your portfolio contributions and the reinvestment of dividends, you’ll really start to feel the effects of compounding over time. Indeed, every year that goes by, the effects of compound interest will be that much more noticeable—call it the snowball effect, if you will. 

Not every saver is up for investing in the stock market, though, especially for those scarred by the Great Financial Crisis and the 2008 stock market crash. Undoubtedly, things can go wrong in markets and the economy. And it’s hard to sidestep some of the ugliest financial market meltdowns. While many of today’s young people have confronted extreme volatility amid the 2020 COVID sell-off, the V-shaped recovery, I believe, has conditioned market newcomers to expect quick, melt-up types of recoveries.

Dip-buying won’t always be a winning, no-brainer strategy. Eventually, a plunge will come along that punishes dip-buyers until their liquidity runs out. And it could take years before things return to their prior highs. Indeed, this is a scary thought to some investors who would rather save up a fortune and leave it in savings accounts.

It’s natural to be afraid of what one doesn’t understand

It took years for stocks to come back from the 2008 market crash, and while those who stayed the course were fine, it’s not hard to imagine that many threw in the towel because they thought another Great Depression-like scenario would be in the cards. When everyone is at a loss over declining portfolio valuations, keeping your cool and riding things out can be tough. 

Indeed, it’s very natural to be afraid when one’s portfolio sheds value at a rapid rate. Either way, when you view stocks as pieces of businesses, rather than just symbols that go up or down based on near-term developments and news, it makes it somewhat easier to hold securities in the face of great pain in markets.

While high-yield savings account (HYSA) rates are rather good today, they’ll still fall well short of stock returns over the long run. That’s why taking baby steps is vital to warm up to the stock market. Indeed, you don’t need to invest a great deal (think $100,000 or so) if you’re not comfortable doing so. You can start with a small amount you’re comfortable with. Whether that’s $1,000 or even less, the important thing is to get started.

Suze Orman thinks educating oneself on financial literacy and markets can help reduce fears of the unknown. She’s right on the money. And to help ease the move into stocks, she advises diversification to reduce market risks, but, perhaps most importantly, starting small so that “shock value” after a market decline doesn’t have a massive impact on your psyche.

Inflation is always working against savers. Stocks are a weapon to fight it off.

As you get a feel for the bumps in the stock market road, perhaps you’ll become a bit more willing to take on a bit more risk for a shot at more reward. If anything, I think investors should treat the wealth-eroding effect of inflation as a motivator to embrace stocks. In high-inflation environments, even a HYSA may not be able to generate a “real” (after-inflation basis) return.

While there’s no avoiding corrections and plunges (at least for most investors) that come our way, I do think investors should “ease” into financial markets if there’s any bit of fear they have about the equity asset class. At the end of the day, it’s the number-one asset to build wealth. But to unlock the long-term wealth creative power of the asset class, you just have to deal with the volatility.

Not every investor has the right temperament to thrive in stocks. However, I do think that exposure to stock market volatility can help improve one’s ability to tolerate volatility and even the odd correction. Indeed, a 10-15% drawdown, which may have horrified you as a beginner, could make you feel a bit greedy about the prospect of bagging a bargain as others around you run scared over a development that may be greatly exaggerated.

The bottom line

Suze Orman’s “start small” advice is perhaps the best takeaway for startled new investors who’d rather hoard cash and T-Bills. Getting a bit of skin in the game will help you learn and grow. Eventually, you’ll become an intermediate investor, and perhaps eventually, you’ll be more than comfortable with a sizeable equity allocation.

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