There are many reasons why you might find yourself sitting on too much cash. Maybe you sold your investments at some point and never got back in. Maybe you've been building up cash in an IRA or brokerage account, but still haven't chosen investments. Or maybe you've never gotten totally comfortable with investing outside your 401(k).
Whatever your reason, it's never too late to get more fully invested. Whether you're completely in cash or you just hold more of it than you really need (i.e., more than what would be necessary in case of emergencies and what you need for short-term goals), here are some steps to consider to help you finally get off the sidelines.
Step 1: Let go of the past
If you feel down that you've missed out on any past market gains, you're not alone. One of Americans' top investing regrets is not investing more more aggressively.1 But focusing on those lost opportunities can leave you feeling like you've already missed the boat on investing (spoiler alert: you haven't). Make peace with those regrets, but then resolve to move on.
Step 2: Focus on the future
You can't capture those past gains, but you still have a chance at sharing in any future ones. Although there are no guarantees, the stock market has historically risen over the long term, and being invested in stocks and bonds has provided better growth than cash over long periods. A sound set of investments that are well-suited to your comfort level and goals, and that fit within your broader financial plan, can give you the chance to get a piece of the action next time around.
Step 3: Figure out the big picture
Putting a portfolio together from scratch can be a major undertaking, but breaking the job up into a few incremental decisions could help you avoid getting stuck.
Start with the basics. There are 2 important initial details to work out:
How much risk to take on. In investing, people often think about risk in terms of how much an investment may rise or fall in price. The right level of risk for you may also depend on how far away your investing goal is, how comfortable you feel with potential dips in your portfolio's value, and the details of your financial situation.
Your big-picture investment mix. Also called your asset allocation, this means your overall mix of stocks, bonds, cash, and other investments. Your asset allocation should generally flow from your risk tolerance, among other factors. That's because with a higher risk tolerance you may be able to hold more in investments with higher risk and higher return potential, like stocks.
You can figure out these questions on your own or work with a financial professional to better clarify your needs and situation.
Step 4: Consider which investments could work for you
Next, you'll need to pick specific investments to fill out your asset allocation, whether with mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, or other choices.
Although the number of options can be overwhelming, don't feel like you need to go down a rabbit hole of researching every possible investment or trying to pick the next hot stock. Instead, focus on building a diversified mix (either on your own, or with the help of a financial professional). That means making sure your money will be spread around with many different investment types, like investments in different sectors and industries.
Granted, that can still leave you with a dizzying number of choices to make, so here's some good news: It's ok to keep it simple. In fact, you can invest in a diversified portfolio with a single fund or professionally managed account.
Step 5: Pick a pace for getting in
Once you know what you want your portfolio to look like, you have 2 basic choices for how you actually make your investments:
Buy in all at once—with one or more big trades.
Buy in gradually over time—with consistent, smaller purchases that ease you in.
Each approach has its pros and cons. Investing a lump sum all at once gives you more time in the market, which could provide the potential to beat a slow-and-steady approach (though there are no guarantees that one or other approach will provide better returns). But spreading your investments out over time might be more within your comfort zone. Note that if you choose the gradual approach, you may be able to automate saving and investing for your new investing plan.
Step 6: Don't get stuck on timing
You're almost there. You're ready to pull the trigger. But is today the best day for it? What if the market falls tomorrow?
Instead of obsessing over the perfect timing for your trades, stay focused on your end goal: actually getting invested. Missing out on only a few days of market gains can make a big difference to your portfolio's long-term returns. And in fact, investing during bad times has historically provided some of the best subsequent returns.
Step 7: Get help if you need it
Trusting your money to the markets can be nerve-wracking. If you're finding it's hard to follow through on your investing plan or you just need more help forming one, it could make sense to check in with a financial professional. After all, there's nothing wrong with asking for help when you need it.
Ready to take the next steps? Consider getting started researching investments, by learning more about mutual funds or stocks or exploring a model portfolio. Or, you can learn more about investing in a digital managed account or working 1-on-1 with a dedicated Commons Capital Private Wealth Advisor.
