How and Why to Invest

This article was originally reported by PRI’s “The Takeaway.” For more, listen to the audio above.

Investment in the stock market can be risky, but there’s a lot of risk in not investing, too. “If you don’t invest your money,” financial expert Beth Kobliner told “The Takeaway,” “what you’re facing is the risk of prices eroding the value of your money.”

Over long periods of time, prices go up. That means the value of a dollar goes down. So if you stash your money in a mattress for 20 years, you won’t be able to buy as much with that money as you could when you started.

Sticking money in a savings account won’t necessarily solve the problem either. In the last 35 years, savings accounts have gone up by about 1 percent, after inflation. The stock market, over the same period, has gone up by about 5 percent.

Nobody can see into the future, but there are ways to invest smartly. Kobliner believes that people should invest for the long term, rather than trying to beat the market’s swings. And to mitigate the risk, investors should diversify their investments using mutual funds and not put all their money in one place.

The question is, which mutual funds? Instead of buying expensive “actively managed” funds, where someone is picking the stocks, Kobliner recommends “passively managed” funds or index funds like the S&P 500 index.

Passively managed funds are usually cheaper, because you’re not paying fees for people to pick stocks, and they often out perform actively managed funds, too.

Investing in the stock market is not for everyone, though. Even Nobel Prize winning economist Paul Krugman isn’t invested in the stock market. He recently told the New Yorker, “It just takes a lot of work to think about it, and at no point—except maybe early 2009, if I’d been really feeling daring, stocks really did look cheap.”

Before investing, Kobliner recommends that people pay off their debts, especially the credit cards. They should also set up a savings cushion of about 6 months of salary, and make sure to max out on the 401 K with matching funds. With those preliminary finances taken care of, interested investors can feel comfortable dipping their toes back into the stock market.

“The Takeaway” is a national morning news program, delivering the news and analysis you need to catch up, start your day, and prepare for what’s ahead. The show is a co-production of WNYC and PRI, in editorial collaboration with the BBC, The New York Times Radio, and WGBH.

More at thetakeaway.org