We are NerdWallet’s Smart Money Podcast, where we answer real-world money questions. This episode is about investing […]

We are NerdWallet’s Smart Money Podcast, where we answer real-world money questions.

This episode is about investing in 2023.

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Our take

It’s possible that investors had a wild ride in 2022 depending on how much the swings of stock market got to them. Let the daily ups and downs of the stock market not worry you. Be afraid to make poor decisions later. Timing the market is not an investment strategy.

Financial advisors will tell you that you can build wealth long-term if you make regular contributions to your accounts, through highs and lows. This strategy is called “dollar cost averaging.” To avoid anxiety, you might not want to look at your retirement accounts as often as possible if the stock markets continues its unpredictable streak through 2023.

If you are new to investing, and you want to get started in the year ahead of you, it is important to know your goals and which accounts will help you reach them. Many new investors will need to set up a retirement account. Many people have access to workplace accounts like a 401 (k). Both Roth and traditional individual retirement accounts are also available.

Our tips

  • It’s okay to be boring. Simple portfolios with diversified investments have more reliable returns than investing strategies that attempt to time the market.

  • Focus on the long-term: Markets fluctuate, so think about the long-term. The time horizon is simply the time it will take to use the money you have invested.

  • One step at a given time: If you are new to investing, look into your options, including retirement accounts, brokerage account and robo-advisor accounts. This will help you determine which accounts can best suit your needs.

Learn more about investing with NerdWallet:

Episode transcript

Liz Weston: This is the NerdWallet Smart Money Podcast. We welcome you to send us your money questions. Our genius Nerds will answer them. I’m Liz Weston.

Sean Pyles: I’m Sean Pyles. For more information, text or call the Nerd Hotline at 901-730-6370. You can call us at 901-730-NERD or email us [email protected].

Liz Weston: Subscribe wherever you have your podcast to receive new episodes every Monday. If you enjoy what you hear, please rate us and share it with a friend. We’re continuing our series on how to set your money up in 2023 so you can achieve your goals and live a happy life.

Sean Pyles: This time, we’re talking to investing Nerd Sam Taube, about how to invest in 2023. We discuss how to invest in a weak economy, the lessons from 2022, and how to find the best investment tools that will help you achieve your goals. Sam, welcome to Smart Money.

Sam Taube: Thank you for having me. It’s a pleasure to be with you.

Sean Pyles: Investors have had a rough 12 months. I am curious to learn what your lessons were and what you expect from 2022.

Sam Taube: There are a few interrelated lessons I have learned since 2022. First, diversify your efforts and don’t put all your eggs in one basket. The second is recency bias. This is the human tendency to assume that the current trends will continue forever.

Big tech stocks were, for example, the largest winners on the stock market during the 2010s. They also rose faster than indexes like S&P 500 in the first years of the 2020s. They were the biggest losers of 2022. Alphabet, which is a company I have a small amount of shares in, was down almost a third at one time. Amazon was almost at half its previous level in one year. Meta was also down nearly half at one time this year. Another example is crypto. This bull market lasted from late 2021 to 2020. Bitcoin and Ethereum both doubled in value during this period, but they are now down more than two thirds as of this recording.

Liz Weston: I now have a reliable indicator that tells me when a market is at its peak. When I think “Hey, maybe that’s something I should invest in,” then everything goes to hell in a handbasket.

Sam Taube: Yes. Many financial advisors will tell you that diversification is important when choosing investments. However, boring can be very good. There has been a gambling trend that has paid off over the years, with big bets placed on trendy investments that will “go to the moon.” Last year was a lesson in how that’s not a good idea.

Sean Pyles While some people made a lot from meme stocks like AMC we also saw many people lose their money.

Sam Taube Just.

Sean Pyles I would like to know how you approach investing in 2023, but with the caveat of not being financial or investment advisers and won’t tell you what to invest your money.

Sam Taube: I approach investing in 2023 in the same way that I approached 2022 in terms of what I’m purchasing and how I’m going to buy it. It is tempting to try to time the market, to adjust your strategy to reflect the latest ups or downs, and buy at the bottom then sell at the top. They’ve done research on it. Brown Brothers Harriman, an investment bank, did a study of market timers. It found that most of them lose money.

Delia Fernandez is a certified financial advisor, whom we have consulted for several articles. She told me to keep in mind that we are in this for the long-term. Dollar-cost averaging is a method where you make small, regular contributions to your investment account. This could be an IRA, 401(k), or brokerage account. It is important to invest consistently over time, and not worry about when you get in and when your money goes out.

Sean Pyles: Dollar cost averaging can be confusing for those new to investing. People should know that if they make regular contributions to a 401k or an IRA, they are already dollar-cost averaging.

Sam Taube: Yes. It is a default.

Liz Weston: When prices drop, they buy more shares and less when prices rise. This is basically dollar-cost average.

Sam, it is widely believed that we will enter a recession in the coming year. What is the difference between investing in a recession and investing in less frightening times?

Sam Taube: Sam, before I answer your question, I would like to gently backtrack and clarify that statement. It is possible. Surveys have shown that most economists believe we will experience a recession. We do however have signs of recession in the economy like a large drop in stock market, rising interest rate, rising unemployment. It is important to keep in mind that economists have a poor track record of making predictions. There are signs that we may avoid a recession. Because inflation is cooling, the Fed is discussing lowering interest rates. While the economy is expanding, GDP still measures it. There’s also a chance that stocks may have reached their bottom and begun to rebound.

After all these qualifiers, it is clear that for many people the best thing to do in a recession, if one exists, is to continue doing what they have done before. Market timing is not a smart move, as I said earlier. Although it might seem counterintuitive, you can invest more in stocks when stocks are falling. However, this means that stocks will be selling at a higher price than they are going up. You can still take advantage of potential recessions by looking at markets that are relatively resilient to them, such as consumer staples or health care.

Particularly, the relative resilience of health care to recessions has been examined. The National Bureau of Economic Research published a paper in 2021 that showed that hiring for health care is very stable during recessions. This was because people still need to get medicine, even though times are difficult.

Sean Pyles: This seems like a rational approach to investing in times when the economy is in trouble, even though it’s not in recession. We know that many people make poor decisions. It can be beneficial to look at things from a rational perspective, rather than trying to be completely rational. What do you think people can do to get the best of both? They might be able to focus on investing, and not worry too much about the stock market or economy being a bit wobbly.

Sam Taube: One of the benefits of an automated set it-and-forget approach like dollar-cost average is that you don’t have to worry about the negative numbers and can simply keep going without changing anything. Although there are some sectors that do well in recessions, such as health care, I think you will spend more time worrying about the one-day returns of your portfolio.

If you are unable to see the negative numbers clearly, or have trouble imagining them, an automated, set-it-and forget-it approach may be right for your needs.

Sean Pyles: Yes. It’s okay to not look at your retirement account for several weeks. You might check it once a quarter or once a year. But you don’t have to monitor it every day. The stock market’s ups and downs can be overwhelming and nerve-wracking.

Sam Taube Yes.

Liz Weston: People often believe they can avoid the worst market conditions and still be able to jump in the right time to catch up with the upswing. It’s actually really hard. Sometimes, the market moves very fast.

Sam Taube: Yes. We can only see the top and bottom from a retrospect.

Sean Pyles: People can lose sight the larger picture when it involves investing. This is because they will likely not retire for many years. They will likely forget the anxiety they felt at this moment and will look back in a decade, twenty years, or three decades. But they will still be grateful that they invested if they did.

Sam Taube Just.

Liz Weston: Yeah. Even if they retire soon, they will likely live for a few decades so they need the inflation-beating power only stocks can provide. They still need to keep a large portion of their portfolio invested.

Sean Pyles: You don’t take all your money out of stocks the day you retire. Right?

Sam Taube. Left.

Liz Weston This is a bad idea.

Sam Taube. Yes.

Sean Pyles: I’m here to offer some guidance to people who are new to investing or don’t know how to get started in the game. Sam, which is the best way to invest?

Sam Taube: Yes. This is not financial advice. If you are new to investing, opening an account is the first thing to do. This could be a 401k if your company offers it or an IRA if not. A taxable brokerage account might be a better option if you are investing for a short-term goal such as buying a house, or other property.

The next step is to find low-cost mutual funds. These funds can help you manage your risk and provide steady returns. There are many options available depending on your level of involvement. A target date fund is a good option if you want to set it and forget it. This is basically a combination of diversified stock funds and bond funds, which you can combine into one investment. It is stock-heavy when you are young. As you get older, the fund becomes more conservative and bonds-heavy. Target date funds can only be found in retirement accounts. You can also consider robo-advisors if that is not possible. They work on the same principle. These portfolios are hands-off and automatically adjust to your needs. They invest your money in customized ETFs.

If you’re feeling a bit more involved, you can purchase index funds and adjust the ratios over time. The two-fund portfolio is the simplest way to achieve this. It consists of a total bond market ETF and a world stock exchange ETF. You can make it more complicated if you wish with a three fund portfolio. This could include an S&P 500 ETF and a total bond-market ETF. You can find a lot of these lazy portfolios online.

Liz Weston ETFs are cheaper than index mutual funds.

Sam Taube: Yes. Very low cost ratios.

Liz Weston Controlling fees is a key factor in ensuring that you get the most out of your money.

Sam Taube: One more thing I’d like to mention is that if you choose to buy index funds from a lazy portfolio, you will need to adjust them. You should rebalance your funds at least once a year. This means that you sell some of the well-performing funds and buy a bit more of those that haven’t. It will ensure that your funds remain in their intended balance. Again, this is going to be stock-heavy when you’re young, and bond-heavy as the years go by.

Sean Pyles: I find it difficult to find the right account for people who are just starting out in investing. There are many companies offering different types of accounts. I am curious how people should approach shopping around to find the best accounts for them.

Sam Taube: Yes. There are some things you should consider. The first is where you want to invest. Are you looking for access to stocks, bonds, and ETFs only? Are you looking for mutual funds? Do you want cryptocurrency or mutual funds? Not every brokerage offers cryptocurrency, especially when it comes to cryptocurrency.

Another important thing to consider is the minimum account balance. Many brokerages have reduced this to zero, but they are not all the same. It’s worth looking at the fine print to determine if there is a minimum amount you must invest. Another thing you should look at is the maintenance fees as well as the trading commissions. These have fallen to zero for many brokerages but not all. It’s a good idea to double-check fees, minimums, and terms and conditions. NerdWallet also has roundups that compare brokerages using all of the metrics I have listed — it’s easy to find this information.

Sean Pyles: Yes, NerdWallet’s 2023 Best of Awards, which is a list curated by our Nerds and highlighting the best financial products, just dropped. If you’re looking for an investment account, or any other financial product, I recommend this page. We will link to that in our show notes post at nerdwallet.com/podcast.

Sam, I also want your thoughts on shopping around. It might seem superficial, but the interface of these apps is what makes it so easy to navigate these platforms and apps. What do you think this means for someone shopping around? Do they need to weigh that more than the fees that allow them to get in an account? If they do, will they use it more? Or, where do you see that fitting in?

Sam Taube: It’s difficult to determine whether the fees are more important than the fees, because at the end it’s your money. However, it’s a consideration that NerdWallet reviews brokers on. Apps like Robinhood are very user-friendly. They are simple, easy, and beginner-friendly. However, they may have fewer capabilities than platforms like Interactive Brokers and a Webull which are more advanced platforms for day traders.

Sean Pyles : These companies are NerdWallet Partners, right?

Sam Taube Yes, they are.

Sean Pyles I mention this because while it may seem absurd to pay more for an account because it looks better on your phone, many people shop around for the platforms they want.

Sam Taube: Yes. If it makes a difference between using it or not, it might be worth paying more.

Sean Pyles Sam, thanks so much for sharing your thoughts with us and our listeners

Sam Taube: I am grateful for the opportunity to be here. It was great.

Sean Pyles: Let’s move on to the take-out tips. Liz, can you please get us started?

Liz Weston: Yes. There is nothing wrong in being boring. Simple, well-diversified portfolios are more reliable than investment strategies that attempt to time the market.

Sean Pyles: Next think about the long-term. Markets fluctuate, so think about your time horizon and avoid getting caught up in the swings.

Liz Weston: Take it one step at time. To help you reach your investment goals, you should explore all your options including brokerage accounts, retirement accounts and robo-advisor account.

Sean Pyles: That’s all for this episode. Call or text the Nerd hotline 901-730-6373 to get answers to your money questions. That’s 901-730-NERD. You can also email us at [email protected] Visit nerdwallet.com/podcast for more info on this episode. Remember to rate, review, and follow us wherever you get this podcast.

Liz Weston and I produced this episode. Our audio was edited by Kaely Monahan. We want to thank everyone at the NerdWallet copy desk who helped us.

Liz Weston: Here’s a brief disclaimer. We are not investment or financial advisors. This Nerdy information is for general entertainment and educational purposes only and may not be applicable to your particular circumstances.

Sean Pyles