Stock Market Investing for the Faint of Heart

The stock market is terrifying. Here are two strategies to make it less so

Allan Roth,

AARP

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En español

Published August 23, 2022

/ Updated September 06, 2022

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Is the market’s current volatility making you skittish about investing in the stock market? If so, that’s understandable, but leaving all of your money in a savings account is risky as well, and will almost certainly buy far less a decade from now. Shake off those market jitters and stay in the game. Here are two versions of a strategy to invest in stocks. Both are likely to give higher returns with only the chance of a (very unlikely) minimal loss.

Let’s say you have $10,000 that you won’t need for a decade, but you don’t want to lose a dime. You can get some upside of the stock market and get your money back by using a combination of a certificate of deposit (CD) and a low-cost stock index fund. (A stock index fund, as its name implies, forsakes a fund manager and simply tracks an index, such as the Standard & Poor’s 500 stock index.)

Start by finding the highest-paying certificate of deposit (insured by the Federal Deposit Insurance Corporation or National Credit Union Administration) for the time frame — in this case, 10 years. Bankrate.com and DepositAccounts.com are two good sites to search. As of the time of this writing, several banks offer 10-year CDs with annual percentage yields (APYs) ranging from 2 percent to 3 percent. Let’s assume you use the 3 percent 10-year CD, since it’s insured by the FDIC for at least $250,000.

For the truly terrified

You first determine how much you’ll have to put into the CD to get $10,000 back after 10 years. While the math isn’t complex, this simple zero risk calculator does the work for you. Simply enter $10,000, 3 percent interest, and ten years while leaving the “complete loss of stock value” alone and it tells you that buying a CD with $7,441 will do the trick if you let interest reinvest and compound. (Bear in mind that CD interest is taxable, so the strategy works best in a tax-deferred account, such as a traditional individual retirement account — or, even better, a tax-free Roth IRA.)

Then take the remaining $2,559 and buy an ultra-low-cost stock index fund that owns thousands of stocks. Examples include a Fidelity ZERO Total Market Index Fund (FZROX), Vanguard Total Stock Market ETF Fund (VTI) or Schwab Total Stock Market Index Fund (SWTSX). You also want to let the dividends reinvest automatically.

Next, sit back and relax. What will your returns be? Though it obviously depends on stock market performance, below are some examples.

Strategy 1
Stock market annualized return	Total annualized return with CD
-100%	0%
0%	2.3%
4%	3.26%
8%	4.50%
12%	6.02%

Source: Depositaccounts.com

In this example, you will get your $10,000 back, assuming you hold your CD to maturity. (You’d get dinged with a penalty for early withdrawal.) For instance, if stocks return 8 percent annually (less than the historical average of about 10 percent), overall you’ll earn 4.5 percent annually and get back $15,525. Hopefully, this will be higher than long-term inflation. If stocks return the historical average of 10 percent, you’ll earn 5.22 percent annually and have $16,638 at the end of 10 years.

Ken Tumin, DepositAccounts.com founder, said, “This strategy gives people the emotional comfort to invest in stocks.” I think it also provides the comfort to stay as well.

Take a little risk

The above returns are modest but, let’s face it, if the stock market lost all of its value, capitalism has failed and, most likely, the U.S. government with it. Your portfolio will be the least of your worries. So let’s use a reasonable worst-case scenario where stocks lose 50 percent of their value in a decade. This equates to the stock index falling 57 percent, since reinvested dividends would dampen the drop to a 50 percent loss. By comparison, during the awful “lost decade” between 2000 and 2009, stocks lost just 2.64 percent over the entire period, thanks in part to those reinvested dividends.

In the calculator, simply change one input from “worst case scenario” to “50 percent loss of stock value.” Now you can put $5,925 in the CD and $4,075 in the stock index fund. With more in stocks, you have a greater upside, as follows:

Strategy 2
Stock market annualized return	Total annualized return with CD
-50%	0%
0%	1.87%
4%	3.42%
8%	5.30%
12%	7.50%

Source: Depositaccounts.com

If the stock market lost everything but the U.S. government survived, you’d get back $7,962 from your CD and lose $2,038 (a little over 20 percent). As long as the stock market earns more than the 3 percent CD rate, you’ll do better. An 8 percent average annual return for stocks would yield a 5.30 percent return which, I hope, will be higher than inflation. If stocks earn the 10 percent historical average, you make 6.36 percent a year and have $18,534 at the end of the 10 years.

The real benefit of this strategy

As a financial planner, I’ve seen so many people panic and sell when the stock market plunges. The benefit of this strategy is the peace of mind in knowing you’ll get all of your money back, or at least most of it, even if the stock market goes to zero. That, I hope, will give most people the courage to stay in the market.

This was a strategy I developed many years ago. I have recommended it to some people for a long time. But when interest rates plunged, the strategy no longer worked, as nearly all of the money had to be in the CD to get your money back, which left little in the stock index fund. Now that rates are higher and the stock market is scarier, I’m beginning to mention it again. In fact, this calculator was created by DepositAccounts.com a decade ago based on my discussions with Ken Tumin.

Finally, one can do many variations of this strategy, such as over a shorter period or even using what’s known as a zero-coupon Treasury bond. That’s similar to the CD with interest reinvested but has the added benefit of the interest being exempt from state taxes.

Investing in stocks is hard, especially in bear markets. Perhaps this strategy can give you the confidence and comfort to invest and stay the course.

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Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal.

Stock Market Investing for the Faint of Heart

The stock market is terrifying. Here are two strategies to make it less so

For the truly terrified

Take a little risk

The real benefit of this strategy

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