How to Invest for Retirement When You're Scared of the Stock Market

Key Points

• Some people have a difficult time bearing the risk of a stock portfolio.

• If you invest too conservatively for retirement, you risk a shortfall later in life.

• Diversifying your holdings and rebalancing often could help mitigate some of the risk of investing in stocks.

• The $23,760 Social Security bonus most retirees completely overlook ›

By now, you're hopefully aware that retiring on Social Security alone has the potential to be disastrous, especially with benefit cuts looming. And like it or not, it's on each of us individually to save for retirement to avoid having to struggle financially.

To that end, you'll often hear that investing in stocks is a good way to grow retirement wealth over time. But what if you're someone who's truly afraid of the stock market, to the point where having a good chunk of your portfolio in stocks will cause you to lose sleep?

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Unfortunately, it's really hard to build retirement wealth without dabbling in stocks to some degree. But there are steps you can take to mitigate your risks.

1. Give yourself time

A big reason it's so important to invest in stocks for retirement is that over time, inflation tends to erode the value of money. So you need a portfolio of assets whose returns can outpace inflation, and stocks have long fit the bill.

One way to mitigate the risk of investing in stocks is to give yourself a lengthy savings window. This not only gives your money time to grow, but also gives you an opportunity to ride out market downturns.

If you're a conservative investor, you may decide to largely pull out of the stock market once retirement starts to get close. But if that milestone is 10 years away or longer, then you really are giving yourself time to recover from negative market events, in which case it makes sense to stick with stocks.

2. Maintain a diversified portfolio

Loading up on the same few stocks, or concentrating your portfolio in a single segment of the market, could result in massive losses in the event of a notable downturn. A better bet is to maintain a diversified portfolio -- one that consists of quality stocks across a range of market sectors.

One good way to achieve optimal diversification is to load up on S&P 500 or total stock market ETFs, or exchange-traded funds. This way, you're effectively investing in the broad market without having to research hundreds of different companies on an individual basis.

3. Rebalance often

Over time, the value of certain assets in your portfolio can grow disproportionately. You may, for example, start out by owning 20 different stocks, each comprising 5% of your portfolio. If one stock really takes off, after a few years, you could end up in a situation where that company alone makes up 40% of your total assets.

That's a good thing in that it means you've done well with that stock. It's a bad thing in that if that stock were to take a hit, your portfolio value would plummet.

That's why frequent rebalancing is important. If you're someone who doesn't like risk, make a point to check your portfolio every quarter to make sure it's reasonably balanced. In the example above, the savvy thing to do would be to reduce your position in the stock that's making up 40% of your portfolio to cut that share down to 5% or 10% at most.

It's easy to tell yourself that the risks of investing in stocks for retirement aren't worth the potential reward. But you invest too conservatively for retirement, you take on a different risk -- a financial shortfall later in life. Rather than do that, use the tactics above to lower the risks associated with a stock portfolio so you can push yourself outside your comfort zone enough to earn an inflation-beating return.

The $23,760 Social Security bonus most retirees completely overlook

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