Stop Messing with Your Investments
And Start Making Money
You study and study a company before buying its stock. Then 24 hours later you regret buying it. You promise yourself you will wait a week and see how it is doing, but two days later you bail out when the stock drops.
Maybe you find a solid stock you can stick with. Six months later, when it hasn’t done much, you get bored with it and sell.
Cut out all the hand-wringing already. Sheesh. You must never get any sleep.
There is a way to invest that is very likely to make you money, and you won’t have to check your investment every five minutes. In fact, you can check it as little as once a year.
The Odds of “Beating the Market”
The “market” is large, but the S&P 500 follows 500 stocks and is considered one of the best measures of how the market performs. Since 1926, the S&P 500 has averaged a 12% return annually. So that’s the “market” you desire to “beat.”
If you were very educated about stocks and had all day every day to study the market, surely you could beat a 12% return right? Well, let’s look at professionals who work full time trying to outperform the market. Money managers work all day studying stocks and making buy/sell decisions. So how many of them beat the market? The percentage of managers who beat the market three years in a row is 5%.
You don’t have the time the money managers have to study stocks. Three years of sleepless nights are unlikely to beat the market consistently. When 95% of money managers can’t beat the market three years in a row, your chances are slim and none.
The Odds of Matching the Market
Suddenly that steady 12% return from the market looks pretty good, doesn’t it? You can buy an exchange-traded fund (ETF) that mimics the behavior of the S&P 500 index and expect to do about as well as the does.
You basically have three funds to choose from: SPDR S&P 500 ETF (Symbol: SPY), the iShares S&P 500 Index Fund (IVV) and the Vanguard S&P 500 ETF(VOO). Do your research. Compare how they have done. Compare their expenses. When you want to buy, you just look up the ticker symbol on your trading platform and buy the number of shares you want. Just like you would with an individual stock.
Buying shares in an index fund makes your odds of matching the market very near 100%. That means that over the long haul, you can expect to earn around 12% on average per year. Some years will be better than others, but it all averages out.
The Hidden Gain of a Steady 12%
An index fund does one more thing for you. Since you are not likely to underperform the market, you won’t have huge losses to make up. For example, if you lose 50% on an individual stock, you have to make 100% on that same stock to make up the loss. That kind of roller coaster ride is hard to live with.
Now look at how the S&P 500 behaves. It certainly has its years of losses, but because there are 500 stocks in the index, no single stock can wreck it. The index has always-ALWAYS-come back and moved higher over time.
Your Investment Horizon
Investing in an index fund is a strategy for the long term. If you are going to need your money next month or even next year, an index fund is not for you. But if you are planning for your future and expect to be in the market indefinitely, an index fund is more likely to give you good returns than your hand-picked portfolio would.
Look at the stock chart of any of the index funds named above. Choose a range of at least five years. You will see a very nice upward movement. In other words, you would have made money. You would also have had a good night’s sleep for five years.