The bulk of American investors are so inclined because they want to have enough money to retire on. Index Mutual Funds and ETFs are two financial products that are very well suited to this goal – especially if the investor begins investing early in life.
For the uninitiated, an index mutual fund takes tiny shares of most of the stocks that are performing the best in individual markets. Because well-chosen markets tend to gain value, overall, being diversely invested in the best stocks is a good strategy to take advantage of the overall market’s propensity for growth. As individual stocks fall by the wayside, they’re replaced in the index by new, better-performing stocks, meaning that the person invested in one or more of these funds is always diversified in an array of stocks that represents the best (or nearly the best) that a market has to offer. It’s a strategy that helps people who might not know a lot about investing but nonetheless see great returns on their investments. Companies like Betterment and Personal Capital make this process very easy indeed, especially for beginners.
But what happens when the market takes a dive, as recently happened after fallout from the Chinese Financial Bubble? Well, it’s pretty simple really. People invested this way will suddenly lose money. In this author’s IRA, there’s still a 7% loss overall. Lots of people are in the same boat right now, and a recovery hasn’t happened yet, leading some to recommend that now is the time to buy buy buy. I don’t see things that way. Here’s why:
It’s impossible to tell if the market will recover soon. When a bear market is in the works, no one on the planet knows when we’ve seen the bottom. It’s possible for markets to drop, appear to be poised for recovery, then drop again. One of the best analogies I’ve seen is to compare a bear market to a falling knife. If you try to catch it, you might get lucky, or you might hurt yourself. While “Buy low, sell high” still applies, it’s anybody’s guess how low a market can fall at any given time.
A regular allocation strategy works, no matter what the markets are doing. If you have a plan to make monthly contributions to your investment account, keep on doing that regardless of what’s getting reported in the media. Market history proves that this investment strategy will work more often than attempting to time your contributions to the moment when you’re getting the best “deal.” People who are a lot more experienced than the average American investor fail at this game every day – don’t assume you’ll fare any better.
Being calm and collected is a great habit to cultivate as an investor. Sudden, frequent changes to investment strategy frequently lead to ruin. It’s much better to stay the course, unless you truly have excellent insight suggesting the contrary. Many people divest themselves during a bear market, only to miss a recovery on the other side that would have seen them making more money than they started with.
The market rises more than it falls. This has been true since its inception. This means that your wealth will increase more than it doesn’t, yielding greater wealth over time. It’s as simple as that.
So if you’re invested, stay calm and carry on. If you’re not invested, now is a good time to start, but not because the market is low. Investment is like planting a tree, it’s better to have started 20 years ago, but the second best time to start is now. So invest when you have money, not when the market does this, that, or the other.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer