The stock market: Knowledge is power
Several weeks ago while shopping for a washing machine, I explained to the salesman at the home improvement store that I was extremely conscience about getting the very best deal. For every penny I saved on an appliance, I could invest it in the stock market. The salesman responded, “You can make money in the stock market?" This took me by surprise. He seemed to be a hard working gentleman, but unfortunately, he did not believe that the stock market was a place to invest money for the future. This made me realize many individuals have a misunderstanding of the stock market, understandably so given the stock market collapse of 2008.
Investing in the stock market does have risks, but those risks can be mitigated when investing for the long-term. If you need your investment back in the short-term, the market is no place to invest. However, if you are looking at a 5-year, 10-year or, even better, a 40-year horizon then there has been no better place to invest.
Historically, the stock market has provided an average return of approximately 10 percent. Year-to-date, our markets have seen phenomenal growth. The Dow Jones Industrial Average is up 19 percent, the S&P 500 is up 22.5 percent and the Nasdaq is up a whopping 27 percent. You really can’t afford not to invest in the stock market.
We are currently in an extremely low interest rate environment. This provides little opportunity for investments in interest bearing securities such as the money market, CDs (certificate of deposits) or bonds. According to Bankrate.com, a 5-year CD is only yielding about 2 percent. A 10-year treasury bond is yielding 2.75 percent and a 10-year corporate bond is yielding only 3.5 percent. Although inflation is currently at extremely low levels, about 1.2 percent, your return after inflation is dismal.
Should you run out and put all of your investable money in the stock market today? Absolutely not! In the same way that you would not sell all of your
stocks when the market drops significantly, you should not wait for the market to run up before gaining trust to invest.
The best policy is to dollar-cost-average into the market and dollar-cost-
average out of the market, meaning to buy and sell a fixed dollar amount of
an investment at a regular schedule. For example, I am investing into the
market each month through my retirement plan. Some months I am buying low, and some months I am buying high depending on current market prices. This reduces the risk of investing or selling at the wrong time. Over the long run, it all averages out. If you are afraid of the stock market, then learn more about it. Knowledge is power, and knowledge builds confidence that will help make better investment decisions.