When it comes to investing, you will read a lot of conflicting information out there. Some of this is due to the fact that the person has their own money invested in a particular product and wants to see it succeed, and some of it is probably due to the fact that people like to feel sophisticated in today's society. I, however, do not buy into all of the advice I read. I like to do my own research and use factual evidence to draw conclusions. That is exactly what you should be doing as well.
Now, I'm not saying that you are not doing the right thing with your investments, if you have any. All I'm saying is that you should understand what you're putting your money in. The investment broker/adviser is not always going to steer you in the direction that is best for you. Just remember that they are also trying to make a living. Selling the least-profitable investments will not help them earn income or keep their job.
With that said, don't assume that all advisers are trying to rip you off either. Some are good people and will try to help. I just feel that if you keep your investing simple and limited to things that are easy to understand, you will be much better off. After all, the point of investing is not to build up a portfolio that is so complex that you don't even know how you're making money. The point is to simply maximize your rate of return. The only way to do this is to invest in things that will increase in value over the long term.
To give you a visual representation of what I mean, let's look at a chart of the Dow Jones Industrial Average from 1900 to now. It will truly show how likely the value is to increase over the long-term. It is also quite funny and represents how most people think when the stock market is swinging up and down.
I know what you're thinking. WOW!
That is literally from the year 1900-2016. Don't get me wrong, I see the huge dips. Like in the late 1920s and early 1930s during the Great Depression. Also the sharp drops in the late 80s, early 2000s, and the one in recent memory during the Great Recession in 2007-2009. These are all good reasons to NOT invest in the stock market, right? Wrong.
As you can also see, the average has continuously rebounded to new highs after every one of these periods. Not only is it likely, it's basically a certainty that the market will rebound. The old saying, "What goes up, must come down," works both ways with investing. You and many others are asking why this happens. I'll try to give a short explanation. So short, actually, that it's only one word.
Economics
Stock prices act in accordance with the behaviors of investors. The typical investor will invest when things feel like they are going well and stop investing when things feel like they are not going well. The price you see on the ticker will change based on investors fear (or lack of fear) of future events.
For example, if a company announces that they're cutting their workforce due to decreased sales, the stock price usually plummets.
This is because investors who own the stock are rushing to put in an order to sell the stock as quickly as possible for fear a drop in value. Since no one else who is buying or selling in the markets wants to buy stock in a company who just announced bad news, the price begins to fall. Sometimes it is only temporary if the company is still considered to have a good long-term outlook.
A recent example of that was when Facebook plummeted around the time of the Mark Zuckerberg testimony on Capitol Hill only to rebound to new highs within the weeks following.
A recent example of that was when Facebook plummeted around the time of the Mark Zuckerberg testimony on Capitol Hill only to rebound to new highs within the weeks following.
Other times, the magnitude of the news may be enough to tank the stock for a long time. A recent example is that of GE going on a downward spiral after firing the CEO and eventually rolling out several negative announcements thereafter.
Despite all the negatives that can occur, the stock market as a whole continues to increase in value over the long-term. Companies work toward improving for the sake of investors. Public companies must do this. Therefore, your investment in a stock with a strong outlook for the long term is one of the safest investments you can make. Look back up at the chart I posted. The value of your investment will ALWAYS increase over the long term. The question that most people need to ask themselves is, Can you be patient enough to ride out the downswings? There will be downturns. I believe you can, and I'll give you a few examples of ways to do it.
ETFs
This investment has become extremely popular in recent memory thanks to the lengthy stock market bull run we've experienced following the recession. ETFs, or Exchange-Traded Funds, are similar to mutual funds. The difference is that they are traded on the stock exchange. The fund itself is still comprised of a bundle of stocks and has an asset value similar to a mutual fund, but the value is divided into shares that are tradeable.
Mutual funds differ from ETFs in that they are not tradeable on the stock market. Since ETFs are like stocks, they can increase or decrease based on the supply and demand for the shares. Therefore, the price can potentially increase even faster than the value of the stocks it is derived from. This is good for your portfolio. Warren Buffett recommends using ETFs as your means of long-term investing in the markets. If that guy is saying it, it's probably going to work.
IRAs
Another very popular choice for retirement investing. This account allows you to invest in stocks, bonds, ETFs, and other investments all from the same account. If you'd rather not do the work, you can also invest in a managed IRA and your investments will be selected by the investment broker.
The only downside is they will take a management fee from your account regularly. The amount and the frequency will vary by institution, but a fee, is a fee, is a fee. Any fees taken from your accounts are basically the same as losing money on an investment. If you can help it, manage the investments yourself and keep them simple. Diversity is not the only way. If you're investing in things with solid historical performance and holding long-term, you should be fine.
Mutual Funds
The last option I'll mention is the mutual fund. If you're not familiar with them, I briefly mentioned them in the description of an ETF.
Mutual funds are a pool of money that invests in multiple stocks and forms a portfolio that is given a value. The company then sells shares of this portfolio to investors. The price will increase and decrease based on the stocks that are held in the fund, but over the long-term they have shown their worth as a stable long-term growth investment.
Dave Ramsey actually recommends this as the only thing to invest in for personal investments, outside of your employers 401k plan (if available) and a Roth IRA. He recommends "Growth stock" mutual funds. The reason for this type of fund is that the portfolio manager is constantly balancing the fund to feature stocks that are increasing in value.
The fund will be updated, rebalanced, and new assets will be constantly added in order to make sure that only stocks in a growth phase are included. This will maximize your return on investment without very much work involved. I'd highly recommend you look into this option if you'd like a good passive retirement investment.
So now that I've discussed the reasons why the stock market is a safe long-term investment, and some options for you to invest in the market safely, I hope you feel better about your ability to be able to use the stock market to your advantage when investing.
The long-term gains to be had are worth the risk of a short-term price swing or two. The most important part of successful stock market investing is patience and consistency. In my next update, I'll talk about trading stocks and how you can use this method of investing to make short-term income with your "extra money" (if you have any.) Most people often warn about the dangers of day trading, but I believe that even the average investor with enough patience can make money trading. Look out for the update coming in the next day or two. In the mean time, please join our mailing list by signing up through the form in the right column.
We're getting ready to start regular giveaways and a weekly newsletter with investing articles, tips, and offers to help you make the most of your money. Thanks for checking in! You can be penniless and still find a way to get on track with your money. I'm working on it myself and I hope that the information contained on this site will also help you in your journey to financial freedom. Have a great week and Happy Monday!
- The Penniless Gentleman
Post Disclaimer: I am not your financial adviser and this is NOT financial advice. This is an educational blog with tips and facts to help people inform themselves of their options for investing in the stock market. Please do not consider the contents of this post as a call to action or financial advice. You should still consider your personal financial situation before investing in the stock market and only invest what you may be willing to lose. That said, I hope that the information is helpful and if you do choose to make a financial decision with it, I am not responsible for the outcome.