When it comes to business and investing, fear and emotion are handicaps. They cause you to make irrational decisions at the worst times, usually brought on by uncertainty and doubt. This natural human tendency explains how the DJIA can tumble from about 17,500 down to 15,500 and back up to 16,500 in one trading week.
We often times view Wall Street as a group of experts who understand fundamental business concepts, financial analysis and objective investing strategies. However, this notion is far from the truth. After all, let’s not forget that Wall Street too is comprised of mere mortals prone to herd mentality.
But like anything else in life, following the herd won’t make you stand out. At a time of volatility, what should you do? How should you play the stock market?
According to Market Watch, just 26% of people under 30 are investing in the stock market. That’s unfortunate because given modest wage growth and the lack of comparable investment opportunities, 401Ks and private stock portfolios continue to be the best way to save and invest for retirement. This presents an opportunity for early investors.
Eventually, Millennials will realize that some exposure to the stock market is needed for proper financial planning and diversification. While the process will be gradual, the influx of funds will help the market in the long run. And that’s the key – to invest for the long-run.
When Warren Buffett buys stocks and entire companies, he buys businesses that will thrive 10, 20, and 30 plus years from now. Especially in a non-tax-advantage investment account, buying and holding is the best way to maximize gains and minimize capital gains taxes.
Since signing up for a brokerage account and depositing funds can be a process that takes several days, it is critical that millennials already have an investment account to be prepared for buying opportunities. Some of the best online brokers are TD Ameritrade, E*TRADE and Scottrade. Because of their size and breadth of services, each firm is a one-stop-shop with some of the lowest fees in the industry.
If you don’t want to pick individual stocks, then a passive index fund might be the best solution and that means a comparison of Fidelity vs Vanguard.
While you may not be ready to invest today or tomorrow, the earlier you start, the better off you’ll be in the future.
Start Early and Let Time Work in Your Favor
It is well documented that the stock market has averaged returns in the range of 9-10% over the last 100 years. This time period includes the Great Depression, multiple boom and bust cycles, years of high inflation, and a major terrorist attack, just to name a few events.
So, let’s run an experiment. Say you start investing at 25, fully fund your Roth IRA ($5,500 for 2015) for the next 10 years, and then stop contributing at the age of 35. To be conservative, let’s estimate the market averages 8% over your lifetime. By the time you’re 65, you’ll have over $860,000.
In a different scenario, let’s assume you procrastinate for 10 years, start investing at age 35 and continue to do so until you’re 65 again. Unfortunately, you only end up with over $670,000.
The difference of $190,000 is the power of compounding interest and the reward you get for starting early, investing consistently, and leveraging a long investment horizon.
Stop Trying To Time the Market
Regardless of what some hedge fund or mutual fund managers claim, almost no one in the history of investing has consistently beaten the market as a stock picker. This is because investment returns are greatly affected by “time in the market, not timing the market.”
A study by Fidelity demonstrates that, had you invested your money at the end of 2002 up until the end of 2012, you would have earned a return of almost 69%. However, if you by chance had missed the best 10 days of the market, you would have lost 4.64% in the same time period.
What this conveys to investors is that, out of 10 years or about 2,520 trading days, missing 10 days would have meant the difference between a massive gain and a small loss.
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If the Great Recession is any indication, investors should realize that there will always be ups and downs, but the economy, stock market, investments and all things related to money will eventually lead higher. Not out of some sense of civic, moral or ethical duty to protect retirees, employees, or investors of the world, but because one way or another, everyone directly or indirectly benefits from the well-being of the world’s economy. If you have faith in businesses, wealthy investors and governments to act out of self-interest, then you should invest now.