Watching the stock markets rise and fall, you can imagine why a total beginner might be frozen with fear.
A thousand points in six months! Two hundred point drops! Booms and busts! Which are the best investments, our novice rightly asks.
Well, first of all, let’s put that volatility into some much-needed perspective. Yes, 2008 and 2009 were seriously frightening years for stock investors. A decline in the Dow Jones average from above 14,000 down to 6,626 was hair-raising.
But we’re back above 15,500 now, just four years and a few months on. Unless you expected to retire in March 2009, the move — while dramatic — was not relevant to you.
Yes, it was relevant to everyone, of course. But, if you are a stock buyer, which by definition most of us are, a decline is welcome news, not a reason to give up. Prices fell. Bargains were everywhere.
Ah, you might say, but who buys at market bottoms other than traders and crazy people? Well, index investors do it all the time. Portfolio indexing is nothing more than holding a variety of investments in precise measures, according to your tolerance for investment volatility and how long you have until you retire.
If so, and you should be, then 2009 was a great year for you. The holdings you already owned fell in face value and only turned into losers if you panicked. And stocks previously priced out of range were there for the plucking.
Best investments 1, 2, 3
Stock market beginners need to understand only these three simple ideas:
1. Index funds and ETFs represent your best opportunity to diversify and cut risk while staying investing in markets high or low.
2. A well-designed investment portfolio will neither zoom higher with equities nor crash to earth with corrections. Rather, you will sell off as stocks rise and reinvest in them when prices fall, using new cash, dividends and interest inflows.
3. You are not retiring tomorrow, next month or next year (unless in fact you are). Most people trade their retirement accounts as if every day were do-or-die. It simply isn’t true, and you shouldn’t approach retirement investing that way.
You can get the kind of steady, compounding return that investment pros seek and you can do it yourself at minimal cost and risk. All it takes is a broader view of the opportunities in the markets and the patience to see a serious retirement plan through to the end.