Investing in the stock market can be an incredibly difficult thing, especially if you don’t have any background or training in investing or business, yet all of us are expected to invest our savings in order to plan for our retirement. What happens is that people make poor investment decisions because they think they should be investing in something and they end up losing their retirement nest egg. I think this is a horrible tragedy that can be easily avoided and that’s exactly what I would like to talk to you about in this article today.
Before we go on, I’d like to bust a popular investing myth, and that is that individual investors should buy stocks of individual companies. That’s the mistake most people make. They sit down and they look through listings of different companies and they find several they recognize and proceed to buy stock in them.
An investor is never going to get ahead by investing in stocks of a few separate companies. It’s just not going to happen. If even one or two of the stocks they picked go down, it can destroy a large percentage of their entire savings.
Instead small investors should focus on large things such as mutual funds or index funds or certificates of deposit at local banks or government treasury bonds. Yes, it’s true that many of these things don’t offer the potential for such high returns, but they will pay out a steady and predictable amount of money that you can plan a retirement around; and that’s the important thing here.
My favorite investment is something called a stock index fund. One popular fund is an S&P 500 index fund that attempts to mirror all the stocks in the S&P 500. It’s like you bought shares in every single one of those 500 companies. This aggregation allows for diversification on a level that an individual investor could never hope to achieve on their own.
Have you ever heard somebody say that the stock market has returned 8% on average year after year? They’re not talking about individual stocks, they’re talking about aggregating all the stocks. That’s what an index fund will do, it will aggregate all the stocks which should allow you to receive those 8% historic returns year after year without the threat of dramatic drops that you would see if you purchased only a few stocks.
Individual investors should also allocate a portion of their portfolio to safe government treasury bonds or certificates of deposit at their local bank. Yes it’s true these pay out very small interest rates of between 3 to 5% a year but they are 100% safe and CDs are even insured by the FDIC.
If you have been trained as an economist or in finance and spent your life working in the industry then you may be able to pick individual stocks on your own with some measure of success, but if you aren’t one of these types of people than following the advice laid out in this article is your best long-term bet for steady and safe returns.