The stock market continues to hit new highs. This is what it means for you
The S&P 500 closed at a record high on Friday – the fourth time this week it has broken its previous record. The strong close of the month also consolidates October as the best month of this year for the S&P 500.
The Dow Jones Industrial Average and Nasdaq indexes also broke several records during the last week of the month.
If it seems like you’re still reading about those core stock averages hitting new highs, you’d be right: the S&P hit over 50 new highs in 2021 alone, and the Dow Jones itself has dozens. For everyday investors, this constant stream of new highs is further support for a simple investment strategy focused on low cost index funds.
If you don’t know where to start investing, a low cost index fund is a good bet. Another good option is a target date index fund, which automatically adjusts your investment strategy as you approach retirement.
Instead of buying and holding individual stocks, index funds are essentially groups of stocks that automatically track a certain segment of the stock market, like the S&P 500, which tracks the top 500 companies in the stock market. Instead of buying stocks of a stock, index funds are like buying stocks from the entire stock market.
What to do when the market swings?
If you are investing for the long term in low cost index funds and other total market funds, then it’s very simple: the experts say you shouldn’t be doing anything.
“You can’t control the market, but you can control your reaction,” says Marc Russell, BetterWallet’s personal finance expert. “You can’t beat index investing. I focus my attention on the long term, boring strategies that work every time.
And if you are investing for the long term using these “boring” strategies, try to ignore the headlines about the dips or gains in the stock market, as short term volatility is the price to pay for long term growth in the stock market. wallet.
“In the news and in pop culture, you hear a lot about crashes, so there’s the concept of the market zig-zagging,” says the investment expert behind Personal Finance Club, Jeremy Schneider. “But it’s still going up, maybe three steps forward, one step back.”
In the long run, the market is always up, which is why the earlier you invest, the more potential you have to make money. Despite periodic but temporary declines, major indices like the S&P 500, NASDAQ Composite Index and the Dow Jones Industrial Average have risen steadily since their inception decades ago.
For example, while the S&P 500 has seen occasional years of decline, it has generated an average rate of return of between 6% and 8% over the past nine decades. And there hasn’t been a single 20-year period in which it posted negative returns.
“Businesses will always be profitable, growing and innovating. This income and these innovations are redirected to the owners of these companies who are shareholders of the shares, which could be you if you have an index fund, ”explains Schneider.
This is why your best decision is to do nothing at all when you see the market falling.
How to start investing
1. Choose a brokerage service
Your first step is to choose a brokerage firm. Experts say you can’t go wrong sticking to the big names, like Fidelity, Charles Schwab, or Vanguard. If you have an employer matched 401 (k), it may be easier to go ahead and keep all of your investment accounts with the same broker.
2. Choose an account to invest in
Experts recommend investing your money in this order to get the most out of tax-efficient retirement accounts: invest in your 401 (k) up to your employer, invest in a health savings account (HSA), invest in a Roth IRA, go Go back to your 401 (k) and fill in the rest after your correspondence with the employer, get a traditional investment account through your brokerage.
3. In the account you have chosen, choose an index fund in which to invest.
We believe index funds are a great choice for both new and experienced investors. Schneider is a big fan of single target date index funds, but the most important thing is to look for index funds that own a wide range of large companies and have expense ratios below 0.2%.
Why index funds are the best
Index funds are a great choice for investors because they give you broad exposure to large segments of the entire stock market. An index fund represents many different individual companies, so you take less risk because your money is not tied to a single stock.
Index funds are often inexpensive and easy to invest in any account of your choice. Since index funds cover large sections of the entire market, your performance is likely to reflect the performance of the market. For example, if you invest in an index fund that is configured to automatically track the S&P 500, your return is likely to match regardless of the total return of the S&P 500.
You can also choose a target date index fund. These index funds are based on a specific “target date”, which is the date you want to retire. Over time, the fund will be reallocated to different assets that will meet your needs as you get closer to that target date. For example, the fund may be more aggressive towards equities in the first few years and then accept more bonds closer to the target date.
When looking for a target date index fund in your brokerage, check the expense ratio before you buy. It should be less than 0.2%. If it’s above 0.5%, you’re probably considering an actively managed fund, which will weigh on your returns.