So you don't follow the stock market. That's not unreasonable -- there are, after all, plenty of other interesting things to follow, such as sports, politics, and news. You might want to reconsider, though, and find some time for the stock market.
Here are three investing tips for you.
Image source: Getty Images.
1. Invest in the stock market
For starters, unless you're independently wealthy or have saved hundreds of thousands of dollars (or more) for your retirement, you probably need to be investing your long-term dollars in stocks. Over relatively short periods, asset classes such as gold or bonds may outperform stocks, but over long periods, few investments can top stocks for building wealth. Over many decades, the stock market has averaged returns of close to 10% annually.
Check out the table below, based on data from University of Pennsylvania professor Jeremy Siegel, who studied returns of various investments over more than 200 years:
|
Asset Class |
Annualized Nominal Return, 1802 to 2012 |
|---|---|
|
Stocks |
8.1% |
|
Bonds |
5.1% |
|
Bills |
4.2% |
|
Gold |
2.1% |
|
U.S. Dollar |
1.4% |
Data source: Stocks for the Long Run, Jeremy Siegel.
2. Invest for the long term
It's important to be thinking long-term with stocks, too, because the stock market is not a good place for short-term dollars -- that is, any sum you expect to need within the next five (if not 10) years. Over the next few years, the market may soar or it may plunge. If it plunges, you don't want it taking, say, 30% of your portfolio with it, just before you were going to make a withdrawal for a down payment on a home.
It's also smart to focus on the long term because that's how you'll likely maximize your portfolio's growth. As your nest egg compounds, it will grow bigger by increasingly large sums. Check out the table below:
|
Growing at 8% for |
$10,000 invested annually |
$15,000 invested annually |
$20,000 invested annually |
|---|---|---|---|
|
5 years |
$63,359 |
$95,039 |
$126,718 |
|
10 years |
$156,455 |
$234,683 |
$312,910 |
|
15 years |
$293,243 |
$439,865 |
$586,486 |
|
20 years |
$494,229 |
$741,344 |
$988,458 |
|
25 years |
$789,544 |
$1,184,316 |
$1,579,088 |
|
30 years |
$1,223,459 |
$1,835,189 |
$2,446,918 |
Data source: Calculations by author.
3. Stick with index funds
Finally, know that you don't have to follow the stock market much at all if you want to take advantage of its wealth-building potential. You can simply park your hard-earned dollars in one or more low-fee broad-market index funds, and then add to that stake regularly. The stock market will rise and fall over the coming years and decades, but it will likely gain a lot of ground over the long run. Look at a graph of the stock market's performance over time and you'll see that it has always risen, but in a zig-zaggy line.
You might earn an above-average return on your portfolio if you commit to studying stocks and picking among them carefully, but that's easier said than done. If you don't have the time or interest (or skills) for that, index funds are perfect. They even outperform most actively managed mutual funds.
So do pay some attention to the stock market, and follow it at least a little. Let it help you amass a nest egg for retirement, too.
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