If I told you that you could walk into Harrah’s and place a bet with a 94% chance of winning, would that sound like a good idea? Personally, I would take a bet with 94% odds every day of the week!
Ninety-four percent happens to be the historical odds that the S&P 500 Index goes up over any 10-year period. That is based on research by the Capital Group that tracks the markets over the past 90+ years. Put simply, people who invested in the broad stock market for any 10-year period during the past 94 years have made money on their investments. Those who were invested this way for 20 or more years would have made money on their investments 100% of the time (as we know, past performance does not guarantee future results).
Does this good news mean that you should be invested in the stock market? The answer is probably yes for most people with investible assets, but not for everyone. Every situation is different, and every investor is different. Let’s investigate a few of the most common factors that help determine if you should invest in the market, and how much.
1. What is your timeframe for needing the money? For long-term investors, having money in the market is a no-brainer. The shorter your investment timeframe, the larger the chance that you could lose money in the market. The same research cited above showed that, for a 1-year period, the market goes down 27% of the time. If you expect to pull money out after one year to buy a car or make a downpayment on a house, putting a lot of money in the market could exposed you to market fluctuations resulting in a substantial possibility of losing money on your investments.
2. What is your ability to tolerate risk? It’s not uncommon that the market goes down 10% or more during a year, but then finishes the year higher than it started. Would being down 10% on your investments keep you up at night? What if the market went down 20%? If that sort of volatility is likely to cause you to sell your investments at a loss because it’s stressing you out, then the investment is too risky for you, or maybe you need to keep a smaller percentage of your investments in stock. I run a risk tolerance assessment on every client before designing their investment portfolio, exactly for this reason.
3. How well-educated are you in investing? It is easy to lose money investing in things that you don’t understand. Even an S&P 500 Index Fund is, by itself, not all that diversified of an investment. If you are going to invest in the stock market, it is very important that you are educated and know exactly what you are doing. If not, I highly recommend that you either take the time to learn before investing or else work with a “fiduciary” financial professional.
The bottom line is that you need to be smart about how and where to invest. The stock market can be a great place to invest, particularly over the long run, and in the past has made gains
well above inflation over those longer periods of time. The stock market can also be a bad investment if you’re winging it or don’t have enough investment duration or the right temperament.
However you choose to grow your wealth, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
Read More: Investment Corner: Should I invest in the market? How much?