One of the hard facts that becomes immediately apparent when you look at financial surveys is that most people are poor. In a candid look at the average American’s net worth the Motley Fool points out that the average person between the ages of 55 and 64 in this country has a paltry $143,964 total net worth, if you include their home. Take away the house and that figure falls to $45,447 and those are people on the doorstep to retirement.
We’ve covered the reasons most people are poor extensively and most of them boil down to simple fear. Fear is what keeps people out of the stock market and other money-making opportunities in the capitalist playground that we call the U.S. economy. Fear is one factor, lack of knowledge is another. Many people feel like they don’t know enough to invest in the stock market or mistakenly believe they need to be day traders to make any money (hint: most day traders lose money). Brokerage houses and investment firms make a fortune off that lack of knowledge and look like geniuses for selling you overpriced securities with high fees.
The fact is you don’t need advice from anyone to make money in the stock market. Certainly there are risks but, on a time horizon on the order of 10, 20 or 30 years, you can minimize those risks and come out looking pretty good by following two simple investment strategies that rely on patience and persistence.
Dollar Cost Averaging
This strategy works because market ups and downs tend to come in short spurts, with the exception of the Great Recession, which basically ran from 2007 to 2009. Let’s say you invested $10,000 in 1993, a time period that encompasses the huge 2007/2008 losses. If you stayed fully invested in the market, that $10,000 investment is today worth over $58,000. By missing just 10 of the best days on the market during that 18 year time frame, your return would be cut in half! Let that sink in. Miss just ten days in 18 years, lose half your returns.
Since you don’t know when the good or bad days on the market will happen, the simplest strategy is to invest in small amounts over a very long period of time to even out the ups and downs. That’s called dollar cost averaging and it works on a very long investment horizon. You already do that if you have a 401(k) at work but you can do the same thing on your own and skip the limited choice of high fee funds you have through most company 401(k) plans.
If investing was easy everyone would be rich. Since most people are poor we can confidently conclude that investing is hard and yet the opportunities are there for those who stick with it. The partner to dollar cost averaging is rebalancing. Start by allotting your investment dollars in fixed percentages between stocks, bonds, cash and hard assets, like silver and gold coins. Once or twice a year add up the total and see how the percentages line up with your original allocation. Most of the time you’ll discover some asset classes have done well over the last year and some have lagged. When you rebalance you sell some of the winners and buy more of the losers to bring your percentages back in line. Sounds easy, doesn’t it? If you practice rebalancing faithfully it is easy, but most people don’t follow it. It works with almost any kind of equity, whether it’s stocks or market index funds.
What tends to happen is on years when the stock market is flying high, people forget about their bond investments and just let it ride. Rebalancing gets crowded out by the demands on life and forgotten about until there’s a major market event, which is almost always bad. In the midst of a crash is the worst time to sell or rebalance but that’s when it tends to happen. People panic and lock in steep losses.
The reason most people are poor is they don’t have discipline or patience. They try to time the market instead of just staying invested and letting it ride. The key to investment success is buying a market index fund, rebalancing your portfolio twice a year and leave it alone for 20 years. Investing is dead flat easy, it’s being patient that’s the hard part.