Recently, a friend of mine asked for my advice: is now a good time to purchase an S&P index fund for his retirement account?
Before I tell you what I think, a little history on the aforementioned friend:
For one, he is in his thirties and will probably not need that money for approximately twenty five years. Furthermore, he feels that during that time he will not lose sleep over market volatility. Not long ago, I showed my friend how to build a diversified portfolio in his retirement account – large caps, international, real estate, etc. At that time, we decided that he should have an S&P 500 index fund as a representation of a large cap stock. Since then, he has transferred money from his old 401K to a newly opened IRA account and is asking whether he should wait to invest in the S&P 500 or if he should buy it now.
This brings me to the facts:
- According to Professor Robert Shiller, since 1871 S&P 500 (or its equivalent until 1950s) never lost money in any 25 years period. See here for details.
- According to Ray Lucia, CFP the worst 25 years period since 1950s would have ~7.9% compounded annual rate of return.
While we cannot say for certain what the next twenty five year period bring, history serves as a good indicator. We cannot predict the stock market but we can use statistics to make educated decisions.
From a different perspective, we can also look at it this way: S&P 500 is more than thirty percent off its peak. Of course it might fall to extraordinarily low levels, but it may also rise – you just never know.
So back to the original question: what advice did I give to my friend? Buy the S&P 500 now. Base your decision on the long term trends. Do not get caught up in its daily performance and just have fun!
Alex Medvedovski
alexfacts.blogspot.com
Twitter: @alexfacts
Shall I invest in the stock market now?
August 19th, 2009 at 02:02 am
August 19th, 2009 at 02:59 pm 1250693988
In the short term, I see consolidation in the market and some testing of some technical levels.
For your friend, I would recommend slowing putting his money in the market and just dollar cost averaging in. I would probably also recommend he use a target fund based on when he will retire. Setting up the diversification is important but maintaining the diversification is also important. A lot of people do not properly rebalance their portfolios. The target funds automatically do this.
August 19th, 2009 at 07:01 pm 1250708475
I don't know about the fun part. A lot of people tie themselves up in knots over saved money, so I think the goal is to learn about what you are buying, and learn about the economy in general.