When some people hear of the stock market they may cringe, especially with the 21st century market downturns with the tech boom and real estate boom. The important thing to keep in mind is no one knows what the stock market is going to do tomorrow, next week, next month much less in the next years and decades to come. That can be a little scary, I will admit. What we do know as it has produced good returns over long periods of time. If people tell you “they know” what the market is going to do they are lying. It is all pure speculation. But we can look at the history of the stock market and get a pretty good idea on what the probabilities of return could be in the coming decades. Here we are NOT trying to time the stock market. Instead we use patience and discipline to ensure returns over time by investing in no-load low cost index mutual funds. Index funds provide us the best way to get market returns at the lowest possible cost.
Stock Market – Historical Returns
Here is a table that provides asset class returns all the way back until 1972. The best way to capture those returns is in making sure you own them at the lowest possible cost over the long-term. When you factor in inflation running around 3% and then the fees you pay (do you know what your fees are?). Some advisors charge an assets under management fee which can run up to 1% in many cases. Most fee-based advisors put you in actively managed funds along with fees to buy into the fund (known as “loads”). Class A load funds take money from you everytime you put money into the fund, Class B load funds take money when you sell the fund and Class C load funds take a percentage every year you own the fund. Adding in the loads, the fees of owning the fund (aka expense ratio) this could be costing you easily 2-3% a year in fees or more plus there upfront costs for you opening the fund and then if they did any buying or selling during that time period in taxable accounts would have transacted more costs. By investing in no-load low cost index funds your total portfolio cost could be as low as .1% per year or less. That may not sound like much but it can add up to thousands and even millions of dollars over your lifetime. Go here to find out more on cost. Scroll down and look at the graph and click on the calculator. Our portfolio cost is at .07% per year thanks to Vanguard low cost options. If you do need help seek out a fee-only advisor. Another blog will discuss the difference of fee-only and fee-based.
Stock Market – Who NOT to listen to
What we need to be able to do when investing in the stock market is cancel out all media, friends, and family, etc. Just let the markets do what they are going to do. We want to focus on owning the whole market in many different asset classes including the US market, foreign markets (both emerging and developed, REITs (Publicly traded Real Estate Investment Trust), value companies, and short to intermediate term bonds to name a few. If you stay put long enough you will see the returns. Don’t listen to Uncle “Bobby” about trying to time the market. Don’t listen to the media about how you need to sell this fund or buy this fund just trust what you know and that is you are in it for the long haul no matter the ups and downs the market takes. Don’t be scared off by dramatic dips in prices. Look at that as you are buying it cheap so you can make a lot when the prices go back up. You want to buy low and sell high. We know it’s not as easy as it sounds but with enough experience, knowledge, patience, and discipline I know YOU can do it. Many of the financial advisors are out there to make money off of you, not for you. The only route we would recommend is a fee-only advisor and even then you need to be careful and do your homework to make sure they are transparent and upfront with you. In other words they are acting in your best interests and the only money they receive is from you. It is important to know exactly what you are paying and who you are paying.
Stock Market- Who SHOULD we listen to
I choose to get my knowledge from the experts. John Bogle who founded Vanguard in 1975 is definitely a go to. He made investing cheap and easy for the average investor. Read the “Little Book on Common Sense Investing” by John Bogle. Mike Finley who enlightened and inspired me to take control of my life. Two of the books he has written “Financial Happiness” and “What color is the Sky”. His books are very easy to read and will open your eyes to all the possibilities. If you want to dig a little deeper read “The Four Pillars of Investing” and “The Investor’s Manifesto” both by William Bernstein. One of my favorites and another easy read is “Your Money or Your Life” by Vicki Robinson and Joe Dominguez. These are just a few. By reading these books your world will open up to many more.
In closing, educate yourselves on the resources that I have provided on this website and from my blog of course as there will be more to come. As always we are here to help as well. Financial freedom to follow!