If I told you you could go into Harrah’s and place a bet that had a 94% chance of winning, do you think that’s a good idea? Personally, I’d bet at 94% odds every day for a week!
94 percent is the historical probability that the S&P 500 Index will rise over a 10-year period. It’s based on research from Capital Group, which has been tracking the market for over 90 years. Simply put, anyone who has invested in the overall stock market in any 10-year period over the past 94 years has made a profit on their investment. Anyone who has invested this way for more than 20 years has made a profit on their investment 100 percent of the time (as we all know, past performance is no guarantee of future results).
So does this good news mean you should invest in the stock market? The answer is probably yes for most people with investable assets, but not for everyone. Every situation is different, and every investor is different. Let’s look at some of the most common factors that can help you decide whether and how much you should invest in the market.
1. When will I need the money? For long-term investors, putting money into the market makes sense. The shorter the investment horizon, the more likely you are to lose money in the market. According to the same study cited above, the market fell 27% in one year. If you plan to withdraw funds in a year’s time to buy a car or put a down payment on a house, putting a large amount of money into the market will make you more vulnerable to market fluctuations and more likely to lose money on your investment.
2. What is your risk tolerance? It is not uncommon for markets to fall 10% or more in a year and end the year higher than it began. Would a 10% drop in your investments keep you up at night? What if the market were to fall 20%? If that kind of volatility stresses you out and you are likely to sell your investments at a loss, then your investments may be too risky or you may need to reduce your share of equity. It is for this very reason that I conduct a risk tolerance assessment with all my clients before designing their investment portfolios.
3. How knowledgeable are you about investing? You can easily lose money if you invest in something you don’t understand. Even an S&P 500 index fund is not a very diversified investment on its own. If you are going to invest in the stock market, it is very important that you are well informed and understand exactly what you are doing. If not, we highly recommend that you take the time to learn or work with a “fiduciary” financial professional before investing.
Ultimately, you need to be smart about how and where you invest. The stock market can be a great investment, especially over the long term, and has been profitable in the past.
Much higher than the rate of inflation over a long period of time. If you invest haphazardly or don’t have a long investment horizon or the right temperament, the stock market can also be a bad investment.
How you grow your wealth is up to you, but be smart and invest well.
Larry Sidney is an Investment Advisor Representative based in Zephyr Cove. For more information, please visit https://palisadeinvestments.com/ Or call us at 775-299-4600 x702. This is not a solicitation to buy or sell any securities. Clients may hold positions described in this article. Past performance is no guarantee of future results. Please consult your financial advisor before purchasing any securities.
