Investing can be very intimidating to get started. While it is not a good idea for the typical investor to buy individual stocks, mutual funds and index funds are a great way to buy into the market for instant diversity at a low cost.
Timing the Market
Because the best mutual funds and index funds for individual investors are broad market funds, such as an S&P 500 index fund, you cannot based your buy and sell decisions around the performance of any specific company. Instead, you are buying into hundreds of stocks with one transaction.
Some people have a full-time job where all they do every day is try to time the market when buying and selling giant lots of options. Hedge fund managers may make a leveraged bet on market trends. However, even with their fancy Ivy League investment degrees and 100+ hour per week schedules, they are still wrong a lot of the time.
You and me, we don’t have 100+ hours per week to spend evaluating market trends and economic factors. Even with my fancy private school MBA, I don’t try to time the markets. If the best in the world at what they do are only right some of the time, we should not gamble waste our time trying to do it.
If you think you can time the market and make money consistently, you are in a big group of people who think they are smarter than everyone else. But if everyone could do it, we would all be trading based on market trends making millions of dollars and could leave our day jobs. Most people who think they can time the market still have day jobs.
Warren Buffett on the S&P 500
Instead of trying to time the market, I like Warren Buffett’s advice, and a bet he put his own money in against one of those fancy hedge fund managers. It is advice he has given again and again, and people would be wise to listen.
In his last annual report to shareholders, Buffett said that he suggests the majority of Americans should just buy a low-cost S&P 500 index fund, naming one from Vanguard as a favorite, and wait. A long time.
Since its establishment in 1871, the S&P 500 has yielded a compound annual growth rate (CAGR) of 9.11%. Of course there are good years and bad years. But even with the Great Recession, the CAGR of the S&P 500 over the last decade is 7.93%. For the last three years, the CAGR was over 20%!
When to Buy and Sell Funds
You can probably tell where I’m going with this, but I want to be very clear and spell it out. Do not try to time the market. You win if you buy low and sell high, but how do you know when the market is low and when it is high?
The best time to buy is every month, and the best time to sell is in retirement, if ever.
Smart investors save as much as they can each pay period and make automated investments into an S&P 500 index fund. My brokerage allows me to do this, but I like to be a little more hands on and buy in lump sums when I get them, or when I save up enough through my Digit account that it is worth making a buy.
If you buy consistently when the markets are both good and bad, you will ride the market down in the bad times, but also ride them back up in the good times. And, over time, the market has always gone up.
This is the strategy I use myself. I call my overall investment strategy my “portfolio snowball.”
Building a Portfolio Snowball
So, how do you build a portfolio snowball? It is quite simple. Buy diverse funds you believe will go up in the over the long-term and reinvest your dividends. It is quite simple.
I don’t have all of my money in S&P 500 index funds, but I do have quite a lot there. I also own target date funds, which include some international and fixed income investments. I have plans to add in a REIT fund as well.
Here is a full list of funds and stocks I own in my Rollover IRA account:
- Stocks: BRKB
- ETFs: SCHX
- Mutual Funds: VEIPX, VHDYX, VSIGX, VGTSX
Here is what I own in my Roth IRA:
- Mutual Funds: SWPPX, VEIPX, VHDYX, VFIFX
You can look those up if you want, but they are pretty much all target date funds, equity income funds, high dividend stocks funds, and S&P 500 index funds. The only exceptions are an international equity fund and the stock Berkshire Hathaway, which I have a soft spot for. Mr. Buffet has grown my investment well, so I plan to keep that for a long time.
In retirement, you can turn the reinvest dividends switch off and enjoy a nice cash flow based on everything you’ve saved. And thanks to the compounding returns of your investments, if you keep up a good savings rate, you will end up in a good place at retirement.
How Do You Invest?
How do you choose your investments? Is it like my strategy, or totally different? Please share that, and any questions, in the comments.
This post was originally published on March 16, 2015 and updated on October 16, 2020.