Getting ready to get started
It doesn’t matter if you have a large lump sum you want to invest or if you’re just starting from scratch and want to put in a little here, a little there, as you can. Rule number one is that to invest in the stock market (through mutual funds, index funds, and the like, not just by buying and selling this stock or that one, the way my mom and I did), you must invest only money that you will not need to touch for at least ten years. Why? Because, as we’ve seen, there has never in the history of the stock market been a ten-year period of time where stocks have not outperformed every single other investment you could have made.
Not that history always repeats itself, but this is a spectacular indicator—a really great bet. However, if you do not give your money ten years, you will be taking a significant risk.
If you don’t have the time to leave this money sitting there, it is possible that when you do need to take it out, that need will arise at the worst possible time. Let’s say you invested in 1983 and were planning to withdraw the money to buy a house within the next four years. You decided, Okay, I’ll just invest in the market, make all I can, and then have more money when the time comes to make the down payment. Four years later you find the house you want and make the offer, which is accepted—on October 19, 1987, the day of the crash. And now you have to take your money out of the market, a scenario that cannot be worse for you. You will most likely take out far less than you initially put in. If you could have waited just another six years, you would have made a ton of money, crash notwithstanding. So time is everything.
Remember dollar cost averaging (page 143)? This is the technique that works so well for long-term growth, in which you are investing wisely by limiting your risk. If you are investing that $50 or more a month, or if you have a huge stash of cash in a savings account that you now feel right about testing the waters with, this is your method of investing, because with dollar cost averaging you raise your chances enormously of ending up a winner.
I am not talking here about you turning into one of those tycoons in B-movies who is always shouting, “Buy, buy, buy,” or, “Sell, sell, sell,” into the half dozen phones on his desk. Instead I’m talking about you venturing into the market in a safe way, spreading your money among dozens or hundreds of stocks, via mutual funds that gifted professionals spend their lifetimes watching and guarding, and having time and the market touch your money with magic. These days the richest and savviest investors may like to shout, “Buy, buy, buy,” or, “Sell, sell, sell,” into a phone from time to time for the thrill (and potential payoff) of playing the market on a hunch or a tip. But these same investors have most of their money exactly where I am going to tell you to put yours: in a safe place, where over time it will grow and grow. If you are reading this and still feeling your inner voice say, No, I can’t do this, it’s not right for me, then listen to that voice and read on, because I will also tell you how to choose an adviser for your money, if that’s what makes you feel best.
But if you can, try testing the waters on your own first. Most of my clients, I find, discover they truly love dealing with their money once they understand how to do it. Just remember:
Give your money ten years to grow.
Tags: Money