You may have noticed that your pension and keren hishtalmut have lost money this year – as have many other investments. It’s been a bad year for stock markets around the world. So… it must be a bad time to invest, right? Why throw my hard-earned money into something that’s losing money?
If you’ve been asking yourself these types of questions, this post is for you.
(This is the time to refer you to our disclaimer and remind you that we are not investment professionals. All investment content on this blog is about our own FI journey and what works for us.)
What is investing? How does the stock market work? And why and how should I invest when the markets are down?
A share is a very teeny tiny portion of a publicly traded company. When you buy one, you own a teeny tiny part of the company. And anyone can buy one! Isn’t that cool? YOU can own a part of Amazon, McDonalds, Disney, Rami Levy – whatever you’d like. The price of the share is determined by the value of the company as well as supply and demand. When a company does well, its share price goes up. When the company suffers, the share price goes down. If you buy shares when they’re low and sell them when they’re high, you make a profit. If you buy high and sell low, you lose out. Day trading, or buying and selling stocks on a daily basis, sounds risky, huh? Yup. If only there was a safer, more promising way to do this…
Good thing there is! Luckily for us, instead of buying shares in one company, index funds and ETFs allow you to invest in multiple companies at once. The S&P 500 enables you to invest in America’s top 500 corporations*, all at once. And investing in total stock market ETFs diversifies your portfolio and spreads your risk even more. There are many other index funds and ETFs that cover different sectors. While one company may go belly up permanently, the chances of the top 500 US corporations, or the entire stock market, permanently dissolving are slim to none. (If they did, we’d all have bigger problems than losing all of our investments.)
While the stock market has its ups and downs, history teaches us that every recession eventually ends, the market recovers and hits new highs. While it does occasionally fall, the overall trend definitely is up – about 7-10% per year on average. If it wasn’t so, we wouldn’t all have our pensions tied to it.
So why buy now?
Because when you are investing for the long haul, you invest the same amount every month no matter the price. This is called dollar cost averaging, meaning that sometimes you buy high, sometimes you buy low, but it all averages out in the end. Timing the stock market is impossible. The best time to start investing is yesterday. The second best time is today.
Unlike day traders who buy and sell stocks every day, we invest for the long term – we’re talking about a decade or more. Any dips in the stock market will correct themselves and average out in that time. Our investment strategy is to set it and forget it. Even a hundred shekels per month makes a huge difference thanks to compound interest. Find one or several diversified indexes or ETFs that you like and have historically done well, choose how much you want to invest each month and automate the payment. As long as you don’t sell, you haven’t lost any money. As a reminder, this works for long term savings. If you are saving for some thing in the near future – up to five years or so – the stock market might not be your best bet. Decades from now, your future self will thank you. You can buy shares directly via your bank. There are also many investment firms to choose from.
While this type of investment comprises a large portion of our portfolio, we have other types of investments as well, which we will talk about in future posts.
Do you have any other investments other than a pension and keren hishtalmut?
* While the Israeli stock market has its own index funds and ETFs, American tax law makes it not worthwhile for us to invest in Israeli funds (while Israeli individual stocks are not a problem). Google PFIC to learn more. Non-Americans – consider yourselves lucky 🙂
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