Most Americans with a net worth of one million dollars or more are self made millionaires, and they are passive investors, meaning they invest in total market, stock and bond index funds and forget about it.
They do re-balance their portfolio maybe once a year to make sure their percentages stay on target, but they don't watch the market, they don't buy and sell stocks like maniacs, and they don't worry about the market's ups and downs.
When you buy and sell stocks, you pay a premium in fees. Add taxes and inflation to this list of things that eat up your gains and you may break even at best, if you are trading stocks all the time.
Invest at least 15% of your salary in total market, stock and bond index funds and forget about it. You'll be glad when you're old enough to retire, and you won't spend your entire life worrying about this stuff.
Very good points as usual.
And corrections will happen. When they do, those who predicted them will say "I told you so!" and proclaim themselves geniuses even if it happens 1, 5, or 30 years later.
Be wary of those making short term “predictions”. They are usually wrong. It seems that people think they will sound smart and sophisticated to insist that gold will be at $xxxx amount in 6 months, or that it will definitely go down nonstop over the next 20 years, or that they are 100% certain that the S&P will top off at XXXX on this date or that date or whatever. They actually sound silly and arrogant to those who know better.
The richest and smartest will willingly tell you they cannot predict these things with any certainty or accuracy. But some who are perhaps trying to get rich and are somewhat smart will always be predicting that the Dow will fall to 6k or rise 20k during the next year or whatever. No one knows for sure.
For the more agressive "enterprising investor" -who chooses to invest at least some of his money by picking his own investments rather than in index or mutual funds or company stock - it's generally better to invest bottom-up… Find the best individual investment prospects, invest in those as long as they are relatively cheap and rapidly growing, and don't really worry about trying to predict the broad markets or whether or not the overall markets are truly fairly valued yet. Maybe add some commodity exposure, some of a broad market short index as a hedge, and perhaps even some put options on a few companies that appear broken, rapidly declining fundamentally, or otherwise ridiculously overvalued.
I dollar cost average in my retirement accounts that I max out each year, buying shares of various investments in a fixed dollar amount each week. When the values of my investments in those accounts go down, I’m able to buy more shares. When they are up, fewer shares are bought. This ends up being a good thing, and is what everyone should do.
If you make $150k a year and your employer offers matching 401k contributions up to 6%, you can max out at $17,500 each year by only putting in half of that. You’re basically getting nearly $9k in free money each year from your employer to invest. And a Roth 401k will grow tax-free if you have that option.
In my more aggressive taxable accounts, I also dollar cost average a certain amount, and add as much additional money as I can. Since the crash of late ’07 to early ’09, I typically keep anywhere from 15-25% or more in cash set aside to buy other securities for trades / additional investments as opportunities present themselves. When the markets sold off 15% in 2010 and 20% in 2011, I bought much more than usual.
