Worth It by Amanda Steinberg

Author:Amanda Steinberg
Language: eng
Format: epub
Publisher: North Star Way

Buy and Hold

Not so much. Tons of variables impact a stock’s value at any given moment: competition, new technology, national and global politics, foreign markets, natural disasters, and on and on. At least 80 percent of people who try to beat the market—meaning, make a big profit—never do. The risk is very high. You may never transition to active investing or direct stock picking, and that’s fine. If you do transition to active investing, only do so with money you can afford to lose.

Passive investing, on the other hand, is known as a “buy and hold” style of investing. Passive investing requires patience because the market ebbs and flows. It takes time. In fact, it’s about as exciting “as watching paint dry,” goes the famous quip of American economist Paul Samuelson. That’s what you want. Either through a financial advisor, discount brokerage, or robo-advisor, you explore what’s appropriate for your age (how long until you retire?), your risk tolerance, and the outcome you’re looking for. And then you buy shares in the appropriate mix of index funds.

Passive funds include funds that mirror the financial indexes that track the value of various sectors of the economy, such as the Standard & Poor’s 500 Index (S&P 500). These are called index funds, and their price goes up and down with their slice of the market. What does that mean? It means that if, for example, a stock has 5 percent of the S&P 500 Index (a collection of five hundred top-grossing American companies), it will represent 5 percent of the index fund. So, when the index goes up, your stock price goes up and you make money. When the index goes down, you lose money.

Because index funds track indexes, they don’t require human analysis. Therefore, they cost less to manage. Investing in index funds gives average mortals like us a fighting chance of making money on our investments. They carry lower costs for consumers and fewer tax implications and require less maintenance than their high-touch, high-maintenance counterparts, mutual funds. Mutual funds allow individuals to invest passively in professionally managed funds made up of stocks and bonds chosen by expert analysts. But, again, because they’re managed by humans, actively managed mutual funds carry costs that index funds don’t.

Over the past eighty years, the stock market has returned, on average, 10 percent per year. However, returns on individual stocks vary widely. There’s no guaranteeing what the market will do. For example, in 2008, the market dropped 50 percent, while in 2011 it was flat. In 2012 it returned about 13 percent, and in 2013 we recovered from 2008 (if you were still in the market, that is). This is what people mean when they talk about market fluctuation. And this is where your tolerance for risk comes in.

Investing Vocab in Plain English

Asset: A financial thing you own.

Stock: Ownership of a piece of a company.

Bond: A loan you make to a government or a company.

Words used interchangeably: Stock, share, equity.

Asset class: Categories of things you own, e.

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