Everybody understands how important it is to save money for your retirement, and these days it can be more important than ever. The problem is, the stock market is very difficult for the ordinary investor to understand completely and with this massive recession we seem to be in at the moment, the stock market seems crazier than ever.
The alternative used to be to purchase government bonds or certificates of deposit from the bank but with the recession the way it is and the Federal Reserve keeping interest rates and near zero, it doesn’t make any sense to invest in those type of safe havens anymore. If you calculate for inflation they actually pay out a negative interest rate!
Which brings us back to the stock market. Unfortunately I think everybody has had experience personally or have at least known somebody who has lost their life savings in the dramatic market drop recently, and it’s so very hard to climb back on the horse and invest in the stock market but you have to do something!
What’s the solution then? Well I think I have one
My strategy harnesses the power of math and the law of averages. Here’s how it works; set aside a certain amount of money that you would normally invest in your retirement account every month. Set up a system to direct deposit that amount of money, either directly from your paycheck or directly from your bank account into your retirement investment account with instructions to invest it in an S&P 500 index fund (the same fund every month).
Be sure to set up this scenario through a mutual fund or retirement company of some sort so that you don’t have to pay a fee every time you make a contribution to the account.
So what exactly does this strategy accomplish?
Over time historically speaking the market has increased 7 to 8% per year and that’s held true over the last 50 odd years. But it only holds true for the entire market as a whole, not individual stocks and that’s where people get into trouble.
When you invest in individual stocks you can easily lose your money but if you invest in a broad stock market index fund it is virtually impossible to lose your money. The entire market would have to tank in order for you to lose and if that was the case civilization would be over anyway and you’d probably already be dead.
Having the money directly deposited automatically every month means that you will take advantage of the stock markets dips and rises mathematically. Some months you’ll purchase when the stock market is up and some months you’ll purchase when the stock market is down and this is where the law of averages works to your benefit.