The S&P 500, Dow Jones Industrial Average, and Nasdaq averages all closed at record highs Monday — after setting multiple new records last week. The strong close to the month also solidifies October as the best month this year for the S&P 500.
If it seems like you’re always reading about these core stock market averages hitting new highs, you would be right: the S&P has had more than 50 new highs in 2021 alone and the Dow has had dozens itself. For everyday investors, this steady flow of new highs is further support for a simple investment strategy centered on low-cost index funds.
Instead of buying and holding individual stocks, index funds are essentially groups of stocks that automatically follow a given segment of the stock market, such as the S&P 500 — which tracks the 500 largest companies on the stock market. Instead of buying shares of one stock, index funds are like buying shares of the whole stock market.
What Should You Do When The Market Swings?
If you’re investing for the long-term in low-cost index funds and other total-market funds, then it’s really quite simple: Experts say you should do nothing.
“You can’t control the market, but you can control your reaction,” says Marc Russell, the personal finance expert behind BetterWallet. “You can’t beat index investing. Long-term, boring strategies that work every single time is where I focus my attention.”
And if you’re investing for the long-run using these “boring” strategies, then try to ignore headlines about the stock market dipping or gaining, because short-term volatility is the price you pay for long-term portfolio growth.
“In the news and pop culture, we hear a lot about the crashes, so there’s the concept of the market displaying a zig-zag,” says the investing expert behind Personal Finance Club, Jeremy Schneider. “But it’s always going up, maybe three steps forward, one step back.”
In the long-run, the market is always going up, which is why the earlier you invest, the more money you have the potential to make. Despite periodic but temporary downturns, major indexes like the S&P 500, the NASDAQ Composite Index, and the Dow Jones Industrial Average have steadily increased since they were created decades ago.
For example, while the S&P 500 has had occasional down years, it’s delivered an average rate of return between 6 and 8% over the past nine decades. And there hasn’t been a single 20-year period in which it has posted negative returns.
“Companies will always be profiting and growing and innovating. Those revenues and those innovations are being funneled back to the owners of those companies who are the shareholders of the stocks, which could be you if you own an index fund,” says Schneider.
So that’s why your best move is to do nothing at all when you see the market falling.
How to Start Investing
1. Choose a brokerage service
Your first step is to choose a brokerage. Experts say you can’t go wrong sticking to the big names, like Fidelity, Charles Schwab, or Vanguard. If you have an employer-matched 401(k), it can be easier to go ahead and keep all of your investment accounts with the same broker.
2. Choose an account to invest in
Experts recommend investing your money in this order to get the most out of tax-advantaged retirement accounts: Invest in your 401(k) up to your employer match, invest in a health savings account (HSA), invest in a Roth IRA, go back to your 401(k) and fill up the rest after your employer match, get a traditional investment account through your brokerage.
3. Within your chosen account, pick an index fund to invest in
We believe index funds are a great choice for both beginning and experienced investors alike. Schneider is a big fan of simple target date index funds, but most important is looking for index funds that own a wide range of large companies and have expense ratios of less than .2%.
Why Index Funds Are the Best
Index funds are a great choice for investors because they give you broad exposure to large segments of the whole stock market. An index fund represents many different individual companies, so you take less risk upon yourself as your money isn’t tied to a single stock.
Index funds are often low-cost and easy to invest in within any account you choose. Because index funds cover broad sections of the whole market, your return is likely to mirror the performance of the market. For example, if you invest in an index fund set to automatically track the S&P 500, your return is likely to match whatever the total return of the S&P 500 is.
You could also choose a target date index fund. These index funds are based on a specific “target date,” which is the date you want to retire. As time passes, the fund will be reallocated to different assets that will match your needs as you come closer to that target date. For example, the fund might be more-aggressive toward stocks in the early years, and then take on more bonds closer to the target date.
When searching for a target date index fund within your brokerage, check the expense ratio before you buy. It should be under 0.2%. If it’s higher than 0.5%, you’re likely looking at an actively managed fund, which will eat into your returns.
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