This is a good time to stop and think about our futures. What will our later years be like? If we are blessed with good health in that time, it would also be nice to have no worries about money.
Dave Ramsey’s radio show delivers a great education for people who are learning how and why to save money. But people want to know what the end-game will be. Mr. Ramsey’s advice to buy good “growth” mutual funds may raise the fear that we will struggle to save money and invest, only to have a Wall Street crash take much of it away from us.
In fact, amateur investors have faced manias, panics and crashes on Wall Street for as long as the stock market has existed. Most were frustrated when their stocks went for years without making much money, then were horrified when prices occasionally dropped sharply. Despite all of that, those who have risked part of their savings in Wall Street have usually made much more money than if they had kept everything in the bank.
Investors need the right attitude and a plan in order to withstand the bad days on Wall Street that will happen now and then. A high level of financial knowledge is not required, unless a person is buying individual stocks. Mutual funds employ skilled people to select stocks, and these funds are ordinarily the best choice for part-time investors.
Even professional investors don’t expect to avoid drops in stock prices; they can only hope to respond to the problem faster than others do. Most of us can’t react very fast, and if you can’t be fast, it is actually better in many cases to be slow—to take time to think carefully before responding to bad news. One study showed that successful amateur investors took as much as three months to respond to changes in the stock market. That fits in with an attitude that they expect to make their money slowly and surely, not in a flash. Investors who held on to their stocks during the 2008 crash saw values recover; some who sold quickly took losses from which they were unable to rebound.
Mutual funds and 401(k) plans have been making it easier for people to carry out a simple investing plan: pick a fund and buy a bit of it each month. Buying a smidgeon at a time evens out the prices paid and may allow a person to build up a profit before any price drops occur. A person starting out that way is unlikely to lose much money, and starting soon gives them many years to build their investments. “Start soon” and “start small” are great pieces of advice for new investors.
Once an investment account is started, the next goal is to diversify. This term can mean several things, but to protect against Wall Street crashes, it means to divide money among several asset classes. This can be done by buying mutual funds that specialize in classes such as U.S. stocks, foreign stocks, bonds and commodities. Always plan on keeping some money in a money market fund or as a cash balance in the account. When things go sour on Wall Street at least the cash will retain its value. Consider having 20% of an account in cash to take some of the sting out of a market crash. It can help an investor react calmly and avoid the disappointment that causes people to give up on Wall Street investments.
Getting an early start in investing is a better way to learn than watching CNBC or reading stacks of books. Real investing experience can help a person stay sane during Wall Street’s recurrent bouts of madness.