Investing In The Stock Market

With the inherent instability involved with investing in the stock market, many question the wisdom of even trying at all.  What’s the use of investing in a company if it might go bankrupt the next year?  There are many who claim that you can time the market, and buy the right stocks at the right time in order to make a good profit while suffering few losses, but in reality, statistics show that even professional money managers have difficulty evaluating these sorts of complex financial markets.

In fact, if we look at the statistics, we see that most professional money managers ever outperform the S&P 500 index over the long run.  If professional fund managers, with all their education and experience, can’t beat a pre-set average of the top 500 stocks, why should the individual investor feel like he or she could even start making the right decisions?  How can investor hope to outperform a market the professionals often underperform?

The answer:  they really can’t outperform the market.  It’s just too complex and unpredictable.  However, they can do the next best thing, something that the professionals often fail to do:  match the performance of the overall market exactly using an index fund.

An index fund is simple a financial product that basically lets you buy the whole market (or a specific sub-set of the market) in bite sized pieces.  You can buy a part of the S&P 500 for a small amount of money.  The best part about this approach is that you are %100 guaranteed to match the performance of the overall market, since you own the overall market.  With one simple purchase, you are matching a market that most professional money managers fail to match.  Pretty nice, eh?

There is much more to learn about investing with index funds, and I’ll be covering this in other articles.  For now, though, understand that buying index funds is a great way to get started in investing without having to learn a bunch of complex financial lingo.  Just buy the market, and hang in there for the long term.  There will ups and downs along the way, but over time, you’ll very likely make money.

This entry was posted on Wednesday, October 8th, 2008 at 8:47 pm and is filed under Index Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.