The Stock Market Keeps Hitting New Record Highs. Here’s What That Means For You

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The S&P 500, Dow Jones Industrial Average and Nasdaq averages all closed at record highs on Monday — after setting several new records last week. The strong close to the month also strengthens 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’d be right: the S&P has more than 50 new highlights in 2021 alone and the Dow has had dozens of them himself† For ordinary investors, this steady stream of new highs further supports a simple investment strategy focused on low-cost index funds.

Pro tip

If you’re not sure where to start investing, a low cost index fund is a good bet. Another good option is a target date index fundthat automatically adjusts your investment strategy as you approach retirement.

Rather than buying and holding individual stocks, index funds are essentially groups of stocks that automatically track a particular segment of the stock market, such as the S&P 500, which tracks the 500 largest companies in the stock market. Instead of buying shares of one stock, index funds are like buying shares of the entire stock market.

What should you do if the market fluctuates?

If you’re investing in low-cost index funds and other total market funds for the long term, it’s actually quite simple: experts tell you not to do anything.

“You can’t control the market, but you can control your reaction,” said Marc Russell, the personal finance expert behind BetterWallet† “You can’t beat index investing. Long-term, boring strategies that work every time is what I focus on.”

And if you’re investing for the long term using these “boring” strategies, try to ignore the headlines about the stock market going down or up because short term volatility is the price you pay for portfolio growth. in the long-term.

“We hear a lot about the crashes in the news and pop culture, so there’s the concept of the market showing a zigzag,” says the investment expert behind Personal financial 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 sooner you invest, the more money you can make. Despite periodic but temporary declines, major indices such as the S&P 500the NASDAQ Composite Indexand the Dow Jones Industrial Average have steadily increased since they were created decades ago.

For example, while the S&P 500 has experienced the occasional downward spiral, it has averaged returns between 6 and 8% over the past nine decades. And there hasn’t been a single 20-year period where it posted negative returns.

“Companies will always benefit, grow and innovate. Those revenues and those innovations are funneled back to the owners of those companies who are the shareholders of the stock, which you could be if you own an index fund,” says Schneider.

Therefore, if you see the market drop, your best move is to do nothing at all.

How to start investing?

1. Choose a brokerage

Your first step is to choose a brokerage. Experts say you can’t go wrong by sticking to the big names, like Fidelity, Charles Schwab or Vanguard. If you have an employer-matched 401(k), it may 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 the rest after your employer match, get a traditional investment account through your brokerage.

3. Within your chosen account, choose an index fund to invest in

We believe that index funds are an excellent choice for both novice and experienced investors. Schneider is a big fan of index funds with a simple target date, but the most important thing is to look for index funds that own a wide range of major companies and have an expense ratio of less than 0.2%.

Why index funds are the best

Index funds are an excellent choice for investors because they give you broad exposure to large segments of the entire stock market. An index fund represents many different individual companies, so you take less risk on yourself because your money isn’t tied to one stock.

Index funds are often inexpensive and easy to invest in within any account you choose. Because index funds cover broad swaths of the entire market, your returns likely reflect the market’s performance. For example, if you invest in an index fund that is set up to automatically track the S&P 500, your return will likely equal the total return of the S&P 500.

You can also opt for 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 goes by, the fund will be reallocated to different assets that will meet your needs as you approach that target date. For example, the fund could be more aggressive towards stocks in the early years and then take more bonds closer to the target date.

Pro tip

When looking for a target date index fund within your brokerage, check the expense ratio before you buy. It should be below 0.2%. If it’s above 0.5%, you’re probably looking at an actively managed fund, which will boost your returns.

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