Index Funds

Using Index Funds to Try to Beat Inflation is Safer Than You Think

Stocks go up and stocks go down. This is called volatility and it scares many people.

They fear they will lose everything in a stock market crash.

Of course their fears are not completely unjustified. This is exactly what happened in 1929. But back then, margin rates were as low as 10%, which meant you could buy $100 worth of stock for $10.

While the market was rising, this leverage created fortunes and every investor looked like he was getting rich. However, when the bubble burst things got ugly and one of the main reasons for the severity of the crash was all those investors who couldn’t meet their margin calls.

But even taking the Crashes of 1929 and 1987, along with the dot.com debacle in 2000 and 2001, returns form stocks has steady beaten inflation. The long term return on the S&P 500 has been about 10% a year.

While individual stocks have done better – and some have done much worse – this average has held up for decades.

It is now possible to buy no-load, low fee index funds that track various stock market averages like the NASDAQ, the Dow, the S&P 500 or the Wilshire 5000. And long term investments in index funds are not really that risky, especially when you have a long time until you need to touch your investments.

As a matter of fact, many investment advisors would find this type of investing to be too conservative for most people to reach their investment goals.

But you have to sleep at night too. Some people just can’t stomach the market's gyrations and usually dump their holding at the absolute worst time.

Index fund investing is about the easiest way to ride out the bumps. An index fund will go up and down, reflecting the value of the index, but generally the ride is cushioned and you feel less need to panic or lose sleep over your money.

Also consider your investment choices. If you placed all your money in a “safe” saving account or money market fund, you are likely to see negative returns - you will actually be losing money to inflation – especially if the money is not tax sheltered.

These last few years have seen historically low interest rates for both borrowers and savers. The savers were hit especially hard since if they managed to get 3% a year on a CD – and until recently this was a lot - they probably lost all that gain to inflation. They definitely lost it all if they had to pay taxes on the interest.

I don’t think you should be scared of stocks, no matter what your age. If you are young, you can be more aggressive and try to better your returns to 12 or 15%. That money will compound much more quickly and you will amass a greater fortune over the years.

It is not impossible or even that hard to make those few extra points. There are mutual fund managers who have a consistent long term record of beating the markets.

You can find them listed semi-annually in Forbes or Consumer Reports magazines.

There are also hundreds of investment advisory newsletters you can subscribe to. Forbes periodically ranks the best.

In your later years, you need to worry about outliving your nest egg. So while many seniors will put all their money into cash, they are actually taking a bigger risk than leaving at least 30 to 50% in stocks.

You have to make your money work hard for you, so that you don’t have to anymore. So look into a diversified portfolio consisting of stocks, bonds, real estate and gold. These can be bought individually or as mutual funds.

If you don’t want to learn how to invest for yourself, read about financial professionals who can help you.

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