As we approach the new year (2022), the stock market experiences daily declines. The stock market correction reached the 10% decline. The stock market fever, which has been hot while staying at home due to the pandemic for the past two years, has cooled down and I am even afraid. Since 46% of Nasdaq stocks have plummeted by more than 50%, I regret investing in stocks and can’t sleep well.
Those who do not understand the stock market and invest in stocks that are rumored to be hot or floating around on the Internet are experiencing this kind of pain. The risk that the stock market may fall if the investment money is accidentally inflated in the atmosphere of a rising stock market is completely forgotten and filled with rosy hopes.
Because the stock market experienced a 10% decline (Correction) once every two years (Bear Market), and a 30% crash (Crash) once every seven years from 1970 to 50 years ago (Bear Market) The decline in the stock market is not surprising, in fact, it experienced a shocking decline of 48% in 1973-1974 and 50% in 2000-2002. In March 2020, it also experienced a 35% decline. And it was clear that a collapse had occurred.
As the stock price of 76% of Nasdaq companies is experiencing a decline of more than 20%, many investors who have invested in individual companies have no choice but to experience the pain of investment. However, considering the investment risk, if you invest in the S&P 500, which is made up of the 500 largest US companies, rather than investing in individual stocks, the return is 27%. The right investment is not to expect a jackpot (?). Don’t listen to people who say you made a lot of money by investing, but if you invest widely, you can increase the probability of increasing your investment money with less risk.
We pay a lot of attention to the current ‘politics, economy, society, and Korean politics’, but it is not of much help to our actual tuition and retirement plans. Here, if you predict the future of the stock market that no one knows about, there is a very high possibility that it will lead to losses. Because no one knows what kind of situation the hot stocks will be in these days when I retire.
As a New Year’s resolution, let’s put these 3 things into action:
- The importance of having an emergency fund. The unexpected can happen to anyone. You may not be able to engage in economic activities at your place of work for various reasons, such as company circumstances, health problems, and so on. You should have an emergency fund that will allow you to live for a while in preparation for the unpredictable.
- When you have an emergency fund, you need to invest. Just as an employee invests part of his salary every month (Dollar Cost Averaging), an individual connects a bank and a financial institution to continuously and automatically invest. The Investment for Retirement (IRA) can be made by any employee, self-employed, or anyone with income. Those under the age of 50 are eligible for $6,000 annually and those over the age of 50 are eligible for $7,000. A 10% rate of return is $6,000, which increases to about $700,000 in 25 years and $1.2 million in 30 years. The average annual return for the past 90 years in the US stock market has been 10%.
- The stock market should be broadly invested in consideration of investment risk. Rather than investing in a few hot companies these days, it is better to invest in the S&P 500 or the Total Stock Market, which consists of 3,500 companies. It is a diversified investment by investing in several companies in one stock, and the investment cost is very low. The average annual rate of return for the past 13 years is 16%, which is a high rate of return. If you didn’t invest in various ways, you wouldn’t be able to get such a high rate of return.
Retirement is near and investors who have already retired, investing in 100% stocks is very risky. In consideration of age, risk, asset amount, etc., it is necessary to diversify investment after distributing assets to stocks, bonds, money markets, etc.
In the new year, let’s be a little indifferent to things that we can’t control, pay more attention to ourselves, and take measures for old age step by step. Stock market history clearly shows that investing long-term with an optimistic mind is very likely to make your money grow.
Myung-Duk Lee, Ph.D., Registered Investment Adviser (RIA)
Copyrighted, Dr. Myung-Duk Lee’s Financial Column All rights reserved.