Now that President Trump’s China trade drama has caused another dip, readers are asking if this is a good time to invest? The best time to buy stocks is when they are down for reasons that have little to do with the company, and this is one of those times. But don’t plunge into the market and don’t wait for a more perfect time to invest. Make small investments that you won’t need to disturb for at least 5 years.
Last year the U.S. economy produced a little over $20 trillion of goods and services. The President’s increased tariffs on $200 billion of Chinese goods, will have a direct impact on 1% of our economy.
As a result, the economy may not grow as fast as it might have otherwise. But with unemployment at 3.2% the economy is already hitting some constraints. A little less growth might not be all bad as it could help keep inflation low for longer.
This is not a high price to pay to reset our trading relationship with China. It’s time they were treated like the 2nd largest economy in the world that they are now as opposed to the developing country they were when the current rules were established. China no longer needs the advantages we give to developing countries to help get their economies off the ground. If China, with a $14 trillion economy, is not already a developed country capable of competing with the U.S. on a level playing field, when will they ever be?
Don’t wait until you’ve got a big amount to invest or until it looks like a trade agreement will be reached. Open an account with Fidelity and put whatever you can comfortably invest in the Fidelity 500 Index fund (FXAIX). This fund holds so many stocks that you are really investing in the economy. There is no minimum initial investment and fees are a very modest 0.02% a year which works out to $0.20 per $1,000 per year.
One of the best things about this fund is there is no minimum for additional deposits so you can make small deposits without paying an arm and a leg in transaction fees. For many investors, this feature makes it possible to make lots of small (easier) investment decisions than to wait until they have a big amount to invest all at once.
What prevents many people from investing is the thought that they could lose money. While it is possible that the market could head lower before a trade agreement is reached, there is a way to manage this risk.
In The Best And Worst Rolling Index Returns 1973-2016, Dana Anspach shows how the risk of losing money gets smaller as your time horizon increases. For example, if you have a one-year investment horizon, the worse case was a loss of 43%. If you extend your horizon to five years, the worse case shrinks to a loss of about 7%. At 15 years, the worse case was a positive return of almost 4%.
The best way to reduce the risk of losing money in the market is to increase your time horizon. The sad thing about time is you will never have as much of it as you do right now. You can’t buy more of it and you can’t get any back. The sooner you start investing, the more confident you can be that you’ll make money during your lifetime.
Compound Interest Is A Miracle
If you make regular deposits of any amount to this account you will be surprised how fast your account will grow. Compound interest is a force of nature that enables the rich to get richer even when they don’t have a job. The sooner you start investing, the longer you will have this modern miracle working on your behalf. If you would like your portfolio to one day make you more money than your job pays, start now with whatever amount you can.
When your account reaches $20,000, there are other strategies to consider such as buying individual stocks or choosing a mutual fund manager. But, that discussion can wait until another day.