Should I be afraid of the US stock market right now?

November 8, 2007 12:55 PM

I've never invested before, but I'd like to start. An S&P 500 index fund seems to be a good, easy, long-term option for beginners. Yet every time I read the news, it sounds like the US stock market is ready to implode. Should I be afraid of the US stock market right now? Where else should I be looking?
posted by the jam to work & money (19 comments total)

If you're going to invest, keep the long view. Yes, you may lose money, but that's always the case. Are we on the verge of another Great Depression? Perhaps, but the Fed has gotten pretty good at manipulating the economy, and there are so many global players who would like to prevent that happening, that it's unlikely.

Invest away! Put in all the money you can risk (because, in the end, it is a risk), and then forget about it. Check your statements yearly around tax time, and don't sweat small losses.
posted by TheNewWazoo at 1:02 PM on November 8, 2007

I'm pretty sure kpmcguire is trying to make a joke here. If you do pick a mutual fund, take one that is well-managed with a good long-term investment record.

There are several things you can do if you're worried about the value of the dollar dropping, including investing internationally and in the harvesting or refinement of resources such as metals and fossil fuels.

I won't go into basic investing advice, but you should definitely search the AskMetafilter archives for previous suggestions on this.
posted by onalark at 1:12 PM on November 8, 2007

The US stock market is always about to explode. There's two reasons to invest now, anyway. One: you put the money away somewhere where you won't spend it. Two: on average, over a time period of 10+ years, the US stock market has always gone up. It could go down 20% this year, or it could go up 10%. No one really knows. But long term, most people believe it will continue to go up.

One way to protect yourself from short term fluctuations is dollar cost averaging. Stated simply, what it means is that instead of buying $1200 of a mutual fund in one day you buy $100 a month for a year. Or spread it out over whatever time frame you are comfortable with. There's financial arguments about why you end up better off with dollar cost averaging, but for me the strongest argument is you avoid the potential sinking feeling of "I picked the wrong day".

An S&P 500 index fund is a fine way to start investing in US stocks. You can easily buy one from Vanguard with a $3000 minimum investment. Or you could buy an S&P 500 ETF from a stock broker. The result is roughly the same unless you have hundreds of thousands of dollars to worry about.

When you're ready to explore beyond S&P 500, consider some of other types of investments. Vanguard's index funds are one place to start. A good investment portfolio is generally diversified between US and international and between stocks and bonds.

If you decide for some reason not to invest in US stocks, please consider investing in something so you get the benefit of putting your money away where it can grow.
posted by Nelson at 1:20 PM on November 8, 2007 [2 favorites]

FYI the George Putnam Fund of Boston begun in 1937 has an annual average 9.3% rate of return. Not an index fund, but an example of long term performance . I am not sure how fees are factored into the total return, some funds charge, some don't, and this should also be considered when choosing a mutual fund.
posted by Gungho at 1:23 PM on November 8, 2007

Yes, dollar cost averaging is the solution to riding out the waves in the market. Right now you might want to be investing part of that in some foreign funds or in US companies that do substantial foreign business, but don't put all your eggs into one basket. If on the other hand you have a big lump sum to invest now, well, spread it around. It could possibly all lose value, but if you just hold it in the bank or keep it in a Mason jar under your mattress it will surely lose relative value.
posted by caddis at 1:33 PM on November 8, 2007

I've given some advice on similar questions before.

The short answer to your question is:

(1) All investing is risky, including investing in an S&P index fund. There are no completely safe options. The best way to mitigate risk is by diversifying your investments as much as possible.

(2) Do not invest in a particular fund or stock based on the advice given by internet strangers. Determine your own goals, educate yourself, and then choose what investment options best meet your goals - either by yourself, or with a qualified financial advisor.

(3) As to your particular question: some sectors of the US stock market (anything exposed to the housing downturn) do indeed look very bad right now; others (oil; anything with significant global sales) look good. An S&P 500 fund exposes you to both. Most would agree that it is still a good, easy, long-term option for beginners - but that the best thing would be to diversify beyond it.
posted by googly at 1:35 PM on November 8, 2007

I personally don't like index funds, as essentially you're paying a fund manager (through fees) to do nothing more than buy and sell shares based on the S&P or what have you. A good fund with a long-term view will look to perform above the market indexes, often doing so with a mix of stocks, in addition to bonds and other more conservative financial instruments. But there are tons and tons and tons of funds out there, all with different aims and carrying different amounts of risk. The best approach would be to meet with a professional, describe what you hope to accomplish and the level of risk you're willing to bear, then get an idea which family of funds you might be interested in and work toward picking a specific fund or group of funds.

In short, go see a doctor lawyer financial adviser. Good luck!
posted by slogger at 1:44 PM on November 8, 2007

Fees for index funds are usually very low because all they do is track the markets, and most other funds don't outperform index funds, much less out perform them enough to make up for their higher fees.
posted by kirkaracha at 1:49 PM on November 8, 2007

essentially you're paying a fund manager (through fees) to do nothing more than buy and sell shares based on the S&P

Yep. The nice thing is you pay them very very little. Vanguard's expense ratio for S&P 500 is currently 0.18%.

A good fund with a long-term view will look to perform above the market indexes

Yes, but the vast majority of funds do not, in fact, outperform the market indices. They do outperform in the fees they charge, though, with 1.00% or higher fees not being uncommon.

For a starting investor, index funds make a lot of sense.
posted by Nelson at 1:51 PM on November 8, 2007

Also remember that, if you are making a long-term investment, when the market is tanking you should be happy! Buy buy buy! You are getting more shares for your dollar, which means more returns when the market goes up again. A soft market is only bad for people who want to take their money out, not those who want to put money in.
posted by bobot at 1:58 PM on November 8, 2007

You can easily buy one from Vanguard with a $3000 minimum investment. Or you could buy an S&P 500 ETF from a stock broker.

You can get in to an S&P 500 index fund with a smaller initial investment through some brokerage accounts. For example, I believe Schwab's S&P 500 index has a $100 minimum if you have an account with them (and that account should be free w/ a $1000 min balance). Fund-level expenses might be a little higher than that Vanguard index fund though. But check out Schwab, Fidelity, E*Trade, etc.

The problem with ETFs (compared to a traditional open-ended index fund) is that they are treated like normal stocks and you might have to pay a commission for every trade. It probably won't be efficient for small investments and especially not for recurring monthly contributions.

I've been recommending David Swenson's Unconventional Success to people who want to learn about personal investing.
posted by mullacc at 2:02 PM on November 8, 2007

My perspective (I have only invested in mutual funds, mainly because I don't have a ton of money) is that I'll be in the stock market for at least 30 years.

As such, investment wise, it doesn't worry me that right now the stockmarket is doing bad. I just have to trust that it will do better than a bank account in the long run. If you think that's the case, then invest away (after reading up, of course).
posted by drezdn at 2:07 PM on November 8, 2007

I reluctantly started investing recently. My first big dip was back in March during which I thought, "Fuck, I would have been better off with it in savings." I left everything alone I knew I should, and things turned around. Same thing happened in August.

The current dip still bothers me, and my friends and I complain about it and make fun of the seemingly chickenheaded nature of the market, but deep down, I'm understand it's likely to all work out. You should take the long view of 5-10 years as everyone else said, but even if you take the short view, a S&P 500 index fund is worth at least 10% more than it was last year, and more if you factor in dividends.

So, investing is always going to make you nervous (unless you have the discipline to not look at your investments or any financial news for a year at a time), and you can't avoid that. You could wait for a "safer" time, but eventually, you'll run into something like what's going on now anyway.

As for US vs. foreign investment: The US stock market affects everything. The current dip's effect is diluted in the foreign markets, but they're still hurt to a degree. It's not a bad idea to invest in foreign index funds to diversify, but they're far from being insular.
posted by ignignokt at 2:11 PM on November 8, 2007

An S&P 500 Index fund is a terrific way to start investing. The Fidelity S&P 500 Index fund(FSMKX) has an expense ratio of .1%, which is nearly half of Vanguard's. I'm just sayin'. I think there is a minimum investment of $10,000, but customer service can usually bypass the minimums.

disclosure: I am a Fidelity customer.
posted by neilkod at 2:42 PM on November 8, 2007

Should I be afraid of the US stock market right now?
posted by yoyo_nyc at 3:44 PM on November 8, 2007

Should I be afraid of the US stock market right now?

Be afraid, be very afraid!!! But honestly I belive there won't be a big decline since inflation will be very (is?) in the comming years (M3 money supply increase gives hint). This should hold any US stock index up, at least against the dollar (but not, let's say gold). BTW, nice how Ron Paul b..f...ed helicoper Ben today: http://www.youtube.com/watch?v=yAwvlDJgJbM

Diversify behind the S&P 500. I like the iShares funds. They offer index funds of several regions (World HSCI, South America, Brazil, Russia, Pacific etc. etc.). Wish I had money but it is hard to find a good job as a non-US guy. Guess it is time to leave, the pacific region is calling.
posted by yoyo_nyc at 3:51 PM on November 8, 2007

In order for the stock market to go down consistently over a long period, the economy has to suck for a long period. So, if the US stock market goes down over the long term, and you live in the US, you will be more worried about the people on your lawn with guns than you will be about your savings.
posted by joannemerriam at 4:26 PM on November 8, 2007

It was a bad week for the stock market. If you bought $1000 worth of the S&P 500 when you posted your question, right now it'd be worth $985. That would have been pretty good timing; if you'd bought $1000 at the beginning of the week it'd be worth $962.

Markets go up and down. If you watch the short term fluctuations day to day it can drive you crazy.
posted by Nelson at 8:09 AM on November 10, 2007

FYI all markets are still up for the year. Go long.
posted by Gungho at 6:26 AM on November 12, 2007