@iced wrote:
@Mdowning30 wrote:
My highest return this year was 18% so idk what you guys are talking about but the average in a good total stock market fund or even in the s&p 500 will return more.
My portfolio as a whole has an return of 26.5% for the past 12 months (with one of my accounts having a 100.83% 12m gain), but I would still never suggest someone do stocks (even a S&P ETF) with a 12-month time-frame because, as has been said, there's risk in equity investment. I could have just as easily been flat over the past year or even down 30% had I made different investments.
The risk mitigation in stock investments comes from having a longer window you can leave the money invested. 12 months is too short to mitigate the risk of short-term fluctuations. Had OP said 10 years or even 5, then I'd be with you in suggesting stocks.
That's a perfect example of volatility. With stocks, you can be up 26% one year, and down 30% the next.
@acercode, interest rates are relatively high, making high yield savings accounts a fairly solid option at the moment. CDs are a way to lock in those high rates for a longer period, if you think rates will drop (that's iffy). If you don't mind a little more complexity, buying a low-fee money market fund primarily invested in treasuries can net a slightly higher return (this a money market fund you buy at a brokerage, not a money market account like those at a retail bank). You can also buy treasuries directly, though laddering makes this even more complex. These are all very safe investments, but they won't grow your real wealth very much.
If you're interested in equity (stocks, primarily), toss out the idea that you can get consistent returns in the 10-20% range. Over the long term, the stock market as a whole has done about 8-10%, and there's an huge amount of academic literature showing even the best equity fund managers can't consistently beat that. These are the best educated, most highly trained people in the world, with the best information and tools available. So if you do better it's luck, making it a form of gambling. And that isn't a good long-term strategy.
The most important factors you can control are diversification, costs, and asset allocation. Studies show that almost all the stock market returns come from a very tiny percentage of companies, and there's no reliable way to pick the future winners, so the best approach is to buy everything. I won't go into the math, but there's also a synergy between different assets classes that results to better overall returns, leading (Nobel Prize laureate) Markowitz to say diversification is the only free lunch in investing. And since fund managers can't reliably beat the market, the premium you pay for higher cost funds is ultimately a net loss. The idea that you get what you pay for is completely inverted, when it comes to investing.
Combined, that's the argument for investing in low-cost passively-managed index funds (or ETFs). So the basic portfolio is some money in an S&P or total US market index fund, some in a total bond market fund, and some a total non-US stock market fund. Asset allocation is how you spread money between these categories, or even break them down further, and is primarily a way to control risk. See the the Boglehead 3-fund portfolio for a good example and discussion. If you lean torwards higher risk, look into factor investing.
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