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Investing for the Long Haul

MoneyWise

Christian talk radio with Rob West

September 6, 2022

After one of the longest bull markets in history, folks are having quite an emotional time with bears running loose on Wall Street. We’ve got some advice about that today. Okay, so folks work hard to build up a nest egg, and they can panic when they see their assets shrink. That’s understandable. but at the same time, reacting out of emotion to what’s going on in the market can be costly in the long run. Remember what Proverbs 21: 5 says, Steady plodding brings prosperity; hasty speculation brings poverty. That verse should be both a warning and a comfort to us. It addresses two human emotions that will derail your long-term investing strategy: fear and greed. It tells us that if we have a long investment horizon where we don’t need the money for at least five to 10 years, it’s safe to invest in things that carry more risk because the markets always recover. DON’T TRY TO TIME THE MARKET It also warns that trying to make or save a quick buck by attempting to time the market can be very costly. Here’s an example: Zoom was hardly an everyday word before COVID hit in early 2020. That certainly changed. If you bought Zoom stock a month before the outbreak, the share price was $63. A month later, just before shelter-in-place began, it went up significantly to $68 a share. If you decided then to take your profit, you would have congratulated yourself for making a tidy 8% return in just 30 days. Of course, you had no idea that millions of Americans would be homebound in the coming months. Millions of churches, schools, and businesses all started using Zoom in the next few months, and its stock was selling at $204 a share. If you’d held onto the stock instead of making 8%, you’d have made 325%. Now, that’s just one example, but it illustrates what can happen when you try to time the market. Let’s look at a scenario where you do it with the market in general and over a long period of time. If you bought $1000 worth of an SP 500 index fund in 1970 and did absolutely nothing with it, 20 years later that $1000 would have turned into nearly $140, 000. But if you tried to time the market, jumping in or out either to take a profit or prevent a loss and you missed just the best five days of the SP during that period, your stock would be worth only about $90, 000. If you missed the best 25 days, your stock would be worth only $33, 000. So we see that the negative impact of trying to time the market can be huge. On the other hand, it would have been extremely beneficial to have missed the market's worst 5 or 25 days, but who can do that? No one. We can’t predict the future. HOW TO COPE WITH BEAR MARKET ANXIETY There are a couple of ways to deal with bear market anxiety. Obviously, you can pull your money out and go to cash, but then there’s a good chance you’ll miss potential gains as the market recovers. The other way is to stick to a long range investing plan, at least 5 years (10 is better), and by dollar-cost-averaging. That means you contribute a consistent amount each month to your retirement account without fail. That could be in stocks, mutual funds, or bonds, and you simply ignore what the market is doing on a daily basis. By investing the same amount each month, you’re automatically buying fewer shares when stocks are expensive. But then when the market’s down, and you still contribute the same amount each month, you’re naturally buying more shares. So no matter what happens on Wall Street, you’re always building maximum equity at minimum cost. You’ll also come to see a bear market as a great buying opportunity because stocks and mutual funds are down. This takes a certain mindset, one that accepts delayed gratification. And it brings us back to our verse: Proverbs 21: 5, Steady plodding brings prosperity Dollar-cost averaging doesn’t make you wealthy overnight. It gives you small but steady, long-term gains. And if you stick with it and don’t pull your money out when things look bleak, or try to take profit when the market’s up, those gains become substantial over time. On today’s program, Rob also answers listener questions: ● When does it make sense to increase long-term care insurance coverage? ● How do you determine what capital gains tax you might owe on the sale of an inherited home? ● Should you tithe on Social Security benefits? ● How are interest gains in savings accounts taxed? ● How should you handle a 401k account with a former employer? ● Should you give your social security number to a credit reporting agency when they contact you?

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