The market keeps going up and those who have simply put their money in index funds tracking the S&P 500 have done better than the vast majority of active investors. At this point you have to ask the question, is there any use for active investments today? Investing in stocks has always been a matter of picking the best stocks to invest in using an approach like intrinsic stock value. But, in the current bull market, stock picking for most folks is not doing as well as choosing and staying with an index fund. Here are some thoughts on the subject.
What Happens to Index Fund Investments in a Bear Market?
When the market goes down, any investments tied to index funds will follow. Is this a reason to get out of an index fund when you suspect that a correction is around the corner? First of all, the reason you are in an index fund is because you know that the fund will do better than managers who try to time the market. So, unless you have a crystal ball that tells you precisely where to put your money instead of the index fund you are using, stay with it. But, if you had that crystal ball, you would not need the index fund!
Market Watch had a useful piece dealing with this issue. They say there is a test of whether you will win or lose in a bear market with index fund investing.
Their advice is to use a buy and hold strategy with index funds and not to bail out when the market corrects. Rather, use a dollar cost averaging approach and continue to add to your portfolio when shares are cheaper!
Is There Any Use for Active Investments Today?
If you have invested in dividend stocks and are using a dividend reinvestment plan, this is something that you cannot do with an index fund. While the cost of investing with index funds is lower than when you routinely buy and sell stocks or when you use a mutual fund, nothing beats the free reinvestment option offered by a dividend reinvestment plan! If your money is in a stock that has been paying dividends for more than 100 years, this is a difficult approach to beat.
And, it is important when investing to understand how a particular investment is going to keep making money over the years. When you invest in a fund that tracks the S&P 500 you are putting your trust in the American economy. But, if you have unique investment skills and knowhow, you may be able to choose some investments that will replicate the Microsoft story of growing nearly 1,000-fold over the years.
Best Investment Approaches Year in and Year Out
No matter if you choose investments where you will not lose any money but also not gain a lot, or if you go with the passive index fund approach, steady investing year in and year out is more likely to be successful for the vast majority of investors than trying to time the market.