Everybody knows how important it is to have savings set aside for your retirement. The problem is that most people don't have the foggiest idea how to invest properly and end up recklessly endangering their entire nest egg when they don't have to.
In this article today I'm going to talk about how you should invest in the stock market to save for your retirement if you're not somebody with financial training who has worked on Wall Street personally.
I've seen it time and time again, people start investing in the stock market and they almost always start out the same way, by picking a handful of stocks. They may have very good reason for picking out those stocks or they may have no reason at all. They may have picked them out with the help of a stockbroker or with the help of a friend with financial or investing experience.
However they've done it, they don't realize that they've done the exact wrong thing. You should never invest in individual stocks for your retirement account. I could get into the mathematics of why it's such a bad idea based on correlation and market risk versus individual risk and some of the different financial theories that prove mathematically why it's such a bad idea, but I won't.
Instead I'll simply tell you that it's a bad idea to put all your eggs in one basket, or even five baskets. All it takes is one or two of those stocks to go down for your entire nest egg to get wiped out, and that's usually what happens.
So what exactly should you do? How do you take the recklessness out of investing in the market yet at the same time maintain a decent rate of return? The answer is simple... stock market index funds.
There are a number of broad market index funds such as an S&P 500 fund that attempts to mimic all the stocks on the stock market; or in this case the 500 stocks in the S&P 500. We all know that historically speaking the stock market rises 7% to 8% per year, but that's the whole stock market not individual stocks.
Investing in a stock market index fund takes advantage of the whole stock market so that you receive that historic 7 to 8% per year increase without the individual risk of individual stocks. It is the safest and surest way to invest for your retirement if you don't have any particular financial or investment experience and it's the only way to make sure you won't get wiped out so close to the finish line.