The stock market has historically averaged a 12% overall increase each year. This is obviously very good when compared to the return you'd get from putting your money in the bank or a long term savings bond.
Therefore, you can look at these historic stock prices and conclude that just throwing your money into a mutual fund is a wise long term choice. Actually, nothing could be further form the truth.
You see, there is a lot of misinformation on investing today. Since the stock market has historically averaged a 12% rate of return on investment, many people view mutual funds as good investments. This is because mutual funds spread out their holdings, and will tend to mirror the market as a whole.
Actually, this can be disaster. Many people have lost small fortunes by keeping their investments a mutual fund long term, and here's why.
Lets? say you've been investing money in a mutual fund for years and years, and it's paid off nicely for you with a 12% return. However, you never know when the next stock market crash is going to come.
Here's something many investors don't know-people are required to start taking their money out of their 401K once they reach 70. With the tremendous amount of baby boomers set to retire, you combine that with the fact that the vast majority will be taking out a substantial amount of money to live on, and the stock market could very well be headed for the biggest crash in history.
We are likely still a few years off from this potential catastrophe, but it's coming in a hurry. Therefore, if you have your money tied up in a mutual fund when this crash occurs, you can literally lose a whole lifetime's worth of investment with one fell swoop. This has happened to many people who were told their money was secure in a mutual fund, and it can easily happen to you.
The bottom line, don't trust others with your finances. Do your own research, become financially educated, and you will be able to spot hidden opportunities that the vast majority of others miss out on.
While the historic stock prices have generally show good rates of return, it doesn't take much to wipe out a whole portfolio. Make sure you know what to look for when you enter the exciting world of investing.
