How do you make money with index funds and stocks ?

[Russell]

I know, what a basic question ? although I'm having trouble with finding the answer. I'll use an example to illustrate my point. I bought stocks in a company about 5 yrs ago. In the past 5 yrs they went from $34/stock to $27 to $30 to $36 to $34/stock - this is typical of what stocks do...they dip and go back up but at the end of 5 yrs have I made any money on it ? not if I still hold them. I probably would've (theoratically) if I sold them when they were at $36/stock.

So if you buy stocks and just hold them for a long time I don't see how you could make a lot of money. Of course, there are exceptions where a company does really well and the stocks split or if the stocks pay dividends etc.

Same goes for index funds I believe ? Mutual funds on the other hand usually do the buying and selling internally as they're actively managed (hopefully).

So am I missing something obvious here ? afterall every advice you come across tells you to buy the S&P 500 index fund and you'll average 10% per yr...not according to my illustration you won't

[Ima saver]

Re: How do you make money with index funds and stocks ?

I don't know the answer, but I just looked up my vanguard index fund. In June of 05, I had a balance of 63,584 with 579 shares. The last time it paid a divident in March of this year, my balance was $70,715 with a balance of 587 shares. I have not added any money to this account or bought any new shares. It helps that it pays a dividend every 3 months. I think I averaged about 10% for the past year!!

[sweeps]

Re: How do you make money with index funds and stocks ?

Russell, the answer is average returns are based on the long term. Some years you're going to do a lot worse than a 10% return, other years you're going to do a lot better. The last 5 years or so have been dreadful for stocks, but for a person saving for 10, 20, 30, 40 years, 5 years is not a very long horizon.

It's tempting to get involved in day trading, especially when you hear stories about people making $20K in a day. But no one likes to tell the more common story of people losing their shirt on day trading.

It's also tempting to avoid investing altogether and just put everything you own in savings accounts and CDs (or stuffing the mattress for that matter). But the problem with that is you never get ahead, you spend the rest of your life fighting inflation.

[Russell]

Re: How do you make money with index funds and stocks ?

Sweeps I hear what you're saying but here's my issue. What if you were saving for a house with a target date of 5 yrs or even 10 yrs, the advice is to stick your money into the stock market as it gives the best returns...and that maybe true but along with that advice goes the second advice, buy a S&P 500 index fund. Well 10yrs later when you want to take your money out the market all of a sudden is having a bad hair day/week/month and your stocks are worth less than what they were 10yrs ago...I just don't see how you can generate decent profit from this up and down cycle unless you jump in and out of the market at the right times, use dividend paying stocks or buy good mutual funds. Even if you make 10% total return when I take my money out after 10yrs that's quite poor considering the tax liability, inflation and not having any compounding effect.

Yes my 401K is doing well and I see it growing but only because 1) I rebalance every 6 mos and 2) they're all actively managed mutual funds. My stocks do well for six months, then do bad for the next six and the cycle repeats...

[34saving]

Re: How do you make money with index funds and stocks ?

Ima -- Be happy. Don't look at your Vanguaard fund now

[disneysteve]

Re: How do you make money with index funds and stocks ?

So if you buy stocks and just hold them for a long time I don't see how you could make a lot of money.

Same goes for index funds I believe ?

So am I missing something obvious here ?

With individual stocks, you make money two ways - price appreciation and dividend payments.

With mutual funds, there are 3 ways - price appreciation, dividend payments and capital gains.

Price appreciation is self-explanatory. If you buy a stock at $10/share and sell it for $20/share, you've made a profit of $10/share.

Dividends are a way the company issuing the stock shares its profits with the shareholders. So let's say that $10/share stock has a 3% yield. That means it pays a dividend of 30 cents/share. You can have that paid to you by check or may choose to reinvest it in additional shares of stock.

Capital gains from a mutual fund are the profits that the fund realized by selling stocks it owns at a profit. So if the fund owned a $10/share stock and sold it for $20/share, that $10 profit gets distributed to fund investors in the form of a capital gains payment.

As for the S&P 500, using the Vanguard fund as my example, the fund opened in 1976, 30 years ago. The average annual return over those 30 years has been 12.03%. Some years it was up more, some years it was up less, some years it was down, but the long term average is 12%/year. If you had invested $10,000 in the fund 10 years ago, today your account would be worth about $22,000, so you would have made $12,000.

[disneysteve]

Re: How do you make money with index funds and stocks ?

What if you were saving for a house

If you were saving for a house, you should not be putting the money into the stock market. You need to have a long-term goal for that money, at least 10 years or more. For shorter term needs, you need to be more conservative with your money.

[sweeps]

Re: How do you make money with index funds and stocks ?

disneysteve is right, Russell. Your house fund should be in MMAs and CDs, not in stocks or even bonds.

Having said that, I personally don't think you should bail out now -- I think the worst is behind us. Just my opinion, of course.

[WellManicuredMan]

Re: How do you make money with index funds and stocks ?

Sweeps I hear what you're saying but here's my issue. What if you were saving for a house with a target date of 5 yrs or even 10 yrs, the advice is to stick your money into the stock market as it gives the best returns...and that maybe true but along with that advice goes the second advice, buy a S&P 500 index fund. Well 10yrs later when you want to take your money out the market all of a sudden is having a bad hair day/week/month and your stocks are worth less than what they were 10yrs ago...I just don't see how you can generate decent profit from this up and down cycle unless you jump in and out of the market at the right times, use dividend paying stocks or buy good mutual funds. Even if you make 10% total return when I take my money out after 10yrs that's quite poor considering the tax liability, inflation and not having any compounding effect.

Yes my 401K is doing well and I see it growing but only because 1) I rebalance every 6 mos and 2) they're all actively managed mutual funds. My stocks do well for six months, then do bad for the next six and the cycle repeats...

Use a ROTH IRA and you won't have to pay any taxes on your gains unless you take the money out early. And use your ROTH to buy an S&P 500 tracking stock or some other broad market tracking stock (or a mutual fund that is a basket of tracking stocks such as VTIVX). You don't even have to rebalance your portfolio. Just don't get scared when it goes down and hold for the looooooong haul. You'll see much better returns after 20 years of doing this than if you had bought CDs or used savings accounts. And never buy stock in individual companies (just my personal advice).

Oh and don't put any money in the stock market that you might need before retirement

[Crystallas]

Re: How do you make money with index funds and stocks ?

Yay, someone said it. Roth IRA. Best solution for you.

[VJW]

Re: How do you make money with index funds and stocks ?

So if you buy stocks and just hold them for a long time I don't see how you could make a lot of money.

Just don't get scared when it goes down and hold for the looooooong haul. You'll see much better returns after 20 years of doing this than if you had bought CDs or used savings accounts.

The ‘Buy and Hold’ as a long-term strategy died in 2001. Check the following chart, which details how the market has gone NOWHERE for very long stretches of time:

[WellManicuredMan]

Re: How do you make money with index funds and stocks ?

The ‘Buy and Hold’ as a long-term strategy died in 2001. Check the following chart, which details how the market has gone NOWHERE for very long stretches of time:

Ok, the Dow Jones is not a good example. It only consists of 30 companies! I said to buy and hold something that tracks the S&P 500 or the broad market.

[sweeps]

Re: How do you make money with index funds and stocks ?

I personally don't think you should bail out now -- I think the worst is behind us. Just my opinion, of course.

Then again, I could be wrong.

[sweeps]

Re: How do you make money with index funds and stocks ?

The ‘Buy and Hold’ as a long-term strategy died in 2001. Check the following chart, which details how the market has gone NOWHERE for very long stretches of time:

I'd like to see other assets (bonds, real estate, commodities, cash, etc.) graphed along with that same chart. You'd see that seemingly tame stock line annihilating other asset classes.

[VJW]

Re: How do you make money with index funds and stocks ?

Ok, the Dow Jones is not a good example. It only consists of 30 companies! I said to buy and hold something that tracks the S&P 500 or the broad market.

But the other indices suffered the same fate over those periods of time (roughly). The DJIA was just an example.

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