The U.S. stock market just capped off its best quarter in more than 30 years, with the Dow Jones Industrial Average jumping nearly 18% in that three-month span.
Although this benchmark has yet to fully rebound from the coronavirus pandemic that sent stocks into a bear market and the economy into a recession, traders have been keen to bet on a broader U.S. recovery. As of July 7, the Dow average is down 9% so far this year; at its worst in March, it was down nearly 35%.
Even though 2020 has been challenging for investors, investing in the stock market over longer periods of time is a proven and reliable way to build wealth. Five years is about the minimum amount of time many experts recommend you should plan to invest in stocks because the market is more likely to fluctuate in the short term, meaning you could lose money. Over longer periods of time, however, the market has always rebounded following declines.
Predicting which stocks will fare better than others is difficult to do, which is why experts — and even famed investor Warren Buffett — recommend investing in index funds that track broad market benchmarks. Here's how a buy-and-hold investment in a fund tracking the Dow average would have grown over the past five years.
If you had invested $500 in an exchange-traded fund (ETF) that tracks the performance of the Dow average back in July 2015, that would be worth almost $818 as of July 7, 2020, according to calculations by Grow. That works out to a return of more than 63%.
Rather than just calculating the change in price, which would be about 46% for the Dow fund in that time period, we've calculated the total return. That assumes you reinvested the dividends — a portion of a company's or fund operator's profit — you earned each quarter, which is an easy way to grow the value of your portfolio.
The Dow index is composed of 30 stocks, and all of those companies currently pay a dividend. The members of the Dow are considered to be blue-chip companies, or leaders in their respective industries. People on and off Wall Street have been tracking the number of points this benchmark moves on a daily basis since the 1800s.
That said, the Dow's performance in the past five years has been overshadowed by another major U.S. benchmark: The Nasdaq Composite Index. An ETF tracking the 100 largest members of this gauge, which is made up largely of tech stocks, has seen total returns of nearly 149% in the same time period.
Video by Jason Armesto
While it can be tempting to invest in those stocks that are leading the market, it's important to understand that even professionals have trouble mastering their stock picks. Buying individual stocks can be risky, since those can experience sharp, unexpected fluctuations.
A safer and more reliable investment strategy is to buy index funds. If you keep adding money to your portfolio regularly — a strategy known as dollar-cost averaging — you won't invest all of your money when prices are at a peak.
Rather than trying to make a quick buck in the stock market, it's smart to focus on the long term. Experts recommend building a portfolio made up of a diversified mix of stocks that tracks the market, because it's generally much safer than investing in individual stocks, and then sticking with your investments over time.
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