I understand buy low and sell high, but then what?
If, say the S&P500, keeps growing there is no ‘peak’ to sell at. Do the gains compound? if so how? Or do you just hold it forever and sell when you want to get the money?
In: Economics
One of the best strategies for growing wealth over a lifetime is to buy-and-hold a diversified portfolio (e.g., an S&P 500 index fund) whenever you have spare money (e.g., 15% of your gross paycheck), only selling when you need the money in retirement or a very severe emergency occurs. It is recommended to have ~6-12 months in expenses in safe assets (e.g., a high yield savings account at Ally) for emergencies to reduce the odds you will have to dip into your retirement investments.
Yes, the gains compound. The growth rate that is commonly used is called the “compound annual growth rate.” From 1980 until today, the S&P 500’s CAGR is about 12%. Keep in mind this is just an average value that is dependent upon the start and end dates of analysis. The S&P 500 may decline a lot very rapidly (~30% in a month at the beginning of the pandemic) or slowly (~50% over 18 months during the Great Financial Crisis). However, historically the S&P 500 has always recovered… eventually.
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