Traditionally the stock market has been seen as a very safe investment over a long period of time. Financial counselors such as Dave Ramsey point to statistics that if you invest your money for any given ten year period of time, you are almost certain to receive some amount of positive gain on your money. Because of the unique situation and dramatic drop that the stock market has seen, in some cases people who invested a given amount of money ten years ago are actually below where they started at.
With the dramatic swings in the stock market and other negative economic news being reported in a daily basis, many are wondering if they should continue to invest money into their Roth IRA’s, 401K plans and other investments accounts, based on fears that they are only throwing good money after bad and will end up losing more money as time goes on.
Although most financial advisors continue to recommend investing in the market, these fears are paralyzing some potential investors into not doing anything at all. Fortunately, there is a system which will allow an investor to purchase a mix of certificates of deposit and an index fund which will guarantee that the investor will not lose any money, while still having the possibility of capturing some upswings in the market if there is a significant bull market.
This strategy, first presented in Money Magazine, is not some newly developed financial product that is being sold with high commissions, rather a simple mix of fixed-rate assets and an indexed fun. The idea is that you put approximately two-thirds of your investment into a CD and the other one-third into the market for a period of ten years. During that 10 year period, the CD would grow to the point where it was equal or greater to the size of the original investment, and then any gain from the index fund aspect of the investment would be an added bonus.
For example, let’s say that an individual has $10,000 in their Roth IRA account to invest over the next 10 year period of time. If the rate for a 10 year CD is 4.50%, this means that an individual would need to place $6440 into a CD to get that balance back up to $10,000 by the end of the 10 years. You would take the remaining $3560 and invest it into the market. Even if the market went to zero, you would still have your original $10,000.
If the market averaged a 10% rate of return over that decade, you would have a total of $19,233. This is a much smaller gain than you would have if you were fully invested into the market (which would be $25,937), but you are also fully insuring that you have no possibility of losing money.
This solution is probably a bit more conservative than most financial advisors would recommend, but if you would like to invest in the market with a guarantee that you would not lose any money, this would be a much better option than the high-commission annuities that many fee-based financial planners are offering.