Hi! I fully do not understand investing, but I’m going to follow the directions you and others give about IRA investments. The one thing that I totally do not grasp is the allocating the funs into an index. Isnt there a scenerio where the index loses money and by retirement age you check it out and it went completely under or something?
Hey kiddo! And welcome to the wide world of investing. You're on the right track by starting an IRA for your retirement.
Yes, there are people who lose money by investing their retirement fund. This happens when they retire at the same time a recession or stock market crash happens. And it's fucking unlucky timing.
If you invest $100, and the market falls to the point that it's worth $80, you will lose money if you pull your money out when it's worth $80. But after the fall, when the market recovers so your original investment is worth $120, and THEN you pull your money out... you will have made money!
In other words, timing matters. We explain exactly how this works here:
Wait... Did I Just Lose All My Money Investing in the Stock Market?
Now to address the second part of your question. You can avoid the risk of losing money by regularly adjusting your allocation. When you're young and many years from retirement, you can allocate your portfolio aggressively into higher-risk investments. Who cares if you lose money in the short term? As we explain in the link above, you don't actually LOSE the money until you take the money out of the stock market.
But as you get older and nearer to retirement, you want to lock in your gains by moving your money from high-risk investments like stocks to safer investments like bonds. That way when you get within a few years of retirement, you can kind of "protect" your investments from being overly affected by market fluctuations.
In other words: allocation is not a one-time activity. We explain this more here:
Investing Deathmatch: Stocks vs. Bonds
This was a big oversimplification, but we go into detail about all of this here:
Do NOT Make This Disastrous Beginner Mistake With Your Retirement Funds
If you liked this article, join our Patreon!
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Want to learn how to invest?
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I've talked about institutional traders, and in general there is a lot of public rambling about "you can't beat the big systems, they have latest-tech internet connections and literal atomic clocks" etc.
Here is a real-world example of what happened about 5 minutes ago
Stocks operate on an auction system: "I have 100 shares, I'll sell them for $1/each."
"I want to buy 50 shares, I'll buy the for $1.00/each."
"I want to buy 50 shares, I'll buy them for $1.02/each."
(me, slower than the second person) "I want to buy 50 shares, I'll buy them at $1.00 -- ARGH!"
If you're not an institution, your order needs to either fit within the pricing (had I said $1.01) or timing.
You can offer whatever you want, you don't have to increment your order by a penny, this is just an example.
Fictionalized accounts of the real world make it sound like you never win (hence the writing of this).
The truth is more, you win when you're lumped into the timing and price of an institutional order, which is very common considering the oceanic volume.
There is not 1 or 2 institutions at play. There are a lot, thousands, if not more.
And there are teams and individuals within each institution that are similarly competing internally.
I am not clamoring around my computer or phone waiting for the split second to scream "BUY" or mash buttons.
Which is a good thing because I have neither the patience nor temperament for something so dramatic and serious.
One of the ways around this is to have an open limit buy order (there are open limit sell orders too, which are the same thing in reverse). This can be for "today only" or "for the next 90 days" (other brokers may have different time frames, I don't know, I've always dealt with these two options).
You can also specify, for either, "only during the hours the market is open" or "extended hours, which is a little bit before it opens and a little bit after it closes, but only on market days."
Using an open limit buy order, set for 90 days, set for extended hours, using the above real-world example, my order is waiting for this stock to drop low enough to trigger the order automatically.
Which, if it does successfully, will be done in a batch of some institution handling their business or solo if I am pricing it between institution orders.
If this doesn't happen in 90 days, or if I get tired of waiting and want to do anything else with the money, I can say "you know what, cancel this."
The money goes from "pending" back into my account and I can pursue another opportunity or just withdraw it from the broker all together.
In either instance, 100% of the order funds return to me. There is no charge with my broker or the market itself.
I hope this has been another installment of demystifying the stock market! May you risks be tolerable, may your gains be mighty, may your losses be within your measured tolerances!
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