Ask the Expert text

Understanding the Stock Market

Ron Baron Illustration
Illustration: Joel Kimmel
" " Investing in financial markets can seem intimidating and risky for the ordinary person. Ron Baron ’65 is chairman, CEO and portfolio manager of Baron Capital, which he founded in 1982 and is famous for its annual investment conference featuring performers such as Paul McCartney, Barbra Streisand and Chris Rock. Baron says regular investors can use a fairly simple approach to take advantage of the power of the U.S. economy and achieve long-term financial success.
What exactly  is the stock market?
The stock market reflects the value of businesses that comprise our nation’s economy. The U.S. stock market has increased on average about 6.6% annually since 1966, the year after I graduated from Bucknell. That appreciation closely mirrors the growth of our economy.
Should ordinary folks invest in the stock market?
Yes, absolutely. Investments in stocks are a hedge against the declining purchasing power of your savings. In 1966, the stock market nearly reached Dow Jones 1,000 for the first time. The Dow Jones is now 34,000. That over 34-fold growth has come despite foreign wars, financial panics, recessions, market crashes, political assassinations, inflations, impeachments and a political insurrection.
Should small investors try to pick individual stocks?
A wiser strategy is to invest in the market itself. Few investors have been able to outperform the markets. Index funds, which are the market, are expected to provide annual returns of about 9% including dividends. They are a terrific long-term investment for you and your family.
Should people worry when the stock market goes down?
Bad news and so-called bear markets have provided you with the best investment opportunities over the past 50 years. Be optimistic about the prospects for our country.
What is your  best advice for investors?
Invest for the long term and add to your investment every year. Follow a process called dollar-cost averaging, where you invest a certain amount of money on a regular schedule, regardless of whether the market or your investment’s share price is up or down. And don’t worry too much about news reports that often are unrelentingly negative.