Your answer might be a clear “Yes,” in case you have loads of money and zero concerns about it—EVER—being depleted. Congratulations!
But in all other cases, I would recommend that you get yourself informed about how money (in general) and the stock market (in particular) work.
I know, rationally one should do that, but most people base their judgments of an activity (like stock investing) or of a technology, not only on what they think but also on what they feel about it.
If they like stock investing (like me), they would be moved toward judging the risks as low and the benefits as high, but if they dislike it, they would be inclined to judge the opposite—high risk and low benefits.
Under this model, affect comes prior to and directs judgments of risk and benefits. Therefore, investors need to pay special attention to biases that are produced from affect.
Let’s check what goes on in the generous “Bias-Generator” of ours, a.k.a. our Brain, shall we?
Neuroscientists have proven that we cannot separate emotions from decisions. In fact, our emotional systems need to operate normally in order for us to make good judgments.
So, how can I emotionally convince you to invest in the stock market?
Humans like being a part of a crowd as a crowd/group often bestows safety and reassurance.
Let’s see how many percent of Americans are already investing in the stock market? (I use the U.S. as there are ample statistics available for that market)
54% (Gallup Poll, Jan 2014)
Even more enlightening is the breakdown into income groups:
How many percent of people with a family income of more than US$ 75,000 own stocks? 80%
How many percent of people with a family income of less than US$ 30,000 own stocks? 15%
Do you believe that you can use money to grow money in the stock market?
No? Why not? What is there to worry about?
I have had discussions on those questions with friends and family members numerous times in the past, so listed below are the Top 10 common worries or excuses I always hear—about getting your hard-earned money to work for you in the stock market.
1) But I do FEAR stock market investments because they are RISKY!
In finance textbooks, “risk” is defined as short-term volatility. However, in the real world, risk is earning low returns (like in savings accounts) which is often caused by trying to avoid short-term volatility.
A broad index of U.S. stocks increased between 1928 and 2013, but lost at least 20% of its value 20 times during that period. Would you be less afraid of volatility, if you knew how common it was and will always be?
So, here are some more incredibly useful statistics: In the U.S. going back close to 90 years to 1928, stocks have crashed by 10% on average once every 11 months; and 50% every two or three times per century. And how have American stocks done? They had gone up more than 10,000% since 1928.
More than 10,000%. Impressive. But—you say—more than 95 years for that achievement is a very long time.
Ok, so let’s look at a shorter term case then.
Apple stocks increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. So you see, it is never a straight path upwards, nevertheless, the longer you have your money invested in the stock market, the lower the risks would be.
Volatility isn’t something to be feared since it’s part and parcel of investing. The fact that stocks crash once in a while is not an indication that something is broken, it’s just a phenomena that is as natural as night following day.
Jeremy Siegel, a finance professor from Wharton, once said, “Volatility scares enough people out of the market to generate superior returns for those who stay in.”
You know which camp I’d be in. See you on the roller-coaster.
2) But there are SAFER ASSET CLASSES, like BONDS!
Let’s hear what Wharton professor Jeremy Siegel has to say about that:
“You have never lost money in stocks over any 20-year period, but you have wiped out half your portfolio in bonds [after inflation]. So, which is the riskier asset?”
Stock markets are going up. Not always, but in the long run. Why? Because like you, most businesses, CEOs, consumers, and entire countries wake up each morning wanting to do a little bit better and make the world better off. Rising stock prices over time reflect their combined progress.
3) But there are HIGHER RETURNING ASSET CLASSES!
About 30% of surveyed Amercians believe that Real Estate is a better choice and 24% believe in God— sorry typo—Gold.
No doubt that real estate or Real Estate Investment Trusts (REITs) can earn a good return, but that comes from the rental income, not from appreciation. According to the data going back to 1890 from Yale economist and Nobel Laureate Robert Shiller, the real appreciation of home prices (after inflation) is 0.2% annually.
Too many Americans consider their home to be their biggest “investment”. That’s a big mistake because buying a house (or a bigger house) which generates no rental income would not net much after inflation, at least on average, according to historical data.
Gold isn’t much better in terms of return. According to Greg Makiw, a Harvard economist, the after-inflation return on gold going back to 1836 has only been about 1%. However, during the same period, stocks earned over 7% after inflation. Nevertheless, gold should have a role to play in your diversified portfolio, although not a leading one.
4) But it is NOT CERTAIN that the good past returns from the stock market will also occur in the future!
If you want to be certain, you should never get married. Nor should you change jobs. In fact, you might as well stay home as I do not know anyone who is certain of the future. That urge to be certain is really just procrastination.
Of course anything could happen over the short haul. In the short term, the stock market can be as unpredictable as a grapefruit’s squirt. But over the long term (and we are talking about prospering slowly), companies want to grow and deliver excellent returns for the shareholders, hence markets would go up.
So, rather than looking for quick gains, spend time instead, looking for good low-costs broad based ETFs that consistently deliver returns over the long term in tandem with the market.
It is as close to a no-lose strategy that you would find.
And do keep this quirky aspect of stock markets in mind: How is it that all past crashes are viewed as an Opportunity but all current (and future) crashes are viewed as a Risk?
5) But I don’t have the PATIENCE to stay invested for years without spending that nice growing nest egg.
If you have not heard of the term “compound interest” till now, do take a moment to let the following words sink in— it’s your best shot at building up the wealth that is needed to retire comfortably.
This is not a lie but an actual mathematical fact. Compound interest can grow your cash exponentially, if you put it in an investment that earns a high enough return rate and leave it there.
Just like a good wine:
“A guy pulls grapes off a vine, smashes them in his hand, drains the juice into a cup and says, “This wine is awful.” Someone tells him he needs to let it age first, so an hour later he says it still doesn’t taste like wine and gives it to his friend. His friend stores it in his basement for 20 years and has the best wine you’ve ever tasted.”
6) But I might later REGRET my decision to invest in the stock market!
Do not suffer from Regret Aversion. I propose that you speak with someone older than you and ask them about regrets. More often than not, they would tell you that their regrets are of not having done something. So do it.
7) But I can always start LATER!
Waiting too long to start investing would deprive you of the biggest asset that you would have as a beginner investor: Time.
Markets rise and fall over shorter periods, but in the long run, choosing investments that would steadily build in value would produce the wealth that would help you in the attainment of all your financial goals.
It’s obvious, but if you do not save, you would not be able to invest. Admittedly, saving can be difficult, but it is important— you can’t win the game if you’re not playing.
How long you stay invested for would likely be the single most important factor determining how well you would do at investing. Sadly, it’s also one of the most discounted and ignored traits.
Investor and financial advisor Nick Murray once said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.”
8) But I can’t AFFORD to invest enough to embark on the complicated stock market journey!
Can you imagine to save 20% of your monthly income?
If you are like most people, you would say, “No.”
Can you imagine to live with 80% of your income?
If you are like most people, you would say, “Yes.”
In truth, the above questions are a bit tricky since the outcome for both scenarios is the same. It’s just that the phrasing of the first question addresses your loss aversion bias.
But back to your savings goal.
Do you drink coffee? Regularly? Daily?
How is it that you can afford that?
Let’s understand the latte factor: a $5 latte per day invested instead—$150 every month—at age 23 could snowball to 0.9 million by age 65. Not bad, right?
Hmm, is $150 per month more than 20% of your income? Just imagine what $300 per month would snowball to by age 65.
To end up rich, one should save at least 20% of one’s income, make it a habit and stick with it for the long term because the foundation of all wealth is not get-rich-quick-schemes, but savings and adding to them regularly.
Live within your means and I assure you that everyone who can live on 80% of their income can become rich.
“The philosophy of the rich and poor is this: The rich invest their money and spend what is left. The poor spend their money and invest what is left.” — Robert Kiyosaki
9) But I am NOT CLEVER ENOUGH to invest in the stock market and time the right buying and selling points!
“The big money is not in the buying or the selling, but in the sitting.” said Jesse Livermore (legendary stock speculator).
Surprising, timing the exact buying point is actually much less important than the time you are invested in the stock market. Let the magic of compounding interest take its effect over many years.
Staying disciplined, adhering to your strategy and objective, and spending time in the market can overcome unfortunate short-time timing. And if you’ve time on your side and expect the future to be brighter than it is today, the time to invest is when you can.
Successful investors know their limitations, they keep their cool, and they act with discipline. And these traits have nothing to do with IQ.
If you think that investing is a game only for the rich, think again; not investing is a luxury only the rich can afford.
10) But I do save regularly: into my Savings and FIXED DEPOSITS accounts!
Putting your money regularly into your bank account is great—that means that you’re saving for the future. But there are compelling reasons why you should go one step further and start seriously considering the act of investing in the stock market.
Here are two of them:
Firstly, deposit rates nowadays are just way too low:
The current deposit rate, if you open an account with a local bank in Singapore, is only about 0.05% per annum (not much difference from other countries in this low interest environment). This means that you earn only 50 cents in a year for every S$1,000 you save in the bank.
It also means that the S$1,000.00 savings in your bank account would be worth S$1,051.26 after 100 years.
In contrast, the SPDR STI ETF (an Exchange-Traded Fund (ETF) which tracks the performance of the Straits Times Index) has generated an annualised return of 8.4% per annum since its inception in 2002. With a 8.4% annual return, a S$1,000.00 investment would be worth be worth S$2,248.51 in a decade; and S$3.3 million in a century.
This looks way more attractive than the S$51.26 in profit you would earn from the saving account, doesn’t it?
Secondly, future costs should not be neglected and should be taken into consideration:
Inflation would eat away at your money, working like a tax on your hard-earned money. Thus, you would need to invest your money in an Asset Class that has outperformed the average inflation rate. Like the stock market.
In a nutshell, whether you choose to invest in local stocks, foreign stocks, or both, the important thing is that you do invest.
If you do not, I assure you that you would not benefit from any gain, be it 10, 20 or 30 years down the road.
And as a reward for reading up till here, here are two short video-clips:
A: Future You Kicks You
B: Future You Hugs You
Which do you prefer: Scenario A or B?
Disclaimer: I am not too fond of whole life insurances (too much of the premium payments goes into feeding the multiple hierarchical layers of an insurance company) and it is definitely not my intention to promote insurances (like the company in the videos does), but the videos do a good job in bringing across the message about how a decision at a young age will make a vast difference to one’s personal future.