Why you shouldn't be afraid of the stock market
So many people I talk to have a deep-seated and, frankly, irrational fear of the stock market. As far as I can tell, there are a number of reasons for this irrational fear of investing in securities.
The first is probably the most obvious: less than 10 years ago the global financial crisis sent stocks plummeting and many investors running to their brokers to “sell, sell, sell!” Investors around the country, from grandparents to recent college grads, saw their nest eggs dissolve to nothing as the talking heads on CNBC and the like kept telling us the end was nowhere in sight. After all of that, many people swore off stocks for good; writing them off as unnecessary gambling in favor of ‘safe’ investments like bond, real estate, or gold.
Second, we’ve probably all met the office day trader. You know him or her because, just like any other compulsive gambler, he or she has major mood swings from day to day and those mood swings tend to match the numbers running across their Yahoo! Finance homepage. They might have a personal favorite stock that they just “believe in” and maybe they bought it on margin so they could get even more of the huge upside they know is right around the corner. I even heard one story about an airman who was overpaid for a few months and invested this entire unexpected windfall in…Lehman Brothers. Needless to say, she was not happy when the Finance office realized their mistake.
Lastly, stocks are complicated. P/E ratios, trend analysis, market caps, IPOs, who has time to learn all of this? Maybe really smart people with lots of letters after their names can make money on stocks, but average Joe and Jane are just going to get fleeced trying to play this game. Sticking to something simple and understandable like CDs or savings accounts is the way to go, right?
Stocks are not complicated. By buying a stock, you are simply buying an ownership stake in a business. But, I’m not here to recommend buying individual stocks. Instead, we have the amazing power to avoid having to do all the fundamental analysis and instead only buy the very best stocks the United States and the world have to offer. It is 2017 and we have index funds. Index Funds are funds that you can buy into that in turn buy every single stock in an index. The S&P 500 is one of the most popular indexes to follow, it tracks the 500 largest companies in the United States. By buying an S&P 500 index fund, you easily take partial ownership of every one of those 500 companies. Awesome, right? I’m one of the owners of Apple, Wal-Mart, and McDonalds. ‘Murica!
Don’t do anything fancy. Don’t buy on margin, don’t buy options, don’t try to time the market. We are investing, not speculating (aka gambling). People get into trouble with stocks when they decide that they can play stocks like they play the slots. They get into even more trouble when they decide to take out loans to buy stocks.
Do you think the United States will continue to be a major world power with a correspondingly large economy in 20-30 years? If yes, you shouldn’t need any other argument to start investing in the stock market. Stocks are inherently volatile, so this is why your stock investments are for things that have a long time horizon. You shouldn’t be investing your next house down payment or the money you have set aside for car repairs in the stock market.
In the short term, the stock market is extremely risky. However, if you have a goal with a long time horizon, say 10-20 years until you want to retire early, stocks should play a large roll in your investing strategy. The beauty of the long time horizon is that you can weather the ups and downs between now and your goal. If history is any guide, we will continue to see 5-10% returns in the market on average just as we have since its inception.