Don’t Be Afraid of the Stock Market

Reading Time: 5 minutes    

Perhaps one of the biggest financial mistakes I made was not entering the stock market at an earlier age. When I entered the market I was in my mid-20s, but I wish it was sooner. I didn’t enter before that because I was simply afraid. I was afraid because I didn’t know how the stock market worked. I thought you needed a Finance degree and an MBA from a big business school in order to understand the stock market and to make money from it. Well I’m here to say you don’t.

 

There are people out there who don’t have a high school diploma and are millionaires who from the stock market. Of course I don’t encourage anyone to drop out of school and invest what they have in the stock market either. But if you are in school and are studying in an unrelated field, you should still take some time to understand the stock market and begin investing early.

 

Historical Evidence

 

So 2008-2009 were extra awful right? But let’s assume the worst and say that’s when you actually got into the market with a $10,000 investment. Here are the returns from 2008 up until 2016 for the S&P 500:

 

simple money man returns history

 

These returns average out to 9%. So your $10,000 investment would have done horrible in an ETF in 2008. But it would have bounced back and BIGTIME based on the positive returns we have experienced over the past recent years. Check out this projection from Nasdaq on where your $10,000 would be today:

 

You’re $10,000 would have returned almost $15,500 – a 55% return; way better than a savings account yielding less than 1%.

 

Recently I read 10 Golden Money Tips by Financial Advisor Jacob Nayman. His Golden Tip number 4 was to focus on making money not percentages. In this tip he illustrated the importance of earning solid returns on less riskier investments. That is, many investors will put a larger sum of their money into a safer investment and overtime will earn more from a lower yield than putting money into a riskier investment.

 

This is because the initial investment amount is lower on the riskier investment (because we are not comfortable with the level of risk) and sold as soon as a profit is made. Therefore, the profit is lower too. An extreme example of this could be day trading where people are in and out of positions on the same day. There are chunks of money to be made, but in this case the risk is high.

 

 

No Crystal Ball – No Problem

 

We all know the stock market is flying at all-time highs right now. As a result, if you’re not invested you may be thinking if I get in the market right now, I’m going to get ripped off due to these arguably inflated prices. Maybe you’re thinking why not wait for it to drop and buy cheap. Well that may be a good idea too, if you know how to time it.

 

s&p chart simple money man

 

This S&P chart from macrotrends shows that if you entered the market in January 2003 when it was low at around 1,152 then 10 years later in January 2013 it would be at 1,592 a 38% increase. But how would you know when it’s time to go in? No one knows for sure, but based on past history, the market will continue to benefit long-term investors.

 

David Hays, president and founder of Comprehensive Financial Consultants says that overvaluations can be a good thing as it can encourage investors to buy more. This is because according to Hays “when stocks are cheap, investors get cold feet and end up missing the boat even though that’s the best time to buy.”  A way to hedge against this would be to start off with smaller investment amounts until you are comfortable with investing, the language, the ratios, the fees, the dividends, and how taxes come into play. I’ve actually read this on other personal finance sites too where investors are strategically deploying funds at every dip of 1.5% to 2%. Yes ofcourse the market can drop more, but at least you are using some form of logic and hopefully still investing for the long-term as part of your strategy.

 

Moneywatch says that all you need to know is that the stock market fluctuates in the short-term, but can earn you an average of up to 10% in the long-term. So if you’re looking to park your money for the long-term, which is most likely retirement, the stock market is a great place for that. The best thing is to get in and leave your money alone. Turn on reinvestment for dividends and almost forget the money is even there. It’s good to periodically check and make sure the dividend payout is accurate, your allocation is going according to your plan and if not rebalance and still stay invested.

 

If you’ve enrolled in your company’s 401k and have maxed out, but still have money left over to invest, lucky you! 🙂 The next logical step would be to open up a brokerage account and invest in a total market index fund and for free! Free meaning you don’t have to pay any commission to invest. This is offered by Robin Hood, an online brokerage where you can simply use your smartphone to invest.

 

 

So are you invested in the stock market? If so, what made you dive in? If not, what’s holding you back? Is it debt or are you waiting for big correction? Do you have any tips for others that are apprehensive on entering the market?

 

_________________________________________________________________________

 

I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!