Don’t Be Afraid of the Stock Market
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:
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. You may be thinking if I get in the market right now and get some Amazon or Tenbagger Aktien shares, how do I know that I’m not buying at the top of the market? How do I know it will keep going up? For that you would need to analyze trends as well as company news to get an indication.
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. Again, this has to do with analyzing trends and your willingness to go ahead.
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!
I agree; there’s just no arguing with the historical returns. So these days, I’m just buying index funds with money that I won’t need for a long time. I think that’s the key, like you say. Set it and forget it. History shows that the money will grow at a nice pace!
Time tested strategy; it’s kind of like if it ain’t broke don’t fix it. There will always be ups and downs in the market – that needs to be accepted….the latter most likely coming soon. But if we set our horizon far out and stay consistent, we should be ok.
I agree. The whole “the stock market is gambling thing” is a fallacy. If I gamble $100 on a hand of poker and lose, its gone forever without a way of getting it back without putting more money on the table. If I put $100 in the market and the price drops 99%, that “loss” isn’t realized until sold. I could just wait until it goes back up to $100 or even higher and actually turn it into a gain. You can keep it in the market for as long as you want. You don’t lose unless the company goes under or you sell. However, if you sell then you can write off losses on your taxes up to a certain amount and its basically a wash. The stock market is safe if you understand it, no need to be afraid. Thanks for sharing.
Absolutely! And guess what? The more you read about it the more you realize what’s safe and what is safer. A lot of regular working people don’t invest in crazy penny stocks or high risk alternative investments so those types of vehicles don’t really apply to many of us. I have a couple of investments experiencing some loss, but I have no need to sel them. Even if I do claim a loss, it will be minimal and like you said the tax loss helps 🙂
Your charts showing the returns say it all. But you need to make sure you have a long term mindset and understand that there may be some short term fluctuations that may cause you to pause. Avoiding the noise and focusing on the end game will help you erase those fears.
Bert
Avoiding the noise is the key…definitely easier said than done. A lot of people that invest have a natural and human tendency to be interested in their investment and possibly the whole market. That can be stressful at times. But as your saying taking a long-term view helps to calm those jitters 🙂
I started investing around the same time you did – mid 20’s. The funny thing is, I have never been scared of the stock market, because up until a few years ago, I had a long-term horizon before I could even access the funds – about 30 years from now. Nowadays, though I do have to consider the short-term in ER planning, I still have the all-in mentality. I just consider that I haven’t lost anything until I’ve pulled out of the market, which helps me sleep at night.
By having that long-term mindset does provide comfort and helps us sleep at night. Short-term gains and stress I’d say have a high relationship. But for my ER planning, I prefer to have cash instead, invested in a money market account. I could consider putting some to use in a bond ETF I suppose; something to think about 🙂
Hi, I think share market is risky but risk can be handled if we look for professional help. Thanks for sharing this informative piece of content.