Many people fear the stock market. They think it’s a casino based on what they see in the news and hear from other people. They don’t understand how it works or don’t know what an investment means. They fear they will lose all of their money – the fallout from the Great Recession in 2008 is still etched in their memory. Millenials (my generation) in particular are fearful and distrustful of the stock market.
The truth of the matter is that the S&P 500 (consisting of the 500 largest publicly traded companies in the US) has returned 250% (17% annualized) since the depths of the Great Recession.
From 1928 to the end of 2016, the S&P 500 has return around 11% annually. A $100 investment in the S&P 500 in 1928 at a 11% rate of return would be $973,693 today (not accounting for taxes and inflation)!
So clearly, the US stock market can generate significant wealth for people.
But how do people overcome the fear and distrust of investing in stocks? The following are some ways:
- The US stock market isn’t some mythical or other-worldy thing. Rather, it consists of the shares of some of America’s finest companies. You’re buying an ownership stake in actual companies when you invest in a stock. You’re even buying ownership into actual companies (albeit indirectly) when you own mutual funds or ETFs. For example, when you buy shares of Apple, you’re buying an ownership stake which gives you a claim to a portion of Apple’s profits and assets. So part of the profits of every iPhone or iPad sold are yours. When you think of it this way, you realize that you’re an actual owner of the company and you take pride in your ownership. You want to see more Apple products sold. You support the company.
- If you don’t feel comfortable investing in individual stocks or don’t understand enough about them then you can consider buying ETFs. ETFs are publicly traded stocks that own a basket of stocks. This allows you to diversify while at the same time participating in the stock market. I’ve outlined some ETFs in my post here. The stock market can be extremely volatile – meaning that it goes up and down a lot so investing in individual stocks can be psychologically difficult to do. If you can’t stomach the stock market swings then investing in ETFs may be better than individual stocks.
- But I might lose money in the stock market! Yes, money can be lost in the stock market. My personal experience and research has shown me that when shares in solid companies (e.g., Coca-Cola, Johnson & Johnson, Nike) or ETFs are purchased and held for the long-term meaning 10, 20, 30 years, you come out ahead. Why? Because over long time frames such as decades, the US stock market increases in value. It should beat what you get in a savings account (assuming interest rates don’t sky rocket). The stock market may decrease in the short-term such as over the course of a few years because of volatility. However, over longer time frames, the stock market increases. Why? Because over time companies grow as the US economy grows. Companies sell more products and earn higher profits, making them more valuable over time. Therefore, it’s important to maintain a long-term horizon when investing in the stock market. Whenever I invest in individual stocks or ETFs, I plan to not touch the money for at least 10 years (minimum). I consider the money gone. If I want to save for the short-term, I put my money in a savings account or certificates of deposit – it is easy to take money out of these things. If I put money that I need for the short-term in the stock market, I may come to regret it because I may need the money when the market is down.
- There are times when the stock market could be down 30%, 40%, or 50% from where I purchased. This can happen when there’s a recession or depression or some other terrible event happens (e.g., a war). I have tried to mentally prepare for this. It means that the value of my investments has gone down. However, I haven’t permanently lost any capital since I haven’t sold anything. It’s just a paper loss. As long as the companies I’ve invested in continue to make money, their stock value will eventually come back. The US stock market has been through various crises – World War 1, the Great Depression, World War 2, the Vietnam War, the Gulf War, the Cold War, the Dot-Com bubble, and the Great Recession. The US stock market has come back stronger than before each of these events. Not only do I plan to not sell during a market crash but I’ve prepared to purchase stocks during a market crash. A market crash presents the best opportunity to buy stocks.
- What if the company that I invested in goes bankrupt? This risk exists but this is exactly why it is important to diversify into a basket of stocks if you buy individual stocks. I also own a variety of ETFs to make sure I protect myself against ETF providers going bankrupt.
- What if the US stock market crashes and goes to zero? If the stock market goes to zero then the world likely has bigger problems. The stock market is one of the pillars of the world economy and it is how companies raise capital to get bigger. Without it, the world economy would likely be crippled. So barring a world-wide catastrophe, the odds of the US stock market being completely wiped out are extremely low.
- Investing in the stock market is one of the best ways to build passive income since it is one of the most accessible and cheapest ways to invest. Brokerage and investing fees have been coming down over the years making investing cheaper than ever. Here is a great resource for finding brokerages that charge little to nothing to invest if you only have a small amount of funds.
The stock market shouldn’t be something that is feared. Rather, it should be embraced because it can build great wealth. It can bring a person closer to financial freedom then other paths.