On Friday I had lunch with a former student of mine. I will call him James (not sure why, I just like the name James). James and I were discussing my new blog and what inspired me to write it. We were talking about finances a bit more and James informed me that he has no intention of investing because he doesn’t want to lose his money and he thinks the stock market is rigged. No matter what statistic or fact I cited James was unmoved. He felt like he needed to keep his money liquid in case something happens.
I can respect James decision to keep some of his money liquid, but I just don’t his total problem and/or fear with investing. Frankly, I think James is like a lot of people. I get it. 2007-2009 was a really scary time and a lot of people lost money. I lost money during this time. My investment balances went down, but I didn’t get out my investments or move them to cash. Unfortunately, many took the money they were investing out of their investments, stuck it under their proverbial mattresses, and missed market gains of over 300% in the past five years.
If investing scares you, that is fine. You don’t have to rush in with both feet, but the longer you wait (like James who is in his early 30s and hasn’t begun to save for retirement) the more you have to save in the future to catch up.
If investing scares you, first ask yourself why? Is it because you don’t understand it? Is it because of a bad personal experience? Is it because of no experience with it? Whatever the reason it’s important to understand what kinds of fears we might have toward investing and the stock market. I have fears in the stock market. I don’t want to lose the principle I invest. But I am more scared of not having enough money to take care of my family into the future. I am more afraid of not being able to do or the potential to do items I want in life (e.g. travel even more, live abroad, etc). Finding out what level of fear one may have can help us adjust us what kind of investments you can put your money into because there a plethora of items that are less risky and can help secure your future.
Second, if you are still scared then smart small. Begin by putting a small emergency fund aside; money that you can access it fairly easily, but it is for EMERGENCIES ONLY (like your car engine blows up, not getting groceries or a new TV). I keep part of my emergency fund in an ALLY savings account that I can get within a day or two if I need it and the rest in a Roth IRA (a post for another time). Once that is done and you can determine how much you want for emergencies. You don’t have to thousands of dollars initially, maybe just $500 or $1000 to start with.
Then it is time to start investing. I think everyone should try to invest. If you are like James and put all of your money in the bank. You will maybe get a return of 1%. That return is less than inflation of 2%. In essence, you are LOSING money because your savings aren’t even keeping up with inflation. You don’t have the purchasing power you did the year before. So while your money still might appear in your savings account you are losing money.
So maybe begin your investing with your workplace. If you have a retirement plan at work, sign up for it IMMEDIATELY! Make the saving automatic (e.g. monthly withdrawals from your paycheck). You won’t miss it and will learn to live without it. And most employers, if they offer a retirement plan, offer a monetary match. Meaning that if you put in 5% they put in 5% or whatever it is. That is FREE money! Why would you pass that up? Especially considering that it will grow over a 40 to 50 year period.
If you don’t have a retirement account you can access at work you can open up an IRA or a ROTH IRA at any financial institution (my money is with Fidelity) and it doesn’t cost you anything. You can do it on your own. Smart small with like $100 a month. Most people can cut something out of their daily lives (e.g. Starbucks coffee or you daily lottery ticket) that will net them $100 a month. Make the saving automatic by having it taken from your bank account every payday or the day after, it will pay off in the future.
Once you start to put some money away then you have to decide where to put that money. I will recommend different funds I like in future posts, but here you need to decide what kind of risk can you handle. I am a person who can handle a lot of risk. When the 2007-2009 stock market crashed I was really scared, but I stayed in. I bought the market. I continued to invest and it is paying off huge now and will into the future. I have most of my money in stock funds that can be really volatile.
You don’t have to be me. You can stick it in safer investments, a subject I hope to talk about in the future. But you have to do some of your own research. It doesn’t take that long. It only takes a few minutes to learn some basic concepts (e.g. mutual fund, ROTH IRA, etc). Investopedia is a great website for financial morons like myself and could be for you.
The point is that you start saving and investing and you do it on purpose. The stock market will go up and it will go down, a lot. There will be extended periods of a down turn. But that is part of cycle of any economy. But I believe over time (5, 10, 20, 40 years) that my investments will continue to make money.
If you were to pick any day over the past 50 years in the market 75% of those days would be positive. Those are pretty good odds. The stock market has gained an average rate of just over 10.75% for the past 140 years. Even if you disagree with that figure, stock market investing has generated a greater return than investing in real estate, precious metals, and/or other commodities. You are still going to be doing a whole lot better in the long run than losing 1% by keeping it in a savings account.
Now past is not prologue, but I believe in the markets. I believe that the average person, like me, can make money by investing. I believe that it takes a little time to educate yourself, open an account, and most importantly making your saving automatic. It doesn’t have to be big. It can be small, $50 or $100 a month. Once you get more comfortable you can then increase your savings over time.
Albert Einstein was supposedly quoted as saying that compound interest is one of the greatest forces in the universe. Not sure if he said that, but over time, just a small amount of investing can be turned into tens, if not hundreds of thousands of dollars. This article does a great job of summing up many of my beliefs about the market and investing.
Ultimately, investing in the stock market is about creating freedom. Freedom to secure the future for my family. Freedom to not have to worry about money. Freedom to send my kids, if we have kids in the near future, to the school of their choice. Freedom to not worry about being replaced by robots. I have no one to depend on but me. The three-legged stool of retirement is now two legs and one of those legs (Social Security) is wobbly at best. I want to give myself a better financial foundation for the future. Money doesn’t buy happiness, but it does provide some semblance of freedom to be the master of my own destiny. That is what I want for others to be the masters of their own destiny.
I understand James decision to keep all of it in the bank, but I think James is missing out.