Why the Stock Market Is Less Scary Than You Think

It’s common to hear that the stock market is like gambling. However, that assessments miss the mark for a few important reasons. Before I dive into those reasons, I think it’s important to outline why it’s important to feel comfortable with the stock market.

If You Want to Retire, You Need the Stock Market

First, I’m guessing you want to retire one day. Working until the day you die is rarely anyone’s vision of a good time. However, it’s virtually impossible to save enough for retirement without investing. You’d need to make a really high income and save a high enough percentage of that income to account for both inflation (which has averaged 3.8% over the past 50 years) and living for potentially 30+ years beyond your retirement date.

The stock market is the only method for reliably beating inflation and earning relatively high returns over time. Crypto is more volatile than my stomach on bread (given my Celiac’s). CDs, Money Market Accounts, and savings accounts virtually never beat inflation. And real estate tends to beat inflation, but only by a little bit. For detailed information on this, see this article.

Real estate is also not very liquid. In other words, it’s not very helpful if you need money right away. That is, unless you rent out properties and make a reliable profit. Plus, real estate involves a lot of start-up and phantom costs like repairs and taxes. So it’s a tough option to rely on unless you have a hefty financial cushion.

Plus, investing can yield incredible gains because of the power of compounding. Financial author Michael Gilmore (the Seven Dollar Millionaire) found that you would need to invest only $7 a day starting at the age of 16 to reach $1 million by the time you’re 65. That means if you invested $125,195 for about 50 years, your investment would multiply almost 8 times by the time you’re 65.

So Why Should You Trust Investing?

There are a few reasons that investing gets a bad rap, but is more trustworthy than you think.

Investing Is Not About Buying Individual Stocks

First, when I talk about investing, I am not talking about buying individual stocks. Buying individual stocks can be fun. However, most financial advisors recommend buying individual stocks with “play money.” That is, money you are okay with losing. The performance of individual companies is too temperamental to rely on for a big part of your portfolio. CEO scandals, product recalls, supply chain issues, changes in consumer preferences, and so much more could all suddenly tank your investment with little warning.

Instead, when financial advisors (and myself) are talking about investing, they’re usually talking about investing in index funds or exchange traded funds (ETFs). In doing so, you invest in a wide swath of businesses. It might be the 500 largest businesses in the U.S. if you invest in the S&P500, a collection of small- and medium-sized businesses if you invest in the Russell Investment Index, or tech companies if you invest in NASDAQ, to name a few.

When you invest in index funds, you are saying that you believe that, over time, the value of a large, relatively diversified group of companies will increase. It may not increase tomorrow, it will experience bumps in the road, but the value will increase more than it decreases over a long period of time. And that’s a pretty safe bet.

Investing Does Not Require a Lot of Knowledge

This was the part that scared me the most about investing. It sounds so complicated and scary. However, smart investing is extremely simple. Most of us mainly care about investing for retirement. So that’s the kind of investing you should focus on first. Though see the graphic below for how financial advisors recommend you order your investments if you have beaucoup bucks.

Generally, financial advisors recommend investing 12-15% of your pre-tax income for retirement, which can include any employer match. Those investments should go into a 401K, Roth IRA, or Traditional IRA which should be largely made up of index funds/ETFs. As you get close to retirement, you may want to move some of your investments into bonds (which are safer but make less money).

If all of that sounds intimidating and scary, you can invest in a target date fund. Target date funds do all the work for you. You enter the year you plan to retire, the amount you want to invest (either one time or at a specified interval), and they invest your money in a diversified group of funds, making those investments more conservative as you approach retirement. Vanguard has great target date funds that have reliably performed well and include a good mix of investments. For more info on retirement investing, you can check out this post.

And if you’re excited about investing outside of retirement, check out this guide.

Bumps Are Expected, So Is An Upward Trajectory

Over the course of the New York Stock Exchange’s 200+ year history, the stock market has followed very consistent patterns. It usually drops by 10% every 1.6 years and 20% every 4 years. However, even with these drops, it has averaged a 7.31% annual return over the past 30 years, after being adjusted for inflation. So don’t get too scared of downturns. If anything, it means that you get to buy stocks on sale. As Warren Buffet famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

Big Fees Are a Thing of the Past (If You’re Careful)

In the past, mutual funds were the big darling of the financial world and key for diversified investments. However, the downside of mutual funds is that they often come with hefty fees. Mutual funds have high fees because they require management to buy and sell under- and over-performing assets and keep things diversified. On the face of it, they might not sound hefty. However, a 1% fee, which is common for mutual funds, translates to huge investment losses over time.

To paraphrase an example from Investopedia, if you invest $6000 in a Roth IRA and invest that money in mutual funds with a 1% fee, you’ll earn an expected $87,199 after 40 years. However, if you invested that in an index fund with a 0.05% fee (which is pretty typical), you would have earned $127,765. And mutual funds don’t outperform index funds. In fact, over a 10-year period, 92% of mutual funds did the same or more poorly than index funds.

As mentioned above, however, index funds and ETFs are where it’s at. They both have very low fees and are diversified. For example, you can get an index fund and an ETF based on the S&P500 which will include the 500 biggest companies in the US and will automatically update itself as companies enter and leave the index.

Summary

In conclusion, investing is super important for your financial health. It’s also less scary than you might think. The simplest investment strategy is the best one for 99% of people. Invest in an index fund, ETF, or target date fund. If you’re investing for retirement, you can do this within a Roth or Traditional IRA or your 401K. You don’t need a lot of knowledge, you just need to be consistent and stay the course if things get scary.

Bumps happen a lot. But there has never been a decline that the stock market has not recovered from. Unless you expect the complete decimation of all the biggest businesses in the U.S., it’s very likely that that upward trajectory will continue. The far riskier strategy is betting that you can save enough money to last you 30+ years of life and inflation if you do not invest.

So if you’ve felt hesitant about investing or even if you are invested in, for example, a 401K but feel too intimidated to explore what you’re actually invested in, I highly recommend doing some research yourself. After all, who doesn’t like making money while you’re just sitting around?

If you liked this post, please consider liking, subscribing, or sharing with others. I always really appreciate it. And remember that I am not a financial advisor or financial professional. Please consult with a professional before making any financial decisions.