…fear ourselves
Why? Surely if anyone is on our side it’s by definition US!
Sadly, any addict and many love songs prove otherwise, also with investing there are a number of ways we’re our own worst enemies.
What are the ways we sabotage ourselves, and why do we do it?
1. I’ll make a killing in the stock market because…
…Someone will pay me more for this stock than I bought it for.
That’s sort of true, since prices strongly tend to rise over the long term, but in the short term, you’re on your own, and the math is against you. Plus, why buy an individual stock vs. a mutual fund, and how could you know which stock to buy? If you think you have a good answer, keep reading.
…That’s what the market is for–it makes smart people like me rich.
A very common belief is that the source of profit from stocks is that someone will pay you more for a stock because someone else will pay them more for the stock. This is the Greater Fool Theory. Namely, whatever price you pay is irrelevant, you just need a greater fool to pay you more. Those are “speculative profits” and if you add them all up they are equal to zero, since every winner requires a loser. Worse yet, you stand a good chance of being the last fool in line, since you don’t have millions of dollars of hardware and software to jump you in and out of the market in microseconds. The real source of return is that companies earn money for the stockholders. That’s a winning game, not a zero sum game, but you have to be a long term investor.
…I’ll use my skill, experience, or intuition to figure out what to buy or when.
This is a staggeringly bad idea. For 2004-2013, after tax annual returns were .2% for active traders instead of the S&P 500’s 5% per year. An investor in an S&P Index Fund would double his money in 14 years, but the active investor would require about 35 years to do so. More often confident in their stock picking ability, men trade 45% more than women and earn 67% less. If someone were to have inside information, it would be illegal to use it. Luckily, it seems clear than no one knows magic stuff about market timing.
…I’ll pay someone to use skill, experience, or intuition to figure out what to buy or when This is the same bad idea, only worse, since you have to pay for the bad advice. Professional investment managers do poorly trying to outperform the market. Worse yet, one year’s top tier “smart” fund manager is far more likely to go to lowest tier performance next year than to have a second great year. If you buy an S&P 500 Passive Index you don’t have to care what happens to any individual stock. Your eggs are not all in one basket. You also don’t have to hugely reduce your returns by paying for someone’s bad guesses. Professionals and amateurs trade too often and reduce their return.
2. I’m staying out of the stock market because…
…it’s just gambling
Some people do indeed try to gamble with the stock market, which is a waste of the 8th wonder of the world. You could also use your car as a refrigerator and be disgusted by its poor job in keeping the milk fresh but that’s not fair to the car. The stock market works well if you use it right. Invest for the long term in low cost mutual funds.
…I don’t know what to do
It’s simpler than you think. See my articles below.
…The system is rigged
Well, over the long term the odds are hugely in your favor, passive index funds often charge only .05% in expenses, and you can handle almost everything automatically. Yes, the system is rigged–in your favor. Let’s not talk about day trading though. That’s really bad for the little guy and even most of the big guys. Read my wife’s review, Behind the Scenes at the Stock Exchanges.
…I don’t want to spend every day managing my investments
Excellent, you have exactly the right attitude. Investors who could only adjust their investments every 5 years made twice as much money on their investments as those who could change every month. You should set investments up and leave them alone for a long time, so you don’t lose money by overreacting.
… I don’t make enough money
Refusing to make money because you don’t have enough money? If you make enough to barely pay the bills that’s enough to start investing. If you can put aside money to pay credit card bills you’ve shown that you can save to help the bank, so surely you can save to help yourself by investing. Read the articles mentioned below on how to start with a little and gradually increase.
…I’m overwhelmed by information.
You don’t need all that information; it just gets in the way. Read the articles listed below.
…There might be a crash.
Of course there will be and nobody knows when, but you don’t need to know. “Wall Street indexes have predicted 9 of the last 5 recessions.” If you sit on the sideline instead of investing long term, you’ll miss out on what those of us who’ve gone through crashes have found. Patience is rewarded. If you sell at a loss you lock in the loss. On the other hand, if you wait long enough, you see recovery. With the 2008 crash it still only took a couple of years. Since markets strongly tend to increase over time, prices will almost always seem high at the moment, but there’s no point in waiting for them to go higher.
Articles on getting started in investing:
