A 2017 Gallup poll showed only 54% of Americans invest in the stock market, down from 62% in 2008, just before the Financial Meltdown. It means 46% don’t invest. And there are probably a fair number among the 54% who do invest, but just barely.
What keeps more people from investing in the stock market? Some of it undoubtedly has to do with personal finances.
For example, statistically, people with lower incomes are less likely to invest. It’s probably also a safe assumption people with a lot of debt also avoid it.
But what about the rest?
For a lot of people, the real issue is fear! There are a lot lies about investing people actually believe. Unfortunately, it only takes one to keep someone from investing.
But there are at least six lies that are making the rounds, and keeping a lot of people out of the market.
Let’s dissect them – and dismiss them – one at a time.
1. Investing is Risky
This lie is actually partially true, which is why it stops so many people. After all, stocks are risky. Just as they can rise in price, they can also fall.
But stocks don’t stay down – ever, and that’s the part that gets left out.
When you invest money for the long-term – and that’s the only way you should – you’re playing the averages. And those always work in your favor.
Taking a look at the very long-term, $100 invested in the S&P 500 in 1928 would have grown to nearly $400,000 by the end of 2017. That translates to an average annual rate of return about 9.8%.
If you invest your money in a portfolio that consists of 60% stocks and 40% bonds, you can easily achieve an average annual return of greater than 7%. And you’d be doing that with a pretty conservative portfolio.
2. I Will Lose All of My Money
Probably everyone knows a story of someone who lost all their money on an investment. That’s certainly scary, but there’s probably a good reason why it happened.
In most cases, a total investment loss happens for one of two reasons:
- The person invested all their money in one or two stocks in the hope of striking it rich, or
- The person invested in something they knew nothing about, often on the advice of someone else.
You can cut your chances of losing all your money just by avoiding those two mistakes.
If you invest in a diversified portfolio, which is the only way anyone should, there’s historically no evidence you’ll lose all your money.
Let’s look at a recent example. During the Financial Meltdown, the stock market took its biggest fall in more than 75 years. From October, 2007, through March, 2009, the market lost 54% of its value.
That’s a worst-case scenario.
And while a 54% decline is certainly bad, it doesn’t approach losing 100% of your money. What’s more, if you had 60% of your portfolio in stocks, and 40% in bonds, you would have only lost about 54% of the 60% invested in stocks. The 40% bond allocation would have been unaffected. Your actual loss would only have been 32%.
That’s the bad news about that market. But there are actually two pieces of good news that are even more significant:
- The 2008 crash lasted for only 17 months.
- The market is up almost 380% in the nine years since the bottom of the crash.
If you simply ignored the crash, and held through it, not only would you not lose any money, but you’d actually be well ahead.
Invest the right way, and you’ll never lose all your money.
3. It Is Way too Complicated to Invest
This is another lie that lives on, partly because there can be some truth to it. I’ve heard them, we all have, those investment advisors and talking heads that speak some language other than English when they talk about investing. They’ll ramble on, using cryptic terms like beta, standard deviation, and correlation coefficient.
It’s all designed to impress their peers, to impress themselves, and to convince listeners and readers they know more than they actually do.
If you spend too much time taking in that kind of input, investing is way too complicated.
But it’s also not true, at least on a practical level. Sure, you should never invest in anything you can’t explain to your grandmother. But that mostly takes in exotic investments, like cryptocurrencies – and hopefully you’re not getting tied up in those.
But please understand, you don’t need to be an investment genius to invest. The investment industry has made tremendous progress in the past few decades. Through the use of mutual funds, exchange traded funds (ETFs), online investing, and automated investment services, simple investment is now available for the average person.
And you can find it everywhere.
In most cases, all you need to do is fund your investment account on a regular basis, and all the complication will be handled for you. That’s as easy as it gets, and that’s why you shouldn’t spend any more time on this lie.
4. It Is Too Time Consuming
There’s a strange breed of investor known as a day trader. They’ve come into existence largely as a result of computerized investing. You’ve probably seen some infomercials on this type of investing, and maybe you even know one or two people who have done it. And for those people who participate in day trading it’s very time consuming.
They spend the day parked in front of their computers, pouring over reams of technical information, including charts, analyses, and other data that defies rational explanation. They move their money in and out of stocks, sometimes even within minutes.
If that’s the image you have of investing, then yes, stock market investing is very time consuming.
Only a very small number of people engage in day trading. It’s not even certain they’re successful over the long term.
But that’s not the type of investor you need to be, or should even want to be.
Instead, you need to be a passive investor. That someone who makes his or her investments, continues to add to them, and then gets on with the rest of their lives.
You don’t need a lot of time for that type of investing. And today, it’s easier to do that kind of investing than ever.
I recently opened up an account with an investment platform called M1 Finance. In under an hour, the account was opened and funded. M1 created an investment portfolio for me, and that was it – I was done. Now all I have to do is continue funding the account to help it grow.
You can do the same thing, and do it in no time at all.
5. I Need to Know a Lot About Investing
This may be the biggest lie of all, especially the way investing works today. Truth be told, you don’t need to know anything about investing at all.
Instead, you need to be focused on your financial goals. Goals are what drive investing; investing itself is just the method that enables you to reach them.
If you have financial goals, you’re halfway there. The investment process itself is very mechanical, particularly when you take advantage of the many investment services available.
If you’re a new or small investor, one of the best ways to begin investing is through what are known as robo-advisors. These are online, automated investment services that handle all aspects of investing for you.
The two largest independent robo-advisors are Betterment and Wealthfront. They start by determining your investor profile which includes your investment goals, time horizon, and risk tolerance. They then build an investment portfolio based on that information.
The portfolio consists of a mix of stocks and bonds, mostly held in ETFs. The platforms will rebalance your portfolio as you add funds, and as investment valuation levels change. They’ll also reinvest dividends, and even work to minimize capital gains taxes.
And they’ll do all that at an annual fee of just 0.25% of your investment (as in $25 to manage $10,000 for a full year).
You don’t need to know anything about investing at all. All you need are your goals, and a commitment to begin funding your investment account, now and going forward.
6. You Need a Lot of Money to Start
On second thought, this might be an even bigger lie. There are plenty of investment platforms that will enable you to begin investing with very little money, or even none at all.
I just mentioned M1 Finance, and they’ll allow you to open an account with no money. You caFn begin investing when you have as little as $100 in the account.
Wealthfront requires just $500 to open an account, while Betterment will allow you to open an account with no money, then fund it with monthly contributions.
To show you how common this has become, there are other investment services that will allow you to begin investing with little or no money. One is Robinhood. Not only can you open an account with no money, but they also allow you to trade for free. It’s more for people who want to invest in individual stocks and ETFs, but it’s another example of the available options.
If you want to invest in commercial real estate, you can do it with as little as $500 through an investment service known as Fundrise.
The point is, you don’t need a lot of money to start investing. You may not need any money at all.
Don’t let this lie keep you from investing any longer. There are just too many options for a person to invest with little or no money.
The Consequences of Not Investing
We often hear a lot about the potential risks of investing. But less common are discussions of the consequences of not investing. There are plenty of those. When you’re aware of what they are, you begin to realize the risks of investing aren’t that big by comparison.
Here are some of the risks of not investing you probably haven’t heard about:
- If you’re holding all your money in bank investments, earning 1% or 2% per year, you’re losing money to inflation, which is running at 2% to 3% per year. That’s a guaranteed money loser.
- By not investing, you’re not preparing for retirement. And when you reach retirement age, you may be dependent on others to take care of you.
- If you don’t invest, you’ll be no better off in 10, 20 or 30 years than you are right now.
- If you’re not investing because you have debt, you may still be in debt 10 years from now, and still not have any money (hint: debt can become a lifestyle).
- A well-stocked investment portfolio is one of the best protections against job loss and other financial disasters. If you don’t invest, those disasters will hit you even harder.
I’m not trying to scare you, but I am trying to make you aware there are risks on both sides. And hopefully I’ve convinced you the risks of investing are really lies. Once you accept that, you have no choice but to begin investing.
Trust me, your future self will love you for it.