A Short Investing Guide is built to help you understand how to invest in the stock market. Which is of no use if you’re not convinced investing in the stock market is a good idea.
Let’s address that. Why should you invest in the stock market?
Why invest
First, why invest at all?
Once you take care of your financial present so you can save money, saving allows you to make plans for your future. You can save towards buying a house, you can save for a vacation, to throw a wedding party, or just to get through difficult times and emergencies.
Those are all shorter-term reasons to save, the house perhaps excepting. But once you get the hang of saving, you can start thinking bigger picture. Saving for your retirement. To put your kids through college. Or to travel the world. Even retire early.
Those are bigger goals. Saving on its own, though, would be like running a one-legged race: you might get through to the finish line, but you’re making it slower and harder on yourself.
Once you have a steady habit of saving money, investing is the way to grow that money. Allowing the money to sit under your mattress or even in a savings account won’t cut it. Investing that money, so it gets put to better use and thus earns a return, is a great way to achieve your goals.
Why invest in the stock market
Having decided to invest, you need to decide where to put your money.
An obvious place to put your money is into a house. In the U.S. especially there is a culture of home ownership, and a series of tax benefits in favor of owners vs. renters.
I own my home. I think it’s reasonable to own, depending on how mortgage payments compare to rental payments in one’s market. And house prices tend to go higher, in a similar fashion to the stock market.
Stock market vs. housing
That said, there are some reasons this isn’t a practical comparison to investing in the stock market. For one, buying a house makes sense when you live in it, or if you are a professional real estate investor. This is something of a one-time purchase, or once a decade, anyway – the associated fees with buying/selling make it less practical to buy more regularly, never mind the costs and hassles of moving. Oh, and that houses are expensive. You can’t buy a share of a house for $10 or $100 the way you can a stock.
Then, the stock market has tended to outperform housing prices over time. The economy gets more productive and more efficient over decades, while a home is unlikely to add that much fresh value. If everything in real estate is location, location, location, your home’s location isn’t going to suddenly upgrade over the years.
The other options to invest are not very accessible to individuals, and come with more risks. It’s not easy or advisable to invest in hedge funds or startups, for example. If you are an expert in something like vintage cars or exotic musical instruments, where you are able to recognize good value and buy things that will appreciate or that you can sell for more, that’s great, and you may be better off investing in your niche. But a lot of niches don’t have value – baseball cards or NFTs, anyone? – and most of us don’t have a niche as accessible as investing in the stock market.
Which reminds me – gold and crypto are areas we’ll talk about later on in this guide. I think they generally can be thought of as part of broader ‘stock market investing’, even though I don’t invest in either type of asset.
Reasons not to invest in the stock market (and why they’re wrong)
Maybe you’re still hesitant to invest in the stock market. I can think of a few reasons people might not want to invest. Let me try to respond to them.
It’s too risky
Investing in the stock market is risky. In investing, there’s a rule that says basically the amount you can expect to make on an investment is proportionate to the amount of risk you take.
We don’t need to get into the weeds on that, but it’s true, as you hope to grow your money over time, you can start in something as safe as a treasury bill from the U.S. government, and then go to riskier things like stocks, like crypto, like real estate, and so on.
The stock market is risky, but there are ways to neutralize that. Firstly, expand your time horizon. Starting in the 90s, if someone invested in the S&P 500 via an indexing strategy for at least 3 years, there would only be three periods where they were losing money:
- September 2001-September 2004
- September 2008-September 2011
- March 20th-March 23rd, 2020
If we extend that to 5 years, we get:
- July 2002-February 2006
- October 2008-January 2011
- August 2011-December 2012
And if we extend to 10 years, we get:
- October 2008-February 2011, and then a few days after that later in 2011
None of that takes into account strategies like reinvesting dividends or buying more shares over time, which would mitigate the timing risk.
The stock market is risky, and it’s always possible that we’ll hit another hard stretch. But those stretches are less frequent, they do end, and they usually correlate with difficult economic times around the world, meaning it’s not easy to hide your money anywhere.
It’s too hard
Investment professionals and people who dedicate themselves to the market would be happy to make investing seem exotic, overly complicated, and unapproachable. Finance as an industry loves to invent new products that consist of complexity stacked on complexity. And there are many participants of the finance industry who design those products specifically to hide the risk and win money off of unsuspecting investors.
While I dedicate myself to the market, I would say that investing with an eye to beat the market is hard, but not overly complicated. That’s the foundational premise of A Short Investing Guide – not the idea of beating the market, but the idea that you can learn how to invest yourself.
But also, you don’t have to try to beat the market! Indexing is a readily accessible strategy that offers average returns and is not very difficult. Complete the ‘How To Start Investing’ course and you’ll have seen our indexing video. It takes some work, but it’s easier than, say, filing your taxes with Turbotax, or paying some of your bills, or learning how to use Tiktok.
It takes too long
For investing to work, you need to stick to a strategy for years if not decades. That’s true.
And maybe you can’t wait that long. You want to get rich, and fast!
The problem is, getting rich quick isn’t really a thing you can plan on. It’s not that way in investing, in gambling, or in life. And if someone offers you a get-rich-quick plan, you should think twice about following it, because it’s probably only designed to make the person selling you the plan rich.
It’s true, the mindset you need to invest is a long-term one. That doesn’t mean you need to suffer in the short term. Build a life that is not only financially sustainable in the present, but also enjoyable, and then invest so that you can tilt the balance more and more in favor of sustainability and enjoyment without working so hard in the future.
It’s distasteful
You might associate investing with greed. Gordon Gecko, cheesy Youtubers, Instagram influencers whatever.
You might associate it with capitalism, a system you may disagree with or be reluctant about.
You might just not want to think about money.
I get all of that. And, I can promise you that not thinking about money is a privilege that only really rich participants in capitalism who have lived of their own or other’s greed can afford.
And that capitalism is the system we have in most of the world. It is likely to stick around in some form or another for a while. Disengaging in it will only deprive yourself.
And there’s a difference between seeking and bragging about money and saving money and investing it wisely to achieve your goals for the future.
You CAN invest in the stock market
Don’t hold yourself back because of these perceptions. Investing isn’t an exotic thing. It’s not beyond your abilities. Its risks can be managed. It is a sober and responsible thing to do, not a distasteful or greedy thing.
Once you have established your saving habits and made your short-term financial picture stable, you have the opportunity to make longer-term plans. The best way to do that is through investing in your future. And investing in the stock market is the most accessible path to that future.
A Short Investing Guide is set up to make that path more accessible and less intimidating. Check out our How to Start Investing course, or get in touch if you have other questions or concerns not addressed here.