If you’re in your 20’s, having graduated college and started your new job in the early to mid 2000’s, you probably have a bad impression of the stock market. After all, you have seen the bursting of two of the biggest economic bubbles America has ever seen. First, at the end of the 1990’s, after about seven spectacular gains in the market, the creation of a whole new market sector, and seeing whole companies full of people become millionaires overnight, you watched those same companies disappear into dust in a matter of days. Even the most dominant companies – Amazon, Priceline, ETrade – fell 80-90% or more from their highs.
At that point Bush cut taxes and people debated for the next several years over whether those tax cuts revived the economy or caused the deficit, but things in the economy and stock market became better. People were spending money like crazy, companies were making money. People were becoming millionaires as their houses went from $300,000 to $1.3 M in a few years. Stocks were also doing fine, hitting new highs and recovering some of their former glory. Again, the bottom fell out, stocks dropped 40-60%, and there was talk on the news about the Great Depression (although we’ve seen nothing like what they saw back then).
After living through one or both of these events very early in your investing life, you have the right to be a bit gun-shy and to pull your money out of stocks. Maybe you even have it invested in eight different bank accounts and a mayonnaise jar buried in your backyard just in case the banks fail. While equities may seem scary right now, you are actually making one of the worst investment mistakes you can make and are setting yourself up for a cold and very uncomfortable retirement by not having everything (except an emergency fund of 3-6 month’s expenses and other money you’ll need in the next 10 years) invested in equities.
Understand that that bank account, while it may seem nice and safe, is about the most unsafe place you can place money for long periods of time. No, no one is likely to come and steal it from you, and no it is unlikely that the bank will default, but even without either of these things happening you are losing money every year that your money sits there. While we have not seen significant inflation since the early 1980’s – ten years before you were born – even at the relatively low 3% rates we have seen your money is dropping in value each year in the bank since they are only paying 0.25% interest if you’re lucky. If inflation picks up they may start paying a few percent more, but it will always be less than the rate of inflation. Over a lifetime of saving that will add up into $500,000 or more in lost value. With that kind of depreciation it is unlikely, even with a lifetime of saving, that you will have enough to have your money last through your retirement.
Worse yet, you are missing out on the opportunity to invest your money and see it actually grow – even beyond inflation. This is income for which you don’t need to work. You receive it because you are willing to partner with others who do the work for you (and themselves). If you are buying stock in established companies, you are partnering with individuals who have shown that they know how to grow a business and that they have a concept that works. Doing this while you are young makes the most sense because you don’t need the money right away. You have the time to wait for the various ideas the company has to be enacted and reach their full potential. You can also afford to wait out bad periods in the economy when company profits are down.
So bite the bullet and get back into equities. The best way if you’ve pulled it all out is to wade back in slowly – maybe put 25% in now and then 25% every few months or after a significant market decline. Then start investing money regularly. Know that you have no other choice. WHile there is uncertainty and account values will decline during some periods of time, it is absolutely certain that you will lose money if everything stays in the bank.
In the next post I’ll talk about the mindset needed to avoid being nervous while investing.
Follow on Twitter to get news about new articles. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing