Should I Invest in the Stock Market?
This question, if I’m being honest, doesn’t come up that often for me. Most of the people I chat to are already on board with the risks involved with investing and are comfortable with the risk to reward ratio.
But it is sometimes a question or an attitude that you might face from people around you if you’re about to start your investing adventures. Do any of these sound familiar?
“Investing in the stock market is risky”
“You’ll lose all your money”
“It’s for the rich, not people like us”
“It’s a bad idea, especially because of [insert latest reason from media]”
“You don’t understand what you’re doing, it’s too dangerous”
Do they have a point?
Investing is risky. There’s a reason why you’ll see something similar to this line quoted on every single investment based website out there – including this one!
“Investments can go up and down in value, so you could get back less than you put in.”
It’s not exactly inspiring, is it?! So maybe they have a point.
So why would anyone ever invest in the stock market?
You want to make money. That’s the only reason you’d be willing to risk losing money or ‘getting back less than you put in’, right?
Now I can spend all day quoting random numbers to prove the point that investing is a great idea, or that it’s a really bad idea. The fact is, the stock markets around the world go up and down in a volatile way, pretty much every year (you can expect about a 10% movement up and down in most years).
If you’d bought the UK stock market in August 2000 and sold in September 2001, you’d have lost 35% in just over a year. But I can play the opposite game too. If you’d bought in March 2003 and sold in March 2004, you’d have made 40% in a year.
My point? I can make numbers my b*tch and make whatever point I want to make when it comes to the stock market. But that’s unhelpful.
What’s the reason someone might invest in the stock market instead of just putting their money into a savings account then?
What is inflation?
Inflation, without getting too bogged down in the technicalities of it, is the % value your money loses each year.
So if you have £100 at the beginning of the year, and that can buy you;
- 2 kettles
- 20 litres of petrol
- 100 Mars bars
If inflation is 10% per year, then by the end of the year, your £100 can only buy you;
- 1.8 kettles
- 18 litres of petrol
- 90 Mars bars
Or it would cost £110 to buy the same as £100 bought at the start of the year. Either way, your money has lost 10% of it’s buying power. Even though you still have the same five £20 notes in your hand.
Why does this matter? Because if your money is just staying “safe” and not growing, it’s actually slowly decreasing in buying power each year.
The average rate of inflation for the last 20 years has been around 2.8%. So every year you sit with your money doing nothing, you’re actually losing 2.8% each year.
But at least my money is safe
Can’t argue with that. The FSCS guarantees £85,000 of any money deposited with banks & building societies that are authorised by the Prudential Regulation Authority. So if they run off with your money, then the Government effectively stands in and gives you your £85k (it doesn’t quite work like that, but close enough for the purposes of this).
Whereas in the stock market, if you invest in a company and it goes bust, you could lose every penny, and not get anything.
So should I invest in the stock market?
The ‘please don’t sue me’ answer is – it depends on your personal circumstances and your attitude to risk and personal financial situation. You should speak to a professional who knows your individual situation and can advise you properly.
The short answer is probably yes.
The long answer is – probably yes, provided you focus on the “invest” part of that sentence. A lot of people see “investing” as gambling. Should you gamble on the stock market? Hell to the no. That’s stupid.
Before when I was quoting random numbers to make someone look right or wrong about investing… that’s gambling. Investing would be more like; If you’d invested every month from March 2002 and August 2005 then the result would be…
(I can’t be bothered running the numbers on that, but I’m going to say it probably would have worked out for you.)
The difference is with one strategy, you’re throwing money into something and hoping it goes up. The other strategy, you’re buying something that you hope will go up in value, but you aren’t sure, so you wait until the next month to buy a bit more – maybe at a lower price, maybe at a higher price. But over time, you’ll end up buying more when it’s cheap and less when it’s expensive.
Over most longer time periods (10-20 years) the stock markets will outperform just leaving your money in a savings account. If you need money in a shorter time frame than that, then investing in the stock market might not be the right thing for you to do.
The only ‘risk’ is you need the cash and are forced to sell when the market is at a low point. If you don’t need to sell, you can sit it out and wait for the market to get back to a higher level. It might take years to do that, but it has a 100% track record of doing that.
Literally, every single time. The stock market has always gone up in price over a long enough time frame.
But what about when a company goes bust and the investors lose all their money? Yep, that happens, and that’s why 98% of people should never own individual company shares. It’s just too much like hard work knowing which is a good, strong, stable, profitable company. If you buy an index (so a tiny bit of lots of companies in a country, like the FTSE 100), then that risk is mitigated to quite a big extent.
If every single one of the top 100 biggest companies in the UK goes bust… money is no longer your biggest issue. There’s some kind of zombie outbreak happening.
Run. RUN I TELL YOU!
More likely is that maybe 1 might go bust every decade or so. But the other 99 do alright. And when you even it all out, then over time the companies that make up the FTSE100 have eventually outperformed just leaving your money in a savings account.
I’m confused… should I or shouldn’t I?
I get it. It’s hard to know because if you happen to buy at a rubbish time, then you’ve got nothing but zero growth or losses to look forward to. If you time it right, you’ve got double-digit growth to look forward to… but who knows when that is!
Personally I assume the stock market will collapse at some point, that it will rocket up at some point, and it’ll just bounce along doing not much sometime in the middle.
My strategy, and the strategy I share with others in my Money Masterclass, allows me to not worry about what the market is doing, and give myself the best chance of achieving growth over the long term.
Whereas with savings accounts, I KNOW for a fact my money will at best keep up with inflation, but more likely will slowly lose buying power.
I’m willing to take the risk that the stock market will do what’s happened for the last 100+ years and will average a return of 7-10% per year growth, instead of the guarantee that I’ll lose money.
One parting thought
The richest people in the world. What do they all have in common? They are business owners (or Royalty).
Find me the person on any rich list who got there because they saved up their money and put it into a savings account.
By investing in the stock market, you are becoming one of those ‘business owners’. It’s not going to make you as rich as the guy who founded the company, but it’s more likely than just saving.
It’s all about how much risk you’re willing to take on. If you cannot afford ANY losses, i.e. you need the money within the next few years – then the stock market probably isn’t the best place to invest your money. If you can afford some losses, because you don’t need the money and can wait until you get back into profit, then the stock market might be the best place for you.
For me, it’s worth it in the long run.