But you should invest anyways.
When you’re young, with not a lot of money to your name, investing can seem like a gamble. Even more so if the recession of 2008-2009 happened right about when you were first becoming conscience of financial markets (I was a senior in high school). You see the adults around you losing jobs, houses, life savings, and promise yourself that you’ll never make a stupid mistake like that. You won’t gamble away your earnings, you’ll keep them in a nice, safe, .01% interest savings account, thank you very much.
The stock market crash was pretty scary. This is what it looked like: people invested in an index fund (a fund that tracks the whole market, basically) lost 50 percent of their wealth in a matter of about nine months. Unemployment went way up. Houses got foreclosed on (most of that was due to the real estate bubble and it being way too easy to get a mortgage you couldn’t afford in the years leading up to the crash). It makes a lot of sense for people our age to be afraid of the market. After all, we’ve never really recovered, right?
This is what the market looks like if we take a wider view than the one above. This one runs 2008-present (2015).
That’s a little less scary, right? The crash in 2008 was a big one, but we’ve recovered. In fact, market crashes, or “corrections,” happen all the time. Actually, let’s take an even wider look, at the whole history of the stock market, from around 1900 to 2010.
This is a log graph, so the difference between 100 and 1000 looks the same as the difference between 1000 and 10,000. For more explanation of why this makes sense as a way to look at the stock market, or to see a linear graph, go here. It’s a much better explanation than I could give succinctly.
Taking a long view, historically, it’s basically impossible to lose all your money in the stock market. That doesn’t mean it’s impossible to lose money in stocks – if you were invested 100% in Enron in 2000, you would have absolutely lost everything. Sure, some people get lucky – investing in the Google IPO (initial public offering) would have brought you a 1300% gain in the last decade – but trying to pick stocks is little more than educated gambling. It can be fun, because you can gain more than you would in an index fund, but it’s also a big risk. Don’t put all your money in one pot.
If you start investing today, you will likely lose money in the next few months. See how jagged those market graphs above are? Those little drops can feel like huge drops when they’re happening. But the stock market is not a one-week quick-cash investment (although it can be pretty fun when you see your investments go up more in a day than you earned at work), it’s a decades-long plan.
For fun, let’s take a look at the graph of my first month of investment returns. I tried out Betterment, and invested $200 in November. That flat line is my $200 initial investment. The blue line shows that I basically immediately lost money. If I didn’t understand the market, I would’ve pulled out right then – “this is ridiculous! I’m losing 5% a month!”
But that’s not true. I just happened to first throw in my money at the top of one of those tiny spikes that happen constantly. I kept my automatic regular deposits up, and in May, my returns looked quite a bit better. Sure, they still went up and down, but it was a net positive.
No one can predict what the next 40-50 years will bring, but taking a long view of history (there was no stock market prior to about 1880, but just think about what the global economy was like in the millennia prior and it’s pretty easy to recognize that we’re on a path of consistent growth) suggests that it’s going to keep growing. Yes, there will be another giant crash eventually. Maybe it’ll be in 2030, or 2040, or 2050. Who knows? The great thing is, if you start when you’re young, it doesn’t matter.
The graph above, from the Investor Field Guide, shows the power of a dollar invested for the number of years shown on the y axis, and why the stock market is a great idea if you have a long time to average out returns. If you’re 22 and just out of college and investing $1 to just sit in a brokerage account, on average that dollar will be worth $18 43 years later (the “real” in the title means it will have the purchasing power that $18 does today). The “worst case” scenario, in red, has you investing in 1966 and retiring at the bottom of the market in 2009 (which also includes the dot-com crash and a period of very slow growth in the ’70s) – and every dollar is still worth five times what it was originally. If you’re interested in a more in-depth look at how this compares to the returns on bonds and cash, I highly recommend checking out the full article for a discussion of why you can’t afford not to be in the stock market.
Short-term crashes are why most financial advisors recommend holding a few months’ worth of expenses in cash. You can’t guarantee that you won’t lose your job or have a health emergency at a point in time when the market is at a low. Short-term, cash is king. Long-term, though, cash loses value to inflation (3% annually on average) while the stock market grows at a faster pace than inflation, for an average of four percent annual real returns (7% growth – 3% inflation).
The risk gets smoothed out over time, although that’s only half of the reason you should invest when you’re young. The other half is the magic of compound interest, which I’ll get into later 🙂
Investing can seem confusing and even dangerous, but you’re shooting yourself in the foot by avoiding it, or putting it off until you have “enough” to invest. Start today. Invest every month. Keep investing even when you lose money. You’ll win in the end
Have you started investing yet? Do you get as much reassurance from math and graphs as I do?
Note: Not a financial advisor. I’m just sharing information that interests me that is freely available on the internet and trying to make it understandable.