Written by guest author Brian Bain of Investor in the Family
Whether conscious of it or not, most people's impression of the stock market is deeply marked by October 2002 and March 2009. Why is that? Both of those days mark the bottom of two of the worst stock market crashes in our lifetime. This essentially means that the average investor in the stock market saw their retirement and much of their financial wealth cut in half, twice in less than 10 years. Most people have yet to recover from this trauma.
Does this mean investing in stocks is a lost cause?
Absolutely not. As of the writing of this article, the Dow Jones Industrial Average is now up around 160% from its lows in March 2009. This means $10,000 in 2009 would be worth $26,000 today if someone had just put their investment in something safe like SPY (more on that later). The point here is the fear of losing has lead to a lot of people missing one of the greatest bull markets in recent history.
How do I know the market won't crash like before?
You should assume that it will, and potentially even in the next few years. The issue is not whether the market will crash, but how you will prepare for it. The market doesn't drop by 50% overnight. A stock market crash is often part of a process. Experienced investors are typically able to read the writing on the wall when things start looking dire and then take appropriate precautions.
If that's the case, why did my "experienced" financial adviser not protect me last time?
I have a few counter-questions in response. How much actual investing experience does your financial adviser have? How does your financial adviser make money? I don't mean to be critical of financial advisers. There are truly some excellent ones out there. The issue I am raising is that many—if not most—financial advisers are not the experienced investors you may want to believe they are. Even worse, many are more focused on selling services than understanding the stock market.
This leads to my second question about getting paid. If a financial adviser gets paid based on how much client money they have invested (not all do), how likely is it that person will be cautious and pull your money out of the market when things look scary? This is assuming they even notice things are scary to begin with. Personally, this set up does not instill much confidence on my part. One takeaway from this is you better know how a financial adviser gets paid before you sign up (if that is the route you want to go).
On top of all of this, you pay the financial planner a fee for managing your money. Why pay someone who has "managed" your money into the depths of two crashes?
Does an individual, non-professional investor have any chance of success in the stock market? YES! Here are a few suggestions:
Know your limitations, you're not a stock analyst so don't pretend like you know what to buy and sell, etc.
Accept the fact that investing involves risks. Begin investing at a level that you are comfortable putting at risk and don't "go for broke" from day one.
To begin with, play things nice and safe by putting your money in a conservative fund like one called "SPY." The full name is "SPDR S&P; 500 ETF Trust," but the stock symbol is "SPY" and way easier to say. This fund is very conservative and very diversified. By putting your money in this fund, you are investing in ALL of the 500 companies of the S&P; 500. The S&P; 500 is one of the core stock indexes in the U.S. and therefore, the world.
While your money is in SPY, start finding some investing mentors to follow and learn from. More on this below.
As you learn from these mentors, take baby steps as you begin investing in individual stocks on your own (if you even do at all). Eventually, you will be surprised at what you learn and how easy following a good set of mentors can be.
This chart offers some great perspective on what putting your money in SPY ("S&P; 500" in the chart) can return compared to you trying to figure it all out yourself ("Average Investor" in the chart). According to the chart, SPY historically would get you around 9% a year as opposed to around 2.5% for the average investor. Once you find some good mentors to follow, you can expect to potentially begin finding returns even in excess of SPY.
You can play things even safer and easier by taking advantage of great services aimed at helping individual investors greatly simplify the investing process and making it cheaper and more enjoyable to boot. Visit me at Investor in the Family for an updated list on my favorite resources and investing mentors.
Won't this process take a lot of time?
Pick a few mentors with good track records. Once you become comfortable buying some stocks, just do what they do. Along the way, you will learn more than you think and your discernment will get better and better. There will be a higher time investment early on as everything is new, but over time this will shrink to minimal time each month. Remember to be patient and not rush into anything.
This approach should help you enjoy the benefits of investing in the stock market without the constant anxiety of fearing the next 2002 or 2009. When my mentors start warning of a market collapse, my plan is to simply follow their lead, sell, and wait for the dust to settle as an informed investor. When things hit bottom, you get to buy companies at half off!
I always want to caution people that there are risks in investing—you probably wouldn't be reading this if you weren't fully aware of that. I also want to make it clear there is a good chance another crash will come, possibly sooner than later, and there is no guaranteed method to protect you from being impacted. My point in this article is that with just a little time and the right mentors, you can become an informed investor who can take advantage of the good times and proper caution in the tough times.
Investing does not have to be a mysterious black box in which you have to fear.
We are always available at Investor in the Family to be that "investor in your family" you can come to for questions, education, and mentoring.
Here is a final thought from one of the greatest investors of our time to help you keep perspective amidst the fears of a market downturn:
"In 20th century, after 2 world wars; a Great Depression; recessions/financial panics; oil shocks…Dow rose from 66 to 11,497." - Warren Buffett
All the best,
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Nothing in this article is to be considered investment advice, a formal recommendation, or solicitation to buy or sell any security. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Please see full Disclaimer.
Photo: Ross G. Strachan