Investing was not the sort of thing that hit my radar until I graduated college and started working full-time. During college, every dollar I earned either went into my savings account or was used to cover my tuition bills to minimize my educational debt.
Thankfully, though, I paid off those loans pretty quickly as a young adult, and from there, I was able to start focusing on investing. Only some poor advice led me astray for a few years, and I’m still kicking myself for following it.
When you let fear get in the way
In my early 20s, I met up with a childhood friend who’s a few years older than me, and we got to talking about financial matters. He told me about some bonds he had put money into and how he wouldn’t touch the stock market with a 10-foot pole.
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For some reason, his words stuck with me, so once I reached the point of having some money to invest, I, too, chose bonds because I didn’t want to take the risk of putting my hard-earned savings into the stock market. I knew stocks were way more volatile, and the idea of losing money just didn’t sit well with me.
To this day, I regret missing out on a few years of stock gains in my portfolio. I thankfully realized the error of my ways a long time ago and have been a stock investor since. But it wasn’t smart of me to listen to one person’s advice — someone who’s by no means a financial expert — and follow it without doing my research.
Since then, I’ve done my research. And one thing I can tell you is that over the past 50 years, the stock market’s average annual return has been 10%.
Except the stock market didn’t do that well every year during that half-century period. In fact, since 1972, the stock had three separate years when it saw losses of more than 20%. But in spite of that, it managed to reward investors who stuck with it with a 10% average return on their money.
There’s a big risk you take when you don’t invest in stocks
I know a lot of people who are risk-averse in general — not just in the context of investing. And to them, the idea of buying stocks is so scary that they pretty much refuse to do it. But when you invest too conservatively, you take on a different risk — the risk of a shortfall in the context of your financial goals.
Let’s say you’re saving for retirement in an IRA and you contribute $300 a month over a 30-year period. With a conservative portfolio, you might get a 6% average annual return on your money, leaving you with $285,000.
Now that’s a decent sum of money in its own right. But with a stock-heavy portfolio and a 10% average annual return, you’d be looking at $592,000 instead. That’s more than twice as much.
In fact, it was the fear of not meeting my financial goals that helped me get over my fear of owning stocks. And so if you’re worried about the risks involved, make sure you’re saving over a long period of time so you can ride out the market’s downturns. And also, make sure to maintain a diverse mix of stocks for added protection. These moves won’t eliminate your risk, but they’ll help mitigate it.
Finally, be careful about who you take investing advice from. The friend who warned me against buying stocks had the best of intentions, but he wasn’t an expert and is sort of a naturally nervous person to begin with, so I should’ve done more of my own research initially. The next time you get investing advice, whether it pertains to a general asset class or a specific company, dig deeper on your own and seek out other sources of information to make sure you’re not being led astray.
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