Investing requires a leap of faith
Whenever I am on my soapbox preaching the merits of investing in the market, I always like to add that ultimately it takes a leap of faith to do so. It’s tough to invest your retirement dollars in the fortunes of the equity market, be it individual companies or mutual funds. You are investing in the future of these companies and the economies in which they do business.
You should know up front that as a business professor, I am an optimist when it comes to the American business world. This is a trait that I share with Warren Buffet. He has said that when he hears people talking pessimistically about this country, he thinks they’re out of their mind, and that shorting America is a loser’s game.
It’s puzzling that more people don’t invest in the market given its performance history. A 2008 study of finance professors, a group you would think has the expertise to do so, found that only 20 percent of them invested in stocks. Given what the market has done since 2008-09, I would venture an opinion that a good number of that 80 percent who didn’t believe in the market now have some serious regrets. A more recent survey found that millennials are investing their savings too conservatively, mostly in cash and bonds. The younger you are, the more time your savings have an opportunity to grow.
It is noteworthy that one of Buffett’s books is entitled “Snowball.” A huge snowman starts with a small snowball.
Why don’t more people invest in the market? The answer is simple: fear of loss and fear of the unknown. Many were frightened out of the equity market after the crash of 2008-09 when the Dow went from about 14,000 down to below 7,000. A year later the Dow had more than doubled, yet many investors refused to get back in, fearing the uptick was just a fluke. But you know what, it has risen every year since 2009, except for a small dip in 2016.
A $10,000 leap of faith in Amazon at the market bottom in 2009 would be worth $250,000 today; $10,000 in Nvidia would be $311,866, in Expedia $199,886 and in Apple $166,598. One can make the argument for or against investing in the market simply by changing your start and stop dates. Support for equities could also be supported or destroyed depending on which companies one chooses to use as examples. A $10,000 investment in some companies 10 years ago might be worthless today.
No one knows what the future holds for the market. Each news days I hear one analyst saying the bull market will last another 20 years, then I flip the channel and someone else is saying you need to get your money out of equities and into bonds or cash today. While we don’t know the future, we do know what has happened in the past. Keeping in mind that the past is no guarantee of the future (Remember the Super Bowl of 2017 when the Patriots were down by 25 points at the end of the third quarter?) in 1984 the Dow was 1,284, the NASDAQ was 415 and the S&P was below 700. In January 2018, the Dow was 27,000, the NASDAQ was 7,500, and the S&P was above 2,800.
There are safer alternatives to equities, such as bonds and CDs. But here’s the problem, particularly for younger investors: Investing $300 a month for 40 years in moderately conservative (cash and bonds) earning 4 percent annually, one would have $342,000 at retirement. But if it was in mostly stocks (aggressive) earning 8, percent, one would have $932,000. If you had earned a percent or two more in those stocks, you could have easily tripled or more what cash and bonds would have done. One could say that playing it safe in cash or bonds is the riskier of the two if at retirement you don’t have enough to live on.
I said earlier that there is the fear of loss and the fear of the unknown when investing. With equities, there will always be the fear of a possible loss, but your portfolio should be one that reflects your level of tolerance for risk. As for the fear of the unknown, one can minimize that like any other fear, through exposure. Don’t be afraid to invest in individual stocks. Create your own mutual fund. Invest your time to learn more about the market and its many opportunities. For beginners, work with a financial expert. Ignore the brief ups and downs of the market, make regular investing a habit and create a portfolio that you are comfortable with for the long run.
In a future article, I will share with you a list of things to consider when choosing which equities to invest in. There are the standard items, but as a professor of strategy (one who studies why businesses succeed or fail) I have others that I also consider. Borrowing a line from the Jim Cramer show, who my wife accuses me of listening to more than her— not true, ‘Stick with Harbin.’