Lucky for you and me, beliefs aren’t really real. They can be challenged and they can change, although there’s usually some pain and resistance involved. Believing you’re Napoleon makes you interesting (and weird), but it doesn’t make you Napoleon. In the same way, believing, for example, that shares are risky, or the money market is safe, doesn’t make it so.
In this first instalment of an on-going “money myth buster” series, I’ll challenge some popular beliefs about investing in the stock market.
Many people don’t invest in shares, because they believe one or more of the following misconceptions:
- Investing in the stock market is risky
- Investing in shares is like gambling
- Investing in shares isn't for those earning a low income
- Investing in shares can make you rich, but you need to know a lot and have the time for research
Here’s an alternative point of view…
The stock market is volatile, but it is not necessarily risky
Many people don’t invest in shares, because they believe it’s risky. They see “the market” up one day and down the next. They hear tall tales of investors striking it rich, or losing everything, and see this as proof that investing in the stock market is a gamble.
The reality, however, is a bit more complicated.
How would you define a “risky investment”?
I define it as the likelihood of my investments not achieving what I intend them to. In other words, I would call an investment risky if it’s unlikely to accomplish what I had in mind for it.
Now, consider this amazing fact:
Equities (also known as shares or stocks) consistently outperform all the other asset classes (these are cash, or what most people know as a “money market account”, bonds and property). Research conducted by Nedgroup Investments shows that if one looks at the South African stock market's total returns over monthly intervals of rolling five-year periods since 1961, not one of these periods were negative.
So, is an investment in stocks really risky?
For a meaningful answer you need to ask yourself what your intention with the investment is. If you’re hoping to make a quick buck then, yes, it’s very risky. If you’re betting your life savings on a single company then, of course, it’s risky.
However, if you intend for your investments to comfortably outpace inflation over the long-term (at the very least five years, but preferably closer to 10 years) then a diversified portfolio of quality shares (i.e. shares in an assorted range of good companies) is the least risky investment you can make. If, however, you stuck your money in the bank you would almost certainly fail to comfortably outpace inflation. There can hardly be a more risky investment than this, if you consider your intention to seriously grow your money over the long-term.
Don’t confuse volatility with risk!
The value of shares is tremendously volatile over short- to medium-terms. They go up and down, up and down. So, if you’re planning on investing to fund Christmas, then it’s risky. Who knows if it’ll be up or down by that time? Nonetheless, if a comfortable retirement in the year 2024 is what you’re after then you can hardly do better than the stock market - the risk of loss is close to zero. Shares are not volatile over long terms.
One could also define risk as “the chance of losing money” or “the chance of an investment not beating inflation”. If, like me, you're investing for the long term then by both these definitions stocks aren't risky, the money market is insanely risky, while bonds and property fall somewhere in between.
Investing in the stock market over longer terms is nothing like gambling
So many people will never be as wealthy as they can be because they believe this.
Gambling, unlike investing in shares, is a zero-sum game whereby money is taken from the loser and given to the winner. Nothing is given in return and no value is created. When you invest in the stock market you’re actually buying a piece of a company. You become an owner of the company’s assets and you share in their profits.
How is this like gambling?
Like I said before, the value of shares are extremely volatile over short terms. So it’s a “gamble” in the sense that, if you’re in it for a quick gain, then you might have to sell when the stock is down, thereby losing money. However, even if the value of the shares you own plummets, you’re not left with nothing, you still own part of a company (admittedly one that is worth less than before) and next month the stock might be up again.
Stock market investors don’t just randomly chuck their money into an investment. There might be some uncertainty regarding outcomes, but you're not simply hoping that luck is on your side.
If you can put aside R300 per month then you can invest in the stock market!
If they’re honest, most employed South Africans will admit that they can afford to save R300 per month, which is all you need to start investing in an index tracker such as Satrix. We’ll discuss index trackers in an upcoming article. For now, just know that it’s a way to own shares in the very best South African companies. And you need only R300 per month.
You don't need to know anything to invest in shares and you don’t have to do any work. I have a fund manager who makes all my investment decisions. I never check my stocks and spend, maybe, ten minutes a month on my portfolio.
You can, of course, be more involved, but you don’t have to. If you have a competent asset manager, then you’ll do well even by mindlessly, yet consistently, investing.
Alternatively, an index tracker such as Satrix buys you the best companies automatically. Simply buy and hold for the long-term and watch your wealth grow!
No other asset class offers a better opportunity to grow your wealth over the long-term than shares. If you want to get rich, and you’ve been avoiding the stock market, I challenge you to open your mind and consider whether your beliefs are holding you back.