Although the investment principles most people follow can be pretty straightforward, they may seem challenging or hard to understand for anyone starting out. Below are some objections beginner investors commonly encounter and reasons to overcome them.
Every financial decision you make — even the choice not to invest — entails a balance of potential risks and rewards. While you may be concerned about the risks associated with investing vs. saving, it's essential to consider what you might be jeopardizing by not investing. By avoiding investment, you run the risk of your money losing value over time due to inflation.
Additionally, you miss out on the remarkable power of compounding. Assuming an average 10% return based on the S&P 500’s average track record, money invested in the stock market can double every seven years, showcasing the potential for substantial growth.
Furthermore, it's vital to remember that diversification, or spreading your investments across various companies, serves as a robust risk mitigation strategy. In the realm of personal financial goals, there's always a tradeoff to consider. By forgoing investment opportunities, you risk the possibility of outliving your financial resources.
It’s important to note that participating in the market with the intent to buy and sell regularly resembles gambling rather than investing. If you engage in stock-picking or market-timing, you essentially need to be correct twice: first when you purchase at a low point and then when you sell at a high point. It’s highly unlikely for individuals to develop a repeatable process for consistently picking the right stocks at the right moments and selling at a high point on multiple occasions.
Fortunately, you can have a successful investment journey without needing to precisely time the market. Once you commit to being a long-term investor, the debate over timing becomes irrelevant, providing a considerable sense of relief. By investing in the entire market, you’re essentially trusting human innovation to address the world's challenges productively.
If you’re fortunate enough to live through several decades, you’re bound to face significant downturns in the market. Nevertheless, the probability of experiencing a complete loss is substantially higher when your investments are concentrated as opposed to having a well-diversified portfolio. To mitigate the risk of losing all your money, consider investing in exchange-traded funds (ETF) rather than investing in individual stocks. ETFs are usually a basket of hundreds or thousands of securities that can be spread across various asset classes, industries, and geographic regions, which reduces the impact of poor performance in any one investment.
This diversification helps protect your portfolio against the potential volatility and fluctuations of individual stocks, thereby enhancing the potential for more stable returns over the long term. By avoiding the concentrated risk associated with single stocks, you can better preserve your capital and achieve a more balanced and resilient investment strategy.
If this sentiment resonates with you, then there’s absolutely nothing wrong with that. Being open to investing in any company is better than not wanting to invest in the stock market at all. The stock market includes all of the publicly traded companies worldwide, so you have plenty of options to choose from. But as mentioned above, investing in individual stocks can be riskier than investing in a basket of securities — such as an ETF or mutual fund — so you should always take that into consideration. Choosing to invest in a wide variety of companies is generally a more promising approach than attempting to predict which single company will outperform the rest. You can achieve success and be financially productive without the need to consistently outperform the overall market through your personal predictions.
Fortunately, you don't necessarily need to trust one person for investment advice — simply put trust in the market itself. As mentioned earlier, the S&P 500’s average return has been no less than 10% annually. Despite what anyone says in the media, no individual possesses insights superior to what the market has conveyed historically. Markets continuously react to real-time current events, meaning what you see or read online or on TV can change instantly.
It's vital to recognize the distinction between factual information and personal opinions. Shifting your financial mindset by cultivating a healthy dose of skepticism towards financial commentary is crucial, recognizing that it often serves as entertainment rather than genuine news. If you seek a reliable source of guidance, consider consulting with a financial advisor, whose interests align with your financial well-being. It’s important to ensure that your financial advisor is a licensed fiduciary, meaning they hold a legal obligation to make financial decisions that are in the best interest of their clients above all else — including their own financial interests.
Truthfully, it’s never too late to start investing. Starting now is always better than never starting at all. Even if you start investing two decades into your career, your investments can harness the power of compounding returns, leading to exponential growth over time. Investing is particularly essential for retirement, as it can help you build a more substantial nest egg, ensuring financial stability during your post-working years. Additionally, investments can help generate other income streams, supplementing your other sources of revenue. Whether your personal or financial goals involve homeownership, paying for college, or having a travel budget, investing can play a pivotal role in achieving them and can change the trajectory of your life.
Throughout history, we've seen financial crises come and go, each with its own unique causes that make them feel different every time they happen. However, what's reassuring is that the market has always managed to bounce back and deliver positive returns once things settle down. By their very nature, a financial crisis is not something we can foresee. Markets, on the other hand, are forward-looking, and they remind us of our ability to adapt and recover in the face of uncertainty.
The initial — and most crucial — step towards investing is building a habit of saving part of your paycheck, and sometimes the biggest hurdle is simply getting started. It's a common human tendency to procrastinate, but starting the process can be as straightforward as allocating a small portion of each paycheck to a savings account, even if it’s just $5 to $10 to start.
This practice, especially if automated, can easily turn into a positive habit, where you witness gradual progress and experience a boost in self-confidence when it comes to your finances. Taking this initial step to budget your money is surprisingly easy, and the sense of accomplishment will surely benefit you in the long run. Once you’ve built a cash reserve of savings to cover a minimum of three months' worth of expenses, you can re-allocate that same budget into an investment strategy.
Dimensional is a recognized global investment advisory firm that positions itself as a bridge between profound academic financial research and practical investment solutions.