The stock market might be a great way to make more than the measly interest paid by bank savings accounts - but it's definitely not the right place for everyone.
I recently got these somewhat related questions. See if you can relate:
Hi Mr. Stacy,
I’m a 23 year old woman and I’ve been looking to invest for quite some time now. However, regardless of the amount of research I’ve been doing on the Market, I find that I’m still a little intimidated and wary of making the plunge.
I just graduated from university 8 months ago with a B.A. in psychology, and I have taken on a job where I’m under-employed, making only $200.00 a week working for a non-profit organization. Although I love the cause of the work that I’m doing with this grassroots organization, $200.00 a week is not quite what I was expecting to make after putting in so much hard work in college.
With that said, I only have about $500.00 in my checking account, and right at $3000.00 in my savings, which I’ve accumulated since age 17. How can I invest without losing what I’ve worked so hard for thus far, and what kind of things should I invest in? I’m familiar with the Roth IRA, savings bonds, CD’s, etc., but I’m wary of those too. Is there anything out there for minorities that could help me? Any suggestions?
Thanks for your help,
And this one:
Hello, I have question for you. I am 29 years old and looking into investing some money into a account for me when I retire (many years down the road).
I do have state retirement, but would like have another retirement account as back up when I get old. I am not depending on social security when I retire, it will be no longer in service in my opinion. But something where I take some money out of each pay check and put into an account. I am looking for an account where if stock market crashes again, it will not hurt this account. I know there are saving accounts but interest rates are low.
Is there something out there for me to start a second (backup) retirement. Please let me know. Thank you for your time.
When you see the success I’ve had investing in stocks, hear on the news about how well stocks are doing, or perhaps have friends tell you how much they’ve made in stocks, the temptation is great to throw caution to the wind and step up – especially when banks are paying virtually nothing on savings accounts.
I think that’s what’s behind these two questions.
But as someone who’s been doing this for 30 years, trust me when I tell you: While stocks may look tempting, especially alongside today’s meager savings rates, there’s no free lunch.
Stocks only offer rewards because they have risk. When you look over my current portfolio, you’ll see the 80 percent return I’ve made over the last couple of years. But what you won’t see is the price I’ve paid to get to this point: the money I’ve lost with the stupid decisions I’ve made. For example, the thousands I’ve lost on options and commodities. Or the time I took some misguided investment advice from a “friend” that ultimately cost me $30,000.
I could go on, but I won’t: It’s too depressing.
The point is that while I’m a big believer in investing in the stock market, I’ve also learned that this type of investing isn’t for everyone. And these two people are textbook examples.
You shouldn’t invest in stocks (or anything else that could potentially lose value) when:
- You don’t have enough excess savings. Cha barely makes enough to survive and has only $3,000 in savings. Because she may need this money if an emergency should arise, she can’t afford to subject it to risk, regardless of how low interest rates are and regardless of the potential reward.
- You can’t stand the idea of losing anything. Chris says, “I am looking for an account where if [the] stock market crashes again, it will not hurt this account.” I met a lot of people in this boat when I worked as an investment adviser: They can’t tolerate the lousy rates on insured savings but can’t tolerate the idea of risk either. Sorry, but it’s this simple: If there’s no potential for pain, there’s no potential for gain.
I’ve said this before, but I’ll say it again: The shortest path to financial freedom requires that you do two things. First, live below your means. Second, learn to make your money work as hard for you as you do for it.
Cha can’t live below her means because she’s not earning enough. If she’s content to swap financial security for a cause, there’s nothing wrong with that – in fact, it’s noble and could potentially bring her great happiness and fulfillment. But it will never result in her being a likely candidate to assume the risk necessary to make her savings work harder. She needs to stick to insured savings until she’s accumulated more.
Chris has the time and the apparent resources to make his money make more money. But he wants reward without risk: something that’s only available in infomercials. He needs to educate himself to the extent that he’s comfortable assuming more risk for more potential reward.
But since both Cha and Chris are here and asking questions, I think they’re both on the right track. Life is long – there’s no rush.