Saturday, August 25, 2018

The Path to Becoming An Equity Investor Has Never Been Easier

In this era of investor friendly, low cost brokers that we find ourselves living in, I find it somewhat unsettling that 46% of Americans don't own stocks. The even more disturbing part is that those who don't have access to a retirement account through an employer are less likely to have money invested in the stock market.

Given that we know the US stock market is the single greatest creator of wealth over medium to long term time horizons, why don't more Americans invest in the stock market? Below, I'll present some of the misconceptions that some Americans may have regarding the stock market that hold them back from investing. I will also offer a rebuttal for each of these misconceptions.

Reason 1: "Investing Is Only For The Wealthy"

I believe that one of the primary reasons that so many Americans don't own stocks is that they believe one must have access to thousands of dollars to begin to invest, so they just never start because of this mistaken belief. As we will discuss below, there are no shortage of options to choose from when investing. 

Twenty years ago, I'd agree to an extent that investing wasn't as accessible. Investing wasn't automated in those days, meaning more work to execute a trade (calling your broker to place a trade), and the costs were considerably higher; although in the last few years this has changed considerably. As I alluded to in my review of Robinhood, signing up for the broker is a very easy and user friendly process. It didn't take me more than 5 minutes to sign up, and a couple minutes to link my bank account to begin investing funds. Robinhood charges no fees to purchase stock. This is fantastic for investors that are just starting out and only have a few hundred dollars to invest. As long as you have enough money in your brokerage account to buy whole shares of stock rather than fractional shares, there is nothing stopping you from becoming a shareholder in some of the finest companies on the planet, and making your money work for you. If Robinhood isn't exactly your style, you could perhaps consider M1 Finance for free automated investing. Even if you prefer the bigger online brokers like Schwab, you can still trade cheaply for $4.95. The point is that regardless of if you have $300 to invest or a cool $1 million, you have access to so many fantastic brokers that allow you to begin investing with much less than you may have thought.

Reason 2: "The Stock Market Is Rigged"

What many Americans will argue when you tout the benefits of investing in the stock market is that it is rigged. In their view, institutional investors (also commonly referred to simply as "Wall Street") are screwing over the retail investor also known as "Main Street" or "the little guy"). This couldn't be further from the truth. Like retail investors, institutional investors also participate in the stock market. Unfortunately, what we continually see is that retail investors commonly try to time the market, and they also panic sell at rock bottom prices when we encounter recessions or a cyclical industry like energy experiences a bust cycle. It should come as no surprise to anyone that when one bases their investment decisions off emotion, they will make foolish decisions, selling precisely when they should be buying or buying precisely when they should be selling. As a result of these foolish decisions on one end of the spectrum, the party on the other end will benefit from the foolish decisions of the other party. Somewhere out there, there is someone who sold BP at $29 a share in January 2016, while someone else bought BP at $29 a share. The former likely experienced significant losses depending upon their cost basis, while the latter has experienced 49% in price appreciation with the current price of over $43 a share, not even including 10 dividend payments the latter investor has collected from BP over this time meaning they collected another $5.95 in the form of cash dividends that they could have reinvested into BP or other dividend paying stocks during that time, or they simply enjoyed the dividends however they chose during that time.

Reason 3: "Investing is Complicated. It's Rocket Science."

As we discussed in the second reason, many believe that the stock market is rigged primarily because they don't understand that the stock market is filled with many great businesses that generate real profits for their owners (shareholders). That is simply because although we live in the golden age of investing, we also live in the age of  "information overload" or "analysis paralysis." People will often over-analyze the stocks that they own, and sell for the most immaterial reasons because of the opinion of some writer about a particular company they own. Many that don't invest are discouraged because they have been led to believe by the financial media that only professionals with an MBA in finance are qualified to invest in the stock market. The truth is that investing can be as simple or as complicated as you'd like it to be. If you don't have the time to invest yourself or you don't feel qualified, you can absolutely invest in low cost index funds. Even Warren Buffett, the world's greatest investor advocates that the vast majority of people should contribute regularly to a low cost index fund, set it and forget it for a few decades to let compounding do the heavy lifting, and propel individuals to a safe and secure retirement. Because investing is a game of patience and endurance, it's incredibly important to know your risk tolerance. I believe the question of whether you are possibly equipped to invest in the market yourself can be answered by the following question. If the stock market were to drop 50% in the next week (assuming that the fundamentals of the global economy are relatively intact and there isn't a zombie apocalypse) would you say A) "Heck yeah, the stock market dropped 50% for absolutely no reason. I'm going to buy up as many quality dividend paying companies as I can." Or would you say B) "Oh no! The stock market dropped by 50% in the last week. I better sell before I lose everything!" Regardless of what you said, it's absolutely fine either way. One of the most important rules in investing is to know thyself. If you would continue buying stock if the market plunged, you may possibly be suited to strike out on your own and begin a strategy such as dividend growth investing (DGI). If not, you'll do well for yourself to contribute to a low cost index fund, and mostly forget about it for a few decades. There is no right or wrong answer. Investing isn't a one size fits all subject. That's exactly what makes it such a broad and fascinating subject.


In no way do I write these sorts of posts to demean or criticize my fellow Americans. Actually, I write these types of posts to try to educate and inspire everyone to invest in the stock market. As they say, "getting started is the hardest part." Whether you decide to invest on your own or you invest through index funds, please know that before you do either, you must know your risk tolerance. Whichever way you choose, just know that there are so many great low cost options at the tips of your fingers that weren't around 5 or 10 years ago.


Are there any reasons you think I missed why more people don't become equity investors? What is your investing style? Do you prefer an active approach like DGI or a more passive approach like index fund investing?

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