Despite the non-stop financial information that flows at us from all manner of media, the vast majority of investors are not getting their fair share of the market’s return in their investment portfolios.
Investing seems for many people a foreign language, lot of concepts and acronyms, the vast majority find it as complex topic, and it can be overwhelming for average person.
The good news is that it should not be like that, I want you to recognize that investing can be really accessible and you can easily build a well-constructed, low-cost, easily-managed, globally diversified portfolio.
You hear many people today saying:
I would like to invest, but I am just way too afraid of losing money.
I am here to tell you that with a passive strategy, low costs investment funds, and an investment horizon of at least 10 years this was quite unlikely.
Since it is a big concern for so many, that it is worth illustrating it with a STORY.
Have you ever heard of ‘Marta,’ the world’s worst market timer?
Each time Marta invested in the stock market, she did so just before a market crash.
At the end of 1972, the 22-year old Marta invested $6,000 in the stock market and then saw her investments decrease by 50% shortly after that.
This was disheartening.
But Marta decided to invest all her savings, $46,000, again in August 1987.
As luck would have it, she did so just before the stock market crashed by 30%.
Despite her past experiences,
Marta gave it another try in 1999 when she invested $68,000.
Then again, she saw the stock market decline by 50% shortly after that.
Finally, she invested again $64,000 in 2007 at the peak of the market.
And as you could guess, she did that just before the stock market crashed by more than 50%.
Now that’s a lot of bad luck…
But despite having invested at the worst possible times,
Marta still managed to retire with over $1.1 million in 2013.
Had she never invested at all, she would have retired with only her savings, totaling $184,000.
What Marta did well?
Well, despite of her terrible timing, she made a few right investment decisions.
1) Invest passively.
2) Choose low-cost investments.
3) Invest for the long term.
How is that possible? How did she managed to accumulate so much wealth?
1 – The magic of passive investing
Rather than trying to select good stocks, Marta choses to invest in an Exchange Traded Fund (ETF) tracking the S&P 500 index.
This means that she put her money in a diversified fund,
Which gave her a broad passive exposure to the US stock market.
It was the right decision because passive investing has been proven to return a superior performance over time when compared to active investment strategies.
Although it might seem counterintuitive, this means that stock picking, even when done by professional and experienced traders, typically returns less money than just investing in the stock market as a whole.
But what kind of returns are we talking about?
Well, in the last thirty years to May 2018, the S&P 500 index returned an average of 10.5% to investors on an annual basis, assuming all dividends were automatically reinvested.
2 – Low fees
Also, by choosing to invest in an ETF rather than a traditional investment fund, Marta put her money in a type of investment fund that charges low annual management fees.
This is equally important because numerous research papers have shown that fees have a tremendous impact on overall performance, especially in the long run.
3 – Start early and stay in
Another thing that Marta did right is that she started investing early.
She also did not sell her investments when the stock market was going down.
By never selling anything, she allowed her investments to grow and compound during her 40 years of investing.
‘Compounding’ means that an investment earns a return not only on the amount initially invested but also on the accumulated earnings of previous periods.
Let’s take an example. If you invest $10,000 now and earn a 8% annual return, this is what would happen:
After Year 1: $10,000 x (1 + 8%) = $10,800
After Year 2: $10,800 x (1 + 8%) = $11,664
After Year 3: $11,664 x (1 + 8%) = $12,597
After Year 4: $12,597 x (1 + 8%) = $13,605
After Year 5: $13,605 x (1 + 8%) = $14,693
And the magic of compounding amplifies the longer your money is invested.
After 30 years, you would end up with a mind-blowing total of $100,627.
That is why you should not be afraid of losing money and start investing TODAY!