The Stock Market is Awesome!
So let’s get back to some investing basics! Everybody say it with me – WE LOVE THE STOCK MARKET! It is awesome and not scary at all. Repeat that to yourself 10 times every day. You need to drill this into your head if you want to have a happy and wealthy retirement. I’m going into some basics. So if you think you already know everything, you can feel free to move on. However, if you’d like to stick around and pick up a few tidbits of knowledge, or if you’re new to the investing world read on!
We already covered where you can put your money: the different tax-advantaged and taxable accounts. Now it’s time to cover the first asset type that you should purchase once you get your money into one of those accounts.
What are stocks?
Tiny pieces of awesome companies. It’s kind of cool when you think about it this way. One share of Alphabet (Google) is currently running around $800. Google is currently worth around $550B. So that means that for every share of Google stock, you own 0.0000001455% of Google. This may not sound like much, but it means that you own a tiny piece of one of the most dynamic and successful companies in the world. A tiny piece of a company that is building self-driving cars, delivering the internet to everyone via crazy cheap infrastructure, and also bringing in over $16B in profits every year from a massive advertising business. Not bad for $800 bucks. What would you rather have? An iPhone 7?
Stocks are tiny pieces of the future of the world economy and the human race. They’re tiny pieces of innovation, tiny pieces of dynamism, tiny pieces of all the human potential in the world driving us forward. If you’re optimistic about the future of the human race (which the Grizzlies are), you should be optimistic about the potential of tiny pieces of the companies that will drive us to that brighter future. Think of all the awesome stuff that exists today that didn’t exist fifty years ago, now think about what will exist in fifty years. If you want a piece of that you want to own stocks. If you’re pessimistic about the future of the human race no amount of investing advice will save you, and I would recommend stocking up on some canned beans, a couple good rifles, and some ammunition. If that’s not you then read on!
Really, why should I own them?
So that was some flashy language about what stocks are, but the real reason that you should own them is that they are good investments that deliver great returns year after year after year. Stocks are the best performing asset that you could have owned over the last 100 years. Anywhere. An awesome source that we’re going to use for the is the Annual Credit Suisse Investment Yearbook that provides a ton of historical data around stock and bond performance globally.
Let’s look at the US! Over the last 115 years if you had been invested in the stock market you would have made, on average a 6.4% return every year after inflation. That’s BIG. There’s a fun rule called the rule of 72. Basically, take 72 and divide it by the interest rate. That’s the number of years it will take for your money to double. That means your investment would have been doubling every 11 years or so. Over time this is INCREDIBLY powerful. The chart below shows just how powerful.
Compare that to the average return you would have received when invested in bonds, around 2%. Over time the difference is staggering. Now obviously, you aren’t going to be investing for 115 years. But even over a shorter time frame, the stock market does significantly better. $10,000 invested for 10 years in the stock market would on average have grown to almost $19,000. $10,000 invested in bonds would be sitting at only $12,000.
But isn’t the United States an outlier? The US has risen to become the dominant world superpower over the last century, our companies and stock market were bound to outperform those of other countries! Correct! We did, by a lot. But the wisdom that stocks are still the best asset class holds true even in those far-flung regions of the world. The graph below is the total global market outside the United States.
Not quite as impressive. But globally, stocks still delivered a 4.3% average return vs. a 1.5% return from bonds. And as a shout out to the Aussies in the crowd, let’s take a look at the top global performer out there. That’s right, the US is the second place finisher in this race.
And all of this growth is through two world wars, a great depression, a great recession, oil price shocks, rampant inflation, rampant deflation, etc. Through all of the global turmoil of the 20th century and the first part of the 21st, the global stock market still delivered. If anyone tells you that the 21st century is shaping up to be bleak, have them read a little history about the period from 1914-1945 and get back to you.
But the Stock Market is Scary? What if it crashes!
2007 – 2008 was one of the worst periods ever for stock market performance outside of the 1929 crash that preceded the great depression. The stock market lost over half its value in one year. Do you want to see a fun picture? The image below is from our own Vanguard account. Can you find the crash? No? Keep looking.
Not easy is it. That is because, like any good bears, when the market was at the bottom we dumped as much as we could into it. Mrs. Grizzly was in law school and Mr. Grizzly was a lowly 1st Lieutenant in the army, so as much as we could was not much at the time. But the result was an ever increasing wave of money that we are continuing to ride to this day.
The Market is a wild ride sometimes. It goes up. It also goes down. But the overwhelming trend as the years march on is up. If you have the fortitude to stick it out during those times when its down – like 2007-2008 – you will be rewarded over time. The secret, which isn’t really a secret at all, is to stick with it.
When should I be scared?
Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett
There’s a reason he’s called the sage of Omaha. They are incredibly wise words. The time to be most wary of the stock market is when everyone else thinks there’s nowhere to go but up. When everyone else thinks that ‘this time it’s different’. That is when you should start to hesitate a little more, be a bit more cautious. When it’s going down and everyone is panicking is the time to get little $ signs in your eyes.
Does that mean I should try to time the market?
No – that’s stupid. If you don’t know what ‘time the market means’, it’s basically when you try to buy low and sell high. Sounds awesome! Who wouldn’t want to do that? And that’s exactly the problem. Smarter people than you and I try to do it all the time, and nearly all of those smart people fail.
“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.” – My Hero, John Bogle on market timing
The simple answer is to just invest. Get your money in the market and leave it there. Let those nice 6.4% average returns carry you forward. Continue to add more year after year. If you run into a big crash then you should add some more, but don’t try to time the bottom. Just get it in there. In 2008 when we invested our excess cash the market still had another 20% to drop. We’re still ended up happy.
How should I buy them?
The simple answer is dirt cheap index funds like those the Grizzlies are invested in. Why? Because they are dirt cheap and Wall Street is trying to steal your money. Index funds let them steal a little less of it.