Hi, TFD Amanda Holden here.
Some of you also know me as "The Dumpster Doggy."
And I'm a writer, speaker, and investment educator.
I'm taking over Chelsea's Tuesday show
to talk about investing in the time of COVID-19.
And yes, I am coming to you from quarantine
dressed in a work-from-home lie essentially, from the waist up.
What's happening in the world right
now is extraordinary on both a public health level
and on an economic level.
And so I'm hoping that I can help assuage some concerns
and explain what's going on with investing in the markets.
This week, this last week has been particularly kooky.
As of filming, I'm filming this on Friday,
the US stock market has had one of its best weeks
in decades, which is insane and which, to be honest,
I don't know, it feels kind of gross considering that this
is also happening alongside a now three-week total of over 16
million unemployment claims.
So let's talk about what this means for you.
You know, what's going on with my 401(k)?
Is it a good time to invest or is it a bad time to invest?
And if it's a good time to invest, how?
And also, what are "markets?"
Before we dive in, let's define some terms that I'll be using.
First, what-- can someone please tell me what is a 401(k)?
A 401(k) is an account.
It's a bank account.
It's specifically for retirement,
and it's a fancy tax-advantaged retirement
account that holds investments.
And it's generally set up through your workplace,
although you can't set one up yourself.
But the key word here is that it is an account.
Because sometimes I'll hear people say,
oh, my 401(k) is an investment, which
is so close, but not quite.
Your 401(k) holds investments.
And like a 401(k), a 403(b) an IRA, a Roth IRA,
these are all just accounts.
So if you have a workplace retirement
account like a 401(k), you may not even realize it,
but you're likely being automatically invested
in a mix of stocks and bonds using mutual funds.
Let's deconstruct that sentence a little bit.
First, stock.
A stock is an investment that represents
a share of company ownership.
So when you buy a stock, you own that company now.
You're an owner.
That's why stocks are also referred to as equities
because you now own equity in that company for which
you own a stock.
And the idea is that as that company grows,
so does your little proportional piece of that pie over time.
A bond is often considered a stocks counterpart,
like the Sonny to its Cher.
A bond is a contract with a company,
like Coca-Cola or the government, so for example,
the federal government, that's a treasury
bond, where you are literally loaning them your cash.
And so then the money you earn on this investment
is the rate of interest is that interest
that they got to pay you for borrowing your money.
Whereas stocks are considered to be higher risk, higher reward,
they're very unpredictable; bonds
are much more predictable, but they're also lower risk,
lower reward.
Next, a fund, whether a mutual fund or an exchange
traded fund.
A fund is really nothing more than a big old basket
of some other investment type.
So it could be a big ol' basket of stocks,
it could be a big oil basket of bonds,
it could be a big ol' basket of real estate holdings.
So whereas buying a single stock would be like,
say, buying just one stem, just one
rose, buying a mutual fund would be
like buying the whole bouquet.
And so for some people, this last month
has come as a bit of a surprise.
They may have a for one kid count that
automatically invest them into mutual funds that hold stocks.
And so these people are very much invested
in the stock market, perhaps unbeknownst to them.
So most of the hullabaloo out there
is with regards to the stock market.
And the stock market refers to just that, the big ol'
marketplace for stocks, these shares of company ownership.
But it also refers to how these investments
are performing overall.
So often when you hear somebody using the shorthand "markets,"
they could be talking about any investment market.
They could be talking about the real estate market.
They could be talking about the market
for antique collectibles.
Insert picture of Beanie Babies here.
But most likely, they are talking about either the US
or the global stock market.
Quickly, compare that to the economy,
which is bigger than the stock market.
It includes everything.
The economy includes everything that we produce--
so our work, our jobs, and also everything that we consume,
so 29 boxes of mac and cheese since the start of quarantine--
but also our rent, our homes, and other public services,
like, for instance, trash collection.
The economy is more important than the stock market.
Jobs are more important than investment markets.
And human lives are more important than all else.
You may have heard this one before, the stock market is
really volatile, and it is.
We felt it last month.
But what exactly does that mean?
What is causing it?
Well, first, it means that prices are up,
and then prices are down.
At around February 19, the market peaked,
and then it lost a lot of its value,
and fast, when it became clear how serious COVID-19
was going to be.
At its worst, the US stock market had lost nearly 34%
of its value.
It has had two very good weeks since then, randomly, and as
of the recording of this video, the US stock market
is down about 17% since the start of the year.
Though there's been a lot of airtime dedicated to what's
happened in the last few months, it's really important
to understand within the context of what
happens in the markets over much longer time frames.
A three-month snapshot tells us as much about the stock market
as it would about a human life, like you're telling me
that you haven't had a really weird
three months in your life?
I know I have.
If you look back over a year, the stock market
is down just a wee little bit, just about 3%,
but it hasn't felt like that because it's fluctuated
as wildly as our emotions during that same time period,
and that's no coincidence.
The stock market is controlled--
I mean, there's some other puppet strings happening
behind the curtains-- but the stock market
is generally controlled by our investor emotions.
When investors panic, they sell their investments,
and that is what causes the prices to drop.
When they feel better and they buy back in,
that's what pushes prices higher.
And we experience this in real time,
which makes it really unique.
It's a really unique marketplace.
Like, imagine if say, like, hot coffee and iced coffee prices
fluctuated every single second of every single day
based on how much demand there was for either.
That would be wild, but that's what's
happening in the stock market.
That's why the stock market is so immediate, and reactionary,
and in your face, whereas the economy
can be much slower to crumble but then also much slower
to rebuild.
It's not like with an investment, where someone
can make a change like that about
whether they want to own it or not,
incongruous with their current and immediate emotional state
and their outlook on the world.
And that's really all that volatility is is this constant
disagreement, this buying and selling,
investors saying I do want it, I don't want it, I do, I don't.
OK, so we understand that first trend about the stock market.
So trend 1, in summary, is that the stock market
is highly emotional.
It's volatile in the short term.
And just so you know, in the market,
short term could mean a day.
It could mean a month.
It could mean a couple of years.
But more importantly, this volatility cannot be predicted.
To know what's going to happen this week
or this month in the stock market would require,
first, you know what's going to happen in the real world, which
is real hard to do, and then also
how the global-investing public is going to react to it.
Trend number two, the longer-term trend.
Over longer periods, the stock market does move higher.
Check out this graph of the growth of the US stock
market over about a century.
So there are some really yikes moments you'll see,
but overall, it does trend upward.
In fact, the stock market is up about 2/3 of the time,
and it's down about one third of the time.
Now you might be thinking, OK, lady,
but what does that mean for me moneymaking wise?
Well, the stock market averages out--
in the world of investing, we say "annualizes" to about 10%
a year, at least that's what it's been historically.
But you should never expect those returns
to be delivered to you in a neat little package of 10% wrapped
up with a bow and dropped on your doorstep
every single December 31 of every year.
That's not how it works.
Instead, what you'll get is some years,
you're going to get-- it's going to be great.
You're going to get a jet ski dropped at your doorstep.
Some years, you're going to get a flaming bag a shit.
That's just the way that it works.
But over time, the stock market's all right.
It does provide.
It just doesn't do so every single year.
And if you understand anything, I want it to be this.
These frenetic moments are not only a normal and natural part
of the stock market lifecycle, but I actually
argue that they are a requisite to achieving higher returns
over time because if we know anything about investing,
it's that risk and reward are really
two sides of the same coin.
You do not get to have one without the other.
If somebody claims that they've got
an investment that is all reward and no risk, what is that?
That's a scam.
Really, the only reasonable goal with investing
in the stock market is to return the average over time.
We can't make the stock market give us
something it wasn't planning on giving us.
And so the best way to do this is just be along for the ride,
be along for the whole dang ride,
knowing that the short term cannot be predicted.
The performance of last week is just
such a good example of this.
Like, last week, of all weeks was record breaking
in the market--
last week, what a world.
A study by Putnam investments further illustrates this point.
They looked at a 15-year period in the US stock market.
If you just stayed invested throughout the entire 15-year
period, you annualized, averaged out, 9% a year.
Now if you had missed just the 10 best days during that entire
15-year period, less than one day per year,
your average annualized returns would have dropped to 4.13% per
year--
just 10 days.
Great days in the stock market are kind of
like these rare, beautiful butterflies,
and they're super important to your long-term success.
And so you've gotta catch them all.
And the best way to do that is just
use your big, wide, I stay invested always butterfly net,
right?
And here's the last thing I want you
to understand about the stock market that's
pretty counterintuitive.
It's really not the way that our brains were designed to work.
When we hear that it's a bad market, which, it actually
presents an opportunity for higher returns in the future.
When we are in a good market, which somebody would describe
a good market as a market that's been good for many, many years,
that actually generally spells lower potential future returns.
Said another way, investing when everybody around you
is freaking out is actually kind of a decent investing plan
because remember what it is that you own when you own a stock.
It is a share of ownership in a company or in many companies
if you're using a fund.
And you still own the same amount of that company.
So would you rather buy that company for cheaper
or would you rather buy it for more expensive?
And so, yes, that share is valued slightly less
than it was two months ago.
It's also valued slightly more than it was two weeks ago.
But who cares?
It only matters if you're trying to sell it right now.
But you're not investing in these companies
because you think that they're going to provide you
some sort of immediate return.
That's not how investing in a business works.
You hold onto them because you want
to take advantage of the wealth created
by these companies over decades.
And so knowing this, here is your strategy summary.
One, knowing that the stock market cannot be timed
in the short term because it is fueled by completely
unpredictable investor emotion.
Don't try to do it.
Two, the best strategy is to keep adding money in regularly
over time, like with your 401(k) contributions,
including right now.
Three, do not invest any money that you cannot afford to lose.
Your ability to weather what could
be a really prolonged downturn in the economy
is more important than seeking out investment opportunities,
so take care of yourself.
But if you've got money that's already invested, keep with it.
If you're looking to get started investing, one of the easiest
ways to do that is by buying an index fund, an index target
date fund, or by using a robo advisor,
like Wealthfront, Wealthsimple, or Ellevest.
These are all diversified approaches
that, although they will definitely expose you
to the risk of the stock market so you've
got to be prepared for that, they aren't nearly as risky
and time consuming as picking out individual stocks.
So good luck.
When it comes to the market, stay cute,
stay completely unbothered by what's happening out there,
and even allow yourself to let go of some of this control.
None of us can control the market.
Controlling the market is not our job,
and so feel free to open up that space for whatever it
is that we can control.
Thank you so much.
Again, I'm Amanda Holden.
I am on Instagram giving away tons of free investing
education @ dumpster.doggy .
My blog is called the "Dumpster Dog Blog,"
and my business is called "Invested Development."
Thank you.