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Have you ever thought about investing in the stock market?
Maybe you have a cousin or a co-worker who’s always talking about how their “portfolio”
is doing, and you think “Maybe I should be doing that, too…”
But then you do a little research and it sounds like this:
[CACOPHONY OF RAPID FIRE FINANCIAL CABLE SHOWS CLIPS WITH LOTS OF CRYPTIC JARGON AND ALARMIST WARNINGS] WARNINGS]
Yikes.
Y’know, it reminds me of the time I walked up to a craps table in Vegas.
The rules were so complicated and confusing, how could I justify plonking down my hard-earned
money on a game of chance I barely understood?
A lot of people feel the same way.
Half of Americans have $0 invested in stocks.
Many of them don’t have spare money to invest, but some might think it’s just for risk-taking
high rollers.
But is the stock market just a big casino?
Or is it something that you should be making a part of your financial plans?
[MUSIC]
What exactly is a “stock”?
The concept was invented in the 17th century by the Dutch East India Trading
Company which wanted to allow multiple investors to underwrite their expeditions, so they sold
shares, or percentages of the company.
It worked out well for Dutch East India, making them the biggest company in the history of
the known universe, with a value greater in today’s dollars than Apple, Google and Facebook
combined!
Today you can buy stock in companies of all sizes, betting that the business will do well
and the value of your shares will increase.
Smaller, newer firms are more risky, because while there’s a chance they could be the
next Uber, there’s a much bigger chance they could go bust.
Larger, established companies aren’t quite as exciting, but they’re a lot more stable.
I mean, who doesn’t think Coca Cola will still be selling soda tomorrow?
That sounds a lot like the odds at a horse race.
Bet on the favorite to win a little bit of money, or go for the big bucks by risking
it all on a long shot.
So, why not skip the brokerage fees and just go to the racetrack?
When you look at the stock market up close, it can sure seem like a gamble.
But you might be missing the forest for the trees.
For instance, track one company’s share price for one year, and it looks like a wild
ride.
Who’d put their savings on that roller coaster?
But let’s take a few steps back.
Instead of just one company, let’s look at a bunch of companies, and instead of one
year, let’s look at 90.
The S&P 500 Index is a measurement of how 500 of the biggest companies have performed
over time, and since 1928, it grown by an average of 10% per year.
Sure, there are still ups and downs, but what looked completely unpredictable up close,
from a wider perspective tells a different story.
So how do you get your portfolio--the collection of stocks you own--to mirror that steady increase?
The two main tactics are diversification and long-term investing.
Stock diversification means owning stocks from a lot of different types of companies,
which protects you from the volatility of any specific sector.
And long-term investing, owning stocks for at least 10 years, protects you from the volatility
of any one bad day.
Even a really bad day.
When the market crashed in 2008, many people rushed to sell off their stocks and just ate
the losses.
But those who could stay in eventually made that money back--plus some!
Behavioral economist Richard Thaler actually recommends not even tracking your portfolio
at all.
People who check the price of their shares regularly tend to get spooked and sell them
when they temporarily dip, which is basically guaranteeing that they sell them for less
than they bought them--the number one no-no of playing the stock market!
These strategies reveal how different from a casino the stock market actually is.
Casinos in Las Vegas have payout percentages that average in the mid-90s, meaning they
pay back in winnings around 95% of the money that is gambled.
So if you played Las Vegas like a stockbroker, diversifying your portfolio by playing a bunch
of different types of games, and long-term investing by keeping your money on the table
whether you win or lose each day, you can be fairly certain that you’d steadily lose
5% of your savings.
It doesn’t take an economist to tell you that losing money and making money are two
very different things.
Of course, there is still some risk involved.
Even a diversified portfolio can take a dive, and when life deals you a bad card, you might
need that money now, not 5 or 10 years down the road when the market goes back up.
So is it smarter to just keep your money in a savings account?
Well, not playing the stock market carries its own risks.
As employer-funded pensions become less and less common, Americans are increasingly on
their own when it comes to saving for retirement.
And as companies continue to grow and everything gets more expensive, if your savings are not
somehow tied to the overall growth of the economy, you can get left behind.
So...where do you start?
Most people buy and sell individual stocks through companies called brokerage firms.
It’s actually pretty easy to set up an account, and they offer guidance on how to invest your
money… for a commission.
Of course, you can always pick stocks yourself, but if you’re new to it, that can be as
risky as a slot machine.
Another, more common way to own stocks is through mutual funds--you might already own
some in the form of a 401(k).
These are pre-assembled bundles of stocks and other investments that are designed in
advance to be diversified, which spreads out the risk--and makes them less of a hassle.
We’ll be covering mutual funds in more depth in a future episode.
Like any big investment, the smartest first step is to seek the help of an investment
advisor who is a sworn fiduciary, who can help you make a plan that best fits your unique
situation.
Remember, even if you keep your savings in cash under your mattress, you’re still a
part of the larger economy.
Which means, in some sense, you’re already invested in the game.
So you may as well be playing with some strategy.
And that's our two cents!
Thank you to Curiosity Stream for supporting PBS Digital Studios!
Curiosity Stream is a subscription streaming service that offers documentaries
and non-fiction titles from a variety of filmmakers, including Curiosity Stream Originals.
For example, you can watch 1929 to hear more about the ups and downs
of the stock market.
You can learn more at curiositystream.com/twocents,
and use the code "twocents" during the sign-up process.
Do you have more stock market questions? Post them in the comments and we’ll try to answer them!
And if you have your own experiences with investing in stocks, we’d love to hear em!