Why You’re Guaranteed to Lose Money in the Stock Market

Let’s say you loan me $10 dollars and a few months later I haven’t paid you back. So you ask me for your money, and I tell you that I only have $5 right now. But I also say that sometime in the future I’ll have the full $10 and I’ll probably even have more, so could you please just wait a little bit?

You ask how long that will take and I say I don’t know. It could be months or it could be years. You’ll just have to wait and see.

That would be pretty annoying, right? Then again, it’s only $5, so maybe not the biggest deal.

But what if you had loaned me $10,000 instead, and when you wanted your money back I only had $5,000? You’d probably be pretty angry, and it may even be enough to end our friendship.

Well, this is the kind of situation that comes up with the stock market all the time. And if you want any of the benefits of investing, it’s a situation you’ll have to learn to live with.

The Stock Market Is an Unreliable Friend

The stock market is the friend that doesn’t always have your money when you want it, but promises it will be there at some point if you just give him some time.

Sometimes he’s down big, like when he lost 55% of your money from 2007 to 2009. Sometimes it’s a little smaller, like when he lost 12% of your money from November 2015 to January 2016. And sometimes he just has a bad day, like when he lost almost 3% of your money on September 9th of this year. (All stock market data based on the Vanguard Total Stock Market Index Fund (VTSAX)).

He means well, but he’s not perfect. Who is?

And of course, he always says that he’ll get your money back eventually. He even says that you’ll probably end up with a lot more if you’re willing to wait.

He just can’t say how much or how long, and he can’t make any promises.

Why You Need to Stick With Your Sketchy Friend

If this was really a friend, you’d probably get as much of your money back as possible and forget the idea of ever lending him anything ever again.

But it’s not a friend, and there are two good reasons why you should accept this personality quirk for what it is and stick with the stock market anyway:

1. You Can’t Predict It

You know for sure that you’re going to lose money at some point. Sometimes it will just be a little bit over the course of a day. Sometimes it will be a lot over the course of a few years. It’s going to happen.

What would be great is if you could figure out a way to predict when it was going to happen. Or at least see it as it’s happening so you could get your money out, avoid the crash, and then invest back in when the market’s on its way back up.

Unfortunately, it doesn’t work that way.

Go ahead, search to your heart’s content for someone who has consistently timed the ups and downs of the markets again and again. If you can find even one person who’s been able to do it repeatedly, and whose claims are verified by a legitimate third party, I’ll eat the shoes right off my feet.

There’s just no evidence that anyone can do it well. And there’s plenty of evidence that almost everyone who tries does it poorly.

So while it would be great to avoid the times when the stock market loses your money, it just isn’t possible. Well, unless you’re willing to avoid the stock market altogether. Which brings us to…

2. The Highs Are Higher Than the Lows

The flip side of all this talk about losses is that in the long run the stock market has always gone up.

Here’s a chart showing the S&P 500 from 1928 through today (source):

sp-500-historical-chart-data-2016-10-11-macrotrends

When you stretch it out over 90 years, even the very rough years end up looking like relatively little blips in the middle of a long, consistent march upward.

That’s not to say that this is guaranteed to continue. It’s certainly not. But if you assume that we continue to see anywhere near this kind of performance going forward, investing in the stock market is going to make your life a lot easier.

Let’s say that you’re 35 and you have $5,000 to invest each and every year between now and the day you retire at 67. If you put it into a savings account earning 1% interest, you’ll end up with $194,345. If you invest it and earn a conservative 6%, you’ll end up with $486,716. That’s a $292,371 difference.

In other words, this is one of those cases where the reward is usually worth the risk. When you’re willing to accept those short-term losses, you’re more likely to reach the long-term goals you care about most.

Accept the Losses and Stick with It

There’s no way around it: The stock market will occasionally lose your money.

You’ll go asking for it, and he won’t have it. Sometimes he’ll be short by a little. And sometimes he’ll be short by a lot.

The only real question is what you’ll do when that happens. Will you take what you can and vow to never lend him money again? Or will you remember that this is just part of the deal and take him at his word that somewhere down the line he’ll have even more than what you gave him?

The stock market may not be the easiest friend in the world, but he’s usually good to the people who stay loyal.

Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

Related Articles

The post Why You’re Guaranteed to Lose Money in the Stock Market appeared first on The Simple Dollar.



Contributer : The Simple Dollar http://ift.tt/2en1bpT
Why You’re Guaranteed to Lose Money in the Stock Market Why You’re Guaranteed to Lose Money in the Stock Market Reviewed by mimisabreena on Monday, October 17, 2016 Rating: 5

No comments:

Sponsor

Powered by Blogger.