A majority of people out there thinks that investing is not for everyone. A recent survey by Blackrock revealed some critical reasons across generations, and as for why people would postpone or even not consider to invest at all. In my last two posts, I have covered the top 3 reasons from that list. Time to get to the last one:
- Access to and understanding of information about investing
- Having not enough money to start investing
- Being too worried about one’s current financial situation (and thus being too busy to worry about the future)
- Being afraid of losing everything
Worrying about losing it all is a very common concern that is being repeatedly mentioned among those who don’t consider investing at all. So let’s take a closer look at this valid concern.
Can you lose your investment?
The short answer is simple: Yes. Of course. It could happen.
You could also lose money if you forgot your wallet on the bus or train. Or you could waste money on a product that you actually don’t need. Or a product of inferior quality that will break once unpacked and force you to have to buy something else. You could lose money when you “borrow” it to someone. There are countless options.
But these would be all examples of let’s call them unvoluntary choices. Let’s look at other ideas that are supposed to make you money, but could end up losing it. Let’s see.
Putting money in a savings account is a viable option. Or so it was. But these days, negative interest rates and inflation do just that, make you lose money. Thinking about putting it all in a safe? There is no way how money can grow there, and again, inflation will take its toll. Want to max out your provident fund payments or social security? Sure, but it’s not that these are without risks either. In Germany, the pension payouts are now so low that many retirees need to apply for additional supplement money just to get by. Playing with the idea of getting some government bonds? Well, just look at Greece, Cyprus or Italy. Countries do get in financial trouble as well.
What I want to say and show is that there is no option without any risk out there. Risk is part of the deal. Of any deal.
What does it mean to buy and to own company shares?
When you invest in the stock market and buy shares of a company, you are basically becoming a partial owner of the business that you put your money in. One of many. It means that the business is already established and grew large. Large and confident enough, to be backed up by millions of other fellow investors. Millions of other people who rely on it for this business to generate wealth for them.
And those investors are never idle. They observe and evaluate the company and express their opinion about the value of the shares and thus ultimately of the company, by influencing the share price. Every single day.
Every time when somebody puts up a buy order to purchase some shares, someone else sees the order and examines whether he/she is willing to accept this offer. So there are always two parties involved. One, that wants to sell. One, that wants to buy. And everyone has his/her reason to do so.
This already clearly indicates that where you might see an opportunity for a great future, someone else sees it the other way round. This also means that where you think that you can make some money, someone else thinks that this ship has already sailed. Or that the value is already fair and has no more upward potential. Or that someone is already happy with the development and needs the funds to invest in something else. Or that someone just needs the money.
You will never know the full and real reason why someone else wants to sell a stock, but you should be aware of this system. Because it also implies that there is a risk. BUT, as Warren Buffett likes to say: Risk comes from not knowing you are doing. The more you know about the company you plan to invest in, the more you can leverage your risk. Or, if you don’t have the time and patience to dive into it, you can just leave it to others.
Reducing risk through diversification and a passive investment
Warren Buffett recommends potential investors a very specific type of investment: Low-cost passive index funds. Also known as ETFs. What makes ETFs a great investment? They reduce the risk by splitting your invested money across all companies in the index that the ETF is being applied to. So if you put 100 Euros in an ETF that is following the German DAX index (which includes the 30 largest companies in Germany), it means that each of these 30 companies listed in that index will become partially yours. In tiny amounts, but yours.
Diversification through ETFs makes sense for small investors because it is hard to achieve if you invest only small amounts of money. For example, one share of the German sports giant “Adidas” costs as of today 259,65 Euro. Just one share. So if you have only 100 Euros a month to start investing, how could you buy even only this one share? There is not much of a chance to start diversifying either.
ETFs work here the same as other funds, by collecting the money from other fellow investors and putting it to work in a nice bundled package. This way they can buy all the shares that are part of the index, and let you participate in it on a partial basis. This is just one of many ways, techniques, and strategies to manage your risk.
The financial system is built for this
As an investor, you put your money to work in a business. Our world is built on that. Our countries depend on that. Our jobs depend on that. Our financial system couldn’t function without this. So unless the whole financial world collapses, there will always be some business opportunities to invest in. As a passive investor, all you do is to put your faith into the system of how the business world works.
And yes, it might collapse someday. But guess what? If our system would collapse, then it wouldn’t even matter where you put your money in. It would be gone anyway. So you have a choice here: Trust in the system and get the chance to participate in all the opportunities that it has to offer, or don’t and forfeit all your chances right from the start. If you see it this way, the decision of whether or not to invest should be a no-brainer.
If you still have some restrictions, it might be not a bad idea to get someone to help you. The internet is very resourceful, but a financial advisor could also make sense. If you are reading this blog, it means that you have already made some steps in the right direction: to educate yourself. Don’t stop there. Keep reading. Keep learning. And start investing.