Growing up, my family never talked about the stock market. We didn’t discuss ticker symbols over the kitchen table. Perhaps it was because my parents were too busy just trying to make ends meet. To us stocks were risky. They were the playground of the rich. You either had to have money or immense intelligence to wade into the world of stocks.
Fast forward a few decades and I realize many of my friends and colleagues were brought up the same way. To this day many of them still believe that the stock market is a fool’s bet.
But here’s the simple truth. Over time, the stock market has become one of the greatest wealth multipliers of our time. Over the past 70 years the S&P 500 has averaged a 7% yearly return on investments. Understand that in some years you would make much more more than a 7% return, in some years you could earn less than a 7% return and in other years, as in 2008, you could even lose money.
But invested over a long period of time, on average, you’ll make a nice return on your investment. Combine this with the power of compounding interest and you’ll quickly understand how stocks multiply your wealth over the long term.
That’s why the wealthy hold a large share of their wealth in stocks, while the rest of us, African-Americans in particular, hold our wealth primarily in our homes.
According to a study by the Spectrum Group, ultra high net worth investors have 68% of their net worth in investable assets while only 16% of their wealth derived from their primary residence:
“Examining the portfolios of Ultra High Net Worth investors with a net worth between $5 million and $25 million, the Spectrem study shows that on average 68 percent of an investor’s net worth is comprised of investable assets, while 16 percent is invested in the principal residence. Less than 10 percent is invested in real estate, defined contribution, restricted stock, insurance, or privately held businesses.”
As African-Americans we’re often too intimidated to take advantage of the money multiplier effect of the stock market. But with a little knowledge, you can ease your fear. Let’s examine some of the myths that keep the stock market from building wealth for you and your family.
Investing in the stock market is too risky
“It’s too risky.” This is the greatest objection people have when considering investing. Let’s be clear. You should not invest in stocks to make a quick buck. Trying to find the next hot stock that will make you an overnight millionaire is the quickest road to financial disaster.
If you look at any graph of long term stock market returns, you’ll find that the graphs all go upward, meaning over a long term period, say 10 to 20 years the market will make you money. But look closer at these same graphs and you’ll notice that in any particular year the market could go down in value. Year to year there is a lot of volatility. Take 2008 for instance. Many investors saw their stock investments drop 40% or more in value. Yet from early 2009 (after the crash) to early 2015, the S&P 500 more than doubled in value.
Once you understand that successful investing is about getting rich slowly, you’ll set yourself up to take advantage of this amazing wealth multiplier. Your investment horizon needs to be 5,10,20, even 30 years or more. In some years you could make a lot of money and in others you could lose money. But keep your money invested over long periods of times and you’ll almost always come out ahead. This is the crucial lesson the rich have mastered.
You have to be rich to invest in the stock market
Fortunately, you don’t have to be wealthy to invest in stocks. Many Americans have access to 401K or 403B plans that allow them to invest part of their salaries in the stock market. Online brokerage firms allow you to invest with as little as $250 to $500 dollars and newer apps and websites like Acorns allow you to invest as little as $5.
But remember, you’re looking to invest over a long period of time to reduce risk and maximize your returns. Never invest money that you’ll need in the not to distant future, and make sure you always have an emergency fund in place before you even consider investing.
You have to know a lot to start investing
You also don’t have to be a whiz kid to get started. According to Warren Buffett, one of the greatest stock market geniuses of our time, the most boring and no hassle methods to invest in the stock market is also be the most effective. He’s a great proponent of index funds.
Index funds allow you to simply purchase all the pieces of stock in a particular index. An S&P 500 index fund would, for instance, allow you to own a small piece of every one of the 500 largest companies in America. Index funds cut out the need to research individual stocks, providing you with a quick and easy way to start taking advantage of the power of investing.
The rich use stocks as a wealth accelerator. They understand that money invested over long periods of time is one of the surest ways to increase their wealth. Isn’t it time you do the same?
BMWK, what’s your greatest fear about investing?