Ever since I started talking about investing with friends, colleagues and family members, I have received different feedback – from encouragement to words of warning. It seems that money is a very divisive subject, and everyone has their own opinion on “Is Investing Dangerous?”. Let me share some of the things people have said to me, and try to put up a strong case against each one of them.
Stock Markets are dangerous, Investing is dangerous
“The stock market is dangerous! I know people who have lost all their life savings.”An old uncle
This is probably the biggest reason why more people think investing is dangerous and don’t invest a high portion of their money into the stock market – I’m excluding people who dabble in the stock market by investing a single, relatively small sum, hoping that they’ll have picked a ten-bagger and multiply their money. It is true that the stock market can be a place where a lot of money can be lost, but thankfully, it isn’t generally down to luck.
It is imperative to understand what one is investing in – the financial information and history, the company’s products, the future forecast, the competition…and all the other factors which determine a good company. Once you know these, and you have purchased shares at a fair price, very little is left to luck alone. Most companies will increase their earnings with time, and therefore their share price will also rise. Look at any of the companies in my FIRE portfolio and you’ll find a great history of both dividend increases and share price increase.
In fairness, it is true that one could lose absolutely everything they own…if they were naïve enough to invest without doing the necessary research, or they had never heard the expression “never put all your eggs in one basket”. A lack of diversification can be disastrous given the wrong conditions, so as long as an investor is properly diversified in many companies and sectors, they could absorb some of the companies they are invested in going bust.
It is also possible that investors could be governed by fear when their stocks drop significantly. They may think it wise to then panic-sell in order to minimize their losses. In reality, they should not be worried with daily variations in stock price and focus on the long term gains they will experience. It is still important to monitor companies periodically, to ensure they are being properly managed and will continue to operate at the expected level.
In case of Emergency
“That money you have invested is locked away – what if you need it in an emergency? I’d rather keep my money in the bank, so it’s safe.”The Paranoid Mausi
The money that I have invested in stocks is still my money – I haven’t bought a depreciating asset, or thrown the money away. I could always decide to sell the shares of companies which are making a profit based on what I paid for the shares, should I ever need a lot of money. Since I am planning on investing for life, and one day live on passive income, I don’t plan on selling my shares.
Another plan would be not to re-invest my dividends in a certain month, and use them to pay for whichever emergency I had. I also keep a decent sum of cash in my bank account or in liquid funds, to act as a short-term cushion. This has been very useful several times in the past. Then again, that is what emergency funds are for.
There is also the issue of inflation, or the rising price of goods and services. In developed and developing countries, this is anywhere from 2-8%. If you keep your money in a savings account, making 4.5% a year in interest, you are effectively losing money, as the effects of inflation will chip away at the purchasing power of that amount. I would rather invest my money and make returns higher than inflation.
Blame it on the corporations
“Corporations are evil and unethical!”The Gen Z Kid
It’s true that some large corporations have been involved in some unethical business practices, or natural disasters, some of which can be attributed to poor management decisions. I find people are very quick to judge corporations based on what they hear in the media, on mistakes they made decades ago. People still use their products or services, maybe even unknowingly. They also provide employment for thousands, or millions of people, thus helping the economy and benefiting countless families.
As much as some people might dislike it, we live in a world of corporations. Every single day we use their services, eat their products, and watch their programs. By simply reading this you are: using electricity from a utility company, looking at a screen manufactured by a technology company, which used materials extracted by another company. The list could go on, but I think you get my point. Rather than focus on the mistakes of some companies, I think it’s better to look at the positives.
“Money is meant to be spent to enjoy yourself, not to save it all. You don’t want to deprive yourself.”The Hedonistic Millennial
Technically this has nothing to do with if investing is dangerous, this point ultimately comes down to personal preference. Everyone has a different idea of how comfortable they are spending or saving, and I’m not different. Up until quite recently, I spent the majority of my salary, and anything I saved was with the aim to be spent in the near future – holidays, fancy watches, a new car, a better computer… Now that I know how useful it is to save a high proportion of my income, and have that money grow, I see money in a different light. I am not depriving myself – I am simply spending less, being more efficient with my expenses, and therefore having a larger surplus of money.
The idea of the FIRE Movement and having enough passive income to support me, is much stronger than the desire of spending in the short term. The time I will be able to gain when I am financially independent is (cliché warning!) priceless. I feel no need to keep up with the Joneses, or to show off how much I earn by buying expensive stuff.
That’s not to say I’ll never buy expensive stuff – I still enjoy eating at good restaurants, having a powerful computer to play games on, and going on holidays. It’s just a matter of how much value something is bringing to my life. Do I really need this? Will I buy it and then forget about it? Would I get the same value added to my life with a cheaper version? Can I make my own version?
I’m sure I’m not the only one who has heard questions like these when discussing investing and dangers. It probably all comes down to education and financial literacy. This is one of the reasons I am writing this blog – I will hopefully be able to teach someone, or at least point them in the right direction. Some of the blogs on my list really helped me when I was starting, so I’m hoping to do the same for more people. Let me know your thoughts in the comments below! Have you also encountered resistance from some people?