The One Thing Scarier Than Investing: Not Investing
byAug 25th 2011 5:00PM
You work hard to earn money, sacrifice immediate wants and needs to save it, and invest it for your future. And what do you get in return? No guarantees that you'll see any of your cash again.
That is the cold reality of investing in the stock market. And if your luck is anything like mine, shortly after you buy a company's stock, its share price will fall, dragging your investment dollars down with it.
But that's only one of the realities of investing. There's a far scarier alternative scenario that befalls so many people's future well-being.
It Could Be Even Worse...
The volatility inherent in investing can certainly be scary in the short term. But in the long run, it's nothing compared with the bleak future you'll face if you don't invest at all.
Let's say you spend all that you earn and never save or invest a dime. What happens when it comes time to retire? Social Security's average benefit isn't all that much and is scheduled to become even smaller by 2036. Or what if you find yourself involuntarily unemployed with nothing in reserve?
Even if you do save money -- socking away some cash for that just-in-case scenario -- you can wind up losing. Sure, you've got a cushion of cash to protect yourself from short-term unemployment. But your cash won't last forever.
Even worse, savings accounts pay an average of 0.15% interest right now while inflation is running closer to 3.6%. This means that the only certainty that comes from holding cash for the long haul is that you're guaranteed to lose purchasing power. While not as visible as a falling stock, it's still a loss in real terms.
That said, there's a huge difference between investing well and simply throwing your money at the stock market to see if it sticks. In large part because of that volatility, preparing yourself to handle the mental aspects of investing is at least as important as getting ready for the financial ones.
Are You Prepared To Be An Investor?
Here are some do's and don'ts to help prepare your mind and your money to invest well:
Do have a long-term perspective and commit to investing regularly. Over the long haul, the stock market can create incredible wealth. Even over the recent "lost decade" -- one of the worst ever for stocks -- you would have made a bit of money by dollar-cost averaging into the market.
Don't invest money you expect to spend within the next few years. If you're headed off to college this fall, the certainty of cash to cover your tuition is far more important than the potential returns in the market. Same goes for money you're planning to put toward buying a car next year or toward a down payment on a house in the next couple of years.
Do diversify your investments across multiple industries. You can either diversify via low-cost mutual funds or through individual stocks chosen with one eye focused on what you're really getting for your money and the other on diversification. Not even the best investors can perfectly predict the future, and diversification provides the difference between a missed forecast being a transient blip or being a financially fatal error.
Do think like a long-term business owner. A business owner makes investments based on a reasonable expectation of returns over time driven by operational results. That same business owner is willing to either invest more in a promising idea that hasn't panned out yet or stop funding an idea that isn't working, rather than throw good money after bad. Either way, the owner's decisions are based on available data and reasonable long-term projections, rather than the hope, fear, and shortsightedness that dominate day-to-day trading in the market.
Investing Will Bring You Peace of Mind
Ultimately, a well thought-out and consistently executed investment strategy can even bring you peace of mind amid tumultuous times like these. Once you reach the point where your long-term investments far outweigh your short-term costs of living, the meaning of money changes. At that point, it's no longer your only tenuous link to tomorrow's dinner, but rather a tool to use, just like any other.
You know you're getting close to that point when you stop seeing market crashes as reasons to panic at the thought of potentially losing your hard earned cash. Indeed, once you really start viewing crashes as potential opportunities to buy more on the cheap, you know you've mastered the mind-set of investing. It might take years -- or even decades -- to get there, but once you do, the transformation from financial fear to financial peace makes the journey worthwhile.
Chuck Saletta is a long-time Motley Fool contributing writer.