There are a group of people that believe investing in the share market is gambling. This opinion is formed by the fact that companies go bust and markets can drop by 30, 40, 50% or more in any given year. This is all true. It happens.
But good news happens far more frequently than bad news when it comes to the share market, as is evidenced by the long term returns for anyone who can stick it out.
Investing is not that scary once we get used to the terminology. In addition to this free blog, there is plenty of other educational materials available. Library books, internet blogs and articles, and podcasts. All free. Many investment advisers try to use words you don’t understand. It is their way of letting you know they are smarter than you. This is a deliberate strategy for you to get to use them.
Investing doesn’t need to be complicated. My strategy of making a monthly payment to my chosen indexes regardless of ups and downs in the market couldn’t be easier.
A common misunderstanding of the share market is that it is gambling. Shares are only gambling if our method of investing is one of high risk and trying to predict the market. The share market is not the place for gambling for the common investor. If you want to gamble, go to the casino. You’ll have better luck.
It is extremely tempting to try and get rich quick, but more often than not, that will get us poor quick. Then we will find ourselves in a position of being too scared of ever wanting to invest in the share market again. This would be a shame. The share market is one of the best methods to grow our wealth.
Countless studies have been done that show that the market, more often than not, performs better than individual advisers. Any adviser can beat the market in any given year. The longer the timeframe is extended though, the lower the percentage of advisers outperforming the market becomes. This is because today’s hot stock picker is often tomorrow’s forgotten picker.
HOW TO INVEST WITHOUT GAMBLING
Stop listening to everyone else’s share market predictions
They may be right, they may be wrong. The main job of the media is to sell news. A lot of information is exaggerated, either towards the good end of the scale, or the bad end. You don’t hear about the share market gaining 8% in a year. You will hear about a fall of 1%. This is because people are predisposed to pay more attention to losses than gains. Don’t be scared off your course.
Keep a long-term focus
Short term noise in the market will make you want to jump ship. Shares go up, shares go down. Understand that there is volatility in the short term, but over time the value of most companies will go up. If you have short term financial goals you shouldn’t be funding these goals through shares.
Don’t stop investing
In the beginning it can seem like we are getting nowhere with our investing. In article 10 of the investing series we discussed how it takes quite some time for us to see the benefits of our investments. This is a sticking point, but if you can keep investing past that point, you will start to see the benefit of your work as your money starts earning you money whilst you sleep.
Don’t try to time the market
We have discussed this in length during the investing series. When timing the market, we will either spend too long sitting on the sidelines or we will only buy shares when they are high and expensive, selling when they are low and cheap. Our returns over time, will be less than those that rode the wave. We can’t lose money if we don’t sell.
Know the market
Know that you may experience large losses in value. We should always invest in something that we understand. If we don’t understand, we are more likely to get shocked, and then have a bad experience making us want to exit. If we can understand the risks and the rewards, we can be much better prepared, and likely to stay in the game.
Do not think the share market is a get rich quick investment
If we come in thinking we will become a millionaire overnight, we will be sadly disappointed and less likely to invest in the market. The share market is one of the best ways to grow our wealth, but understand it will be gradual.
March to the beat of your own drum
The share market can experience big bubbles. Bubbles are a rapid increase that can’t be explained for any fundamental reason. They are fuelled by people’s emotions and stories. Word gets out about this amazing investment and more and more people blindly jump on the bubble through stories of other people getting rich. The herd can get noisy so stay strong to your strategy. Don’t invest because someone tells you it is a good idea. Invest because you want to, and it is the best thing for you.
Don’t look at your performance constantly
The more often we check the value of our portfolio or watch the market movements on the news, the more we will feel like we have to do something. Heat of the moment emotions can make us do non-rational things. If we only look every few months, we will save ourselves plenty of stress and from doing something we may regret. I will say it again, if we don’t sell we can’t lose money.
Ask for help
If you are unsure of anything, find an adviser or a trusted friend to discuss things with. Someone that can hold you accountable can be a great motivator to not doing anything silly.
Have clear investment goals
If we can see that our investments are helping us to buy that house, or save for retirement, or go on that world trip, then that is a great motivator to stay the course.
Don’t be discouraged
There will always be someone that ‘gets lucky’, or is doing better than you. They may be further along on their journey. You may start thinking it is too hard or not for me. Remember, you may be only at the beginning of your journey. Don’t compare yourself to others. It is you and your own goals that matter. Soon enough, someone may be looking up to what you have achieved.
Stay diversified
A well-diversified share portfolio will reduce the chances of large losses. If we only invest in 1-10 companies, a loss from just one company can have a big impact on our returns, which may scare us off investing.
FINAL THOUGHTS
Minimising fees and maximising diversification will minimise the losses we will make from investing. As will dollar cost averaging. If we have been reluctant to invest in the share market, learning how to minimise our losses will be key for our peace of mind. Rebalancing our portfolio every year, or when an asset class rises or falls above our threshold, will force us to buy low and sell high which is a good habit to follow to further minimise losses. This is key as we now know that gains from losses take longer than losses from gains.
If we learn how the share market works so that we understand what we are investing in, then we will be well prepared for any volatility. The share market is not a place for emotions. Knowledge helps to eliminate our over or under confidence. Knowledge gives us the confidence to invest, and also has the opposite effect of reducing any overconfidence we had before knowing the share market ins and outs. Seems ironic that the more we know, the less confident we may become right? I knew of several people investing large amounts in bitcoin only because of all the hype over how well it was doing in 2018. I asked a couple of them a simple question: what is bitcoin? They couldn’t give a good answer. They are overconfident. If they learned more about what they were investing in they may still invest, but at least they will be more prepared for any consequences. They would be a lot less confident, and more realistic. I can see some hurt if things don’t work out.
Investing is not gambling. It is if you are doing it wrong though.
If you are invested in globally diversified index funds, then investing in the share market is not gambling. You will hear many stories of people losing large amounts of money in the share market. However, this is not because the share market is a gamble, that is because the way they invested is a gamble. Chances are they speculated on individual companies and were not well diversified across many countries, industries and companies. Or they needed the money in the short term. That is a gamble.
In other words, the way someone invests can be a gamble. But over the long term, the market itself is not much of a gamble. Companies will continue to be productive and will continue to make money and grow. By having your money invested in as many of these companies as possible, you will minimise your losses and continue to grow with them.
Thanks for reading.
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The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here