More and more, when I ask members of The Gen Y Wealth Newsletter what they want me to write about, a common response is, “I have little faith in the stock market going up for the next 40 years. What are alternate options besides investing in stock?”
Why the Lack of Faith?
As a financial planner, I cringe when I hear someone say they won’t put a small percentage of their savings in the stock market.
But on second thought, can you really blame someone in their 20’s for not wanting to invest? In less than 10 years, we’ve had two bubbles burst.
The first was the dot-com bubble in 2000. Most young adults didn’t invest in this bubble. That’s not to say that we didn’t have exposure into it. There’s a good chance our parents did, which means it’s likely there was pessimism towards saving and investing in our families growing up.
Our next negative exposure came recently. Right at the time members of Gen Y started to invest, the credit bubble hit.
More Information Doesn’t Matter
For those with a negative belief about the stock market, what if I told you that it’s a great time to buy for someone in their 20’s. Since you’re in the accumulation stage of investing, you want prices low. Would that make a difference? Would you invest in stocks, with that knowledge? Probably not.
I’ll try again. What if I told you that the last time investor’s were very fearful were the 1930’s and 1970’s. And that, investors who bought and held through these decades experienced very high returns the following 20 years. Would that make a difference? Would you invest in stocks now? Again, probably not.
One last time. What if I told you that there are ways to reduce your risks. You don’t, and shouldn’t, have your entire portfolio in stocks. You should have a portion of your portfolio in bonds. Bonds have historically moved in an opposite direction as stocks. Therefore, when stocks go down, at least your bond investments will rise. This protects you from large losses. Not only that, but you can diversify your stock and bond investments for a very low cost with an index fund. Last, you can also rebalance yearly to again reduce risk and increase your return. Oh, and if this sounds like too much work, you can invest in a target retirement fund and professional fund managers will do all this work for you for a very small fee. Knowing this, would you begin investing? I’m guessing the answer is still no.
That’s because more information doesn’t matter. You’re not going to change a belief you’ve held since a young age based on just information. No matter what statistics about long-term investing I throw at you, your beliefs are strong.
What really is a Belief?
Stop thinking about the stock market and start to think about what a belief really is. Wikipedia defines a belief as, “The psychological state in which an individual holds a proposition or premise to be true.”
When we talk about our beliefs, they feel true to us. Although, our beliefs are not necessarily an accurate statement about reality.
For example, most of us grew up with the belief that mistakes are bad. It’s not hard to imagine why. When we made a mistake as kids, it was looked down upon by a parent, teacher, or coach.
Unfortunately, most of us take the belief that mistakes are bad into adulthood. Now instead of making mistakes, one becomes fearful.
My Beliefs about Money
In order to write this post, I had to dig into my past. I’ve always believed that the stock market was great, but why? Just like someone with negative belief about a investing, I had to form my positive belief.
Looking back, I can think of three reasons why I’m not afraid of putting my money into the stock market.
- In 8th grade, our entire class competed in a stock market simulation contest. I don’t think I won but I came in second or third out of a class of a few hundred. Inside of 60 days, my fake stock portfolio was up over 25%. This contest occurred in 1999. A time when you could invest in anything and make money.
- I worked at a country club starting around age 12 and through college. I was always around businessmen talking about investing.
- My Grandpa was a successful buy and hold investor.
Where did Your Beliefs come from?
No matter if you believe stocks are risky or safe, attempt to identify where your beliefs came from.
If you believe that “Investing is risky,” try to think of an event that led to that belief. Did you enter into a stock market simulation contest during a down year of the market in Middle School? Do you remember situations in which your parents complained about their investments? Did you grow up in a household that never saved and was always going from paycheck to paycheck?
A new trend in financial planning, is to not only sit down with a financial planner but a psychologist as well.
Often you know exactly what you want to do but can’t get yourself to take action. Most of the time, there is an underlying belief explaining this behavior.
The area of psychology is new to me but one that I find very interesting. If you did the exercise above, I would love to hear what you came up with in the comments.
There’s two more followup posts on psychology and behavior this week, so check back Wednesday and Friday to learn a little more.
If you want to know more about changing your beliefs now, two good books I’ve read lately are:
Photo by: Steve Rhodes