If you’ve been on the internet over the past two weeks you might have heard about the frenzy over GameStop stocks. I won’t get into all the details here because that isn’t what this post is about, but on the day of the height of the madness I had the thought that if the people driving this thing are able to do what they want to then I’d be dumb not to invest. If this sounds to you a lot like, “Extended warranty how could I lose,” don’t worry it did to me too. What it did cause me to do is to call my friend, who is a financial advisor, and ask him his thoughts.
He told me not to do anything reckless and promised to send me a book on stocks and investing. By some miracle I am unaware of the book arrived the very next day and a day and a half later it had been read. The author of the book’s number one suggestion was to work with a financial adviser, funny finding that in book sent to me by a financial adviser, but aside from that i had a lot of good information.
The takeaway point of the book isn’t that the risk in investing money is in investing money it is in not investing money. Think about the advise you and I, the common millennial, have received in our lifetime. It’s save, save, save, stop eating toast, no more lattes, and all that other jazz. The focus is on saving money with no advise on what to do with the money after you’ve saved it. If I save $5 and put it in the bank in five years I will have $5. Whereas if I spend that $5 on a delicious latte I won’t have $5 anymore but I will have had a delicious latte and my happiness level and functionality will have increased tenfold. So for me, and possibly you, the argument of save, save, save has always fallen flat.
What if instead of telling people what not to do with their money the argument was framed as what to do with that money. That was the point of the book I was sent that I am too lazy to run downstairs to provide you the title of. What the book made perfectly clear to me was that the mindset that makes one successful in investing is the same that keeps someone sane during the baseball season. Let’s say it is June and your favorite team has lost eight games in a row to fall to one game over .500. They are still a good team, but some things have gone wrong. The hitters aren’t hitting, the pitchers out pitching, and the bounces aren’t going their way. How do you react to this eight game losing streak? How would you react if you were in control? Bench all the struggling players, shake up the rotation with fresh blood, or do you keep calm and let the water find its level?
That’s what investing is. It is baseball. It is about the understanding that the market is volatile and crazy in the short term, but over the long run it is a .335/.411/.512 career hitter that for one week might hit .156/.297/.308 but by the end of the season those numbers are going to look a lot more like the career average than the one week fluctuation. The point is if you’re playing the market for short term gain then you’re doing it wrong, but if you’re investing in the long term with a long term strategy then you’re going to make a lot more money than simply by not eating toast and lattes and shoving money in the bank.
Let’s us a real world example. Let’s say you have $5000. I don’t care how you found it or got it. Maybe you didn’t drink 1,000 lattes for a period of 20 years, but you have or had $5000 five years ago. You decided you wanted that money to do something other than sit around so you did what you thought was the smart thing and put it in a CD. The best current interest rate on a five year CD is 1.25%. After five years your $5000 would now be $5,320.41. Your money has grown some, and you certainly haven’t lost anything, but you can’t add money to a CD or take any out if you need it. Now let’s imagine instead that you invested that $5,000 into an S&P 500 Index Fund. We’ll use the ETF that trades as SPY on the stock exchange. Over that last five years that ETF’s share prices have increased by 99.43%. So that same $5000 invested in that one ETF would be worth $9,971.50.
I don’t know if I have to tell you which one I’d rather have invested in, and with that style of investing you could have added money and monthly intervals and your earnings would be even better. We all know the warning that past performance isn’t a guarantee of future results but historically the S&P 500 Index increases 10% per year. You aren’t going to get that type of interest rate from any bank in America, and if you can refrain from panicking when the market goes down and remember you only lose money if you sell then over the long run you will win.
Now let’s revisit the latte. If you’re now not simply locking that $5 away until retirement or your kids need to go to college or whatever you’re saving for but instead you’re investing that money in something that will give you a return are you more or less likely to not spend it on the latte. My answer is, honestly, I may consider not getting the latte unless I’m really dragging, and I’m even more pissed at the people telling me not to drink the latte. Because I bet that bank that has had my money all these years knew about smart investment strategy and gained that 99% or even more (QQQ grew 216% over the past five years) on my money.
I am not a financial advisor or anyone you should listen to for investment advice. I do have the name and number of one if you’d like it. I just had to to tell you that, man, I wish I had known these things 20 years ago, and that really ticks me off because someone I know knew this and I don’t know why they didn’t tell me.
David Huzzard Writes 