A chart to make investing feel real
Let’s say you were born in 1993 and on your literal birthday mom put $1000 in the stock market in your name. On your 25th birthday (1993-2018), you’d have $8607. If mom were more conservative and put it in bonds (why are bonds more conservative?), you’d have $3350. If mom did neither, and kept it in a savings account for you, you would have $1818.
What to know about that chart:
The path from $1K to $8608 wasn’t without some fanfare (read: volatility) that could’ve caused you stress during the rollercoasters in 2002 (tech bubble burst) and 2008 (financial crisis).
Life will happen, so remember what causes volatility:
What makes company stock prices go up/down - when people want to buy more of an individual stock (when they think the company’s outlook is good), or sell off (if they think it looks grim)
What makes overall market go up/down - a whole host of different factors, from domino effects across tech of banking industries, or just investor confidence in the economy. For example, the US-China trade war doesn’t make anyone feel great so markets are rocky. Terms to know: Bull market = a growth period for stocks or economy. Bear market = a period of decline.
The 3 takeaways on volatility are:
1. Don't make rash decisions: If the market is down, you haven’t lost money until you sell those stocks at a loss. If you hold on, it’s extremely likely things will recover.
2. Know your risk tolerance: If you invest for the long term (vs making a quick buck) you fundamentally CAN tolerate some risk. Make sure you have enough time (3-5 years is a good time horizon) to ride the waves, meaning life expenses are well covered. And no matter what, diversify. No one can predict the future and how one company will succeed (or not).
3. Have a long term plan: When we say invest for the long-term, it means taking money from today-self to invest in your future-self. That assumes, though, that you have a PLAN for a) where your money is coming from today and b) what you’re spending it on that covers next month & year’s expenses.
Do you know how to make a plan? Tell us if not. We will show you how.