The Motley Fool is dedicated to the proposition that an individual can, if they invest properly, beat the market. So we're here to give those investors a leg up on the process with our best Foolish advice. But to make use of that advice, you have to be in the market. While our tips generally start from the premise that our listeners will be in the market, plenty of folks aren't.
We understand. Investing is complicated. It puts your hard-earned money at risk. And the closer one looks, the more there seems to be to learn.
If you're one of the many who want to begin, this Rule Breaker Investing podcast is for you. David Gardner has gathered a talented trio of Fools -- Jason Moser, Matt Trogdon, and David Kretzmann -- to gently guide you through the basics of how to become an investor.
In this segment, they talk about two of the scariest concepts in the investing universe: volatility and market drops. When you have real cash on the line, a steep plunge can generate panic and cause you to feel negative about stocks for a long time after. But if you internalize the message the Fools have for you about how the market moves over the long term, you just may be able to inoculate yourself against some impulses that could otherwise seriously reduce your returns.
A full transcript follows the video.
This video was recorded on Oct. 3, 2018.
David Gardner: All right, so getting started investing. We've got it down to three steps and we're definitely going to be delivering this. Before we do, I hope I'm not delaying too much the gratification of this podcast, but I do feel like we should talk briefly about "volatility" and "market drops."
Whether you're invested in stocks, or whether you own stock funds [equity funds if you will, David Kretzmann], you need to realize that one year in three historically the market drops. And for a lot of people, psychologists tell us the pain of loss is greater than the joy of gain. And sometimes if somebody starts and their first year of investing was one of those one-in-three years where the market drops, they might have a really bad taste in their mouth, stop funding their account, and decide this wasn't for them and stop investing. And we all know what a horrible mistake that would be.
Gentlemen, any thoughts about market volatility drops and how that affects us with that lifelong odyssey of investing?
Jason Moser: I'll just chime in. I think this is why investing in your retirement account, whether that's a 401(k) through your employer or a self-directed IRA is so important. If you're doing that, ideally with an employer, you're having a little bit of your money taken out of your paycheck every pay period. Normally, that's every two weeks or a couple of times a month.
Gardner: Trying to max that out, right?
Moser: Max it out!
Gardner: It's getting matched.
Moser: Exactly. It's free money. But even more valuable is that you're just going on with life and that's happening every pay period year in and year out. Market up, market down. It really helps you cope with that volatility, because at the end of the day we teach people this. It's actually because when you're a net buyer of stocks, you like seeing that stock market pull back because you're getting a little more bang for your back. And when you're looking at it in 10-year and 20-year time frames, it really can start to add up.
Matt Trogdon: To add to that, money is so emotional for us and it's emotional in ways that we don't even realize. When you see the market drop, it's hard to hang on and it's hard to buy more. It's just the actual way that our brains work. They work against us in those instances.
It's interesting. Vanguard put out a study earlier this year -- I know it was quoted in Bloomberg -- that shows that young adults who have started investing since the financial crisis are much more conservative than the experts would suggest for them to be. That four million accounts Vanguard has of people who'd already begun investing were twice as likely to hold no stock in those accounts as those who had begun investing before the crisis.
Gardner: Wow! And this is not just a survey, Matt. This is real data from Vanguard looking over the accounts of four million account holders and what they're doing.
Trogdon: And so going back to what we said earlier about time horizon, these are folks who have accounts, and they're young, so this is a great time for them to get started buying stocks. But they're a little gun-shy and it just goes to show you how emotional it can be and how market volatility can scare people off.
David Kretzmann: I think that emotional piece for most people is probably the most challenging aspect of being a successful investor. Most people -- even people on the street -- can recognize a good company. They can look at Apple, Starbucks, or Netflix and recognize that those are great brands and solid companies that are becoming more relevant.
The tricky part, though, is being able to buy and hold those companies through thick and thin. Through periods like the Great Recession or if an individual company is going through a tough quarter, or year, or two. Again, it comes down to time horizon. Whether it's individual companies or a fund like the S&P 500, the longer your time horizon the higher the odds that you will come out ahead. And that's why anything you invest in the stock market should be money that you comfortably won't need for at least three years and ideally much longer.
So if you can do that and have that mentality, start small with your investments. Ideally add a little bit every month, quarter, or year; whatever time frame works for you, I think that helps ease the nerves that come with seeing that inevitable short-term volatility with the stock market.
Gardner: Well put. Thank you very much! Let me close off this portion of the podcast by saying that we've tried to speak as helpfully as possible to you, whoever you are, especially if you're new at this.
I'm quite sure we've probably missed something. We may have made some assumptions that were wrong assumptions, or maybe we just didn't give you enough. That's why one month from this week, we're going to have part two to close off this short series for Rule Breaker Investing, "Get Started Investing." We're going to have part two.
It's going to be driven by what you tell us. The email address is RBI@Fool.com. We would love to hear any additional questions that we didn't speak to that seem important. We'd also love to hear some stories. Maybe you have a great story about how you got started investing. We'd especially love to hear that you got started investing from this podcast. That we helped you do that, because that's what we're trying to do this week. So again, one month from now, RBI@Fool.com. E-mail us. Let us know what more we can program for a few weeks from today.