The stock market can be a scary place for many people, and that's perfectly normal. The unfortunate reality is that the world has a lot going on at any given time, and it seems like all of it can impact the market.
Investors might be wondering whether it's safe to invest today, a time when there is geopolitical conflict, a presidential election next year, and a potential recession around the corner.
But that's not the question you should be asking. Instead, flip your mindset to a question that is not only easier to answer but will get you thinking about how you might build wealth in the future.
Here is what you need to know.
Asking the right question
A human's lifespan is typically under a century, which means our investing lives span just a handful of decades. Such a small sample size of history can cause people to lose perspective on what the broader market has overcome over time. Worried about war? There have been several wars over the past century. Is the economy in trouble? The Great Depression saw unemployment soar to 25%. Recessions have occurred numerous times, about a dozen in the U.S. since World War II alone.
Understandably, these events make people feel fear or other negative emotions, but the critical fact is that they've all happened before. It's just that most people aren't around long enough to recognize when history rhymes.
So, how do you combat this in your mind? Try zooming out and asking: Has adversity ever stopped progress? In other words, has adversity prevented companies from creating goods and services that keep getting better and less expensive?
The remarkably resilient stock market
So far in history, the answer to that question is a resounding no.
Decades ago, a computer that filled a room could perform basic functions. Today, you could read this article on your smartphone, an exponentially more capable computer that fits in your hand. Healthcare and medicine is more advanced than ever. Artificial intelligence is emerging, which can outsmart the brightest minds of the past. Amateur investors have faster access to better information than Wall Street pros of the 1970s, thanks to the internet and commission-free brokerages.
Innovation drives economic growth, which causes the stock market to rise over time. See for yourself -- the S&P 500, an index of the 500 most prominent companies in America, has had its occasional bumps but has always trudged higher eventually:
Of course, past results don't guarantee future outcomes. But so far, the market remains undefeated. And if there is ever a dire enough situation where the stock market is permanently wiped out, say from an Independence Day-style alien invasion, your portfolio will likely be far from your list of concerns.
How to invest for success
That said, adversity can make the stock market very volatile in the short term. Investors shouldn't avoid the market but should take steps to protect their money and minimize the pain when markets fall. For starters, only invest money you know you won't need anytime soon. Don't put next month's rent or your emergency fund into any investment. If you think you could need that money within the next several years, you're better off not touching it.
Second, make sure you diversify your portfolio. Feel free to spread your funds between a wide selection of index funds or individual stocks if you're comfortable picking individual companies. Different industries often thrive and struggle at other times, so having your money in high-quality holdings across the economy will help you avoid catastrophic volatility.
I think The Motley Fool's investing philosophy offers a great path to wealth in the markets:
- Buy 25+ companies over time.
- Hold stocks for at least five years.
- Add new funds regularly.
- Hold through the market's ups and downs.
- Let your winning investments keep growing.
- Invest for the long term.
If you embrace this philosophy and maintain faith in the long history of innovation and economic progress, the market will likely create wealth for you.
