According to recent data, nearly half of all Americans own stocks or stock-based investments such as mutual funds. However, only 26% of millennials fall into that category. If you're a member of the other 74%, you could be making a terrible financial mistake. As you'll see shortly, investing for the long term is much more effective if you start as early as possible.
The reasons people don't invest, and how to get around them
In a survey by Bankrate, investors who don't own stocks were asked why they aren't in the market. Here are the top four answers, and why you shouldn't let any of these excuses stop you from investing.
1. "I don't have the money" (53% of respondents) -- By far, the number one excuse for not investing is a lack of available funds. Many non-investors believe that in order to effectively invest, you need tens of thousands of dollars, but this is simply not the case.
Many brokerages allow investors to open an account with just a few dollars, and today's low commissions can allow you to effectively invest with less than you may think. Further, there are several companies that will allow you to automatically invest small amounts of money over time. For example, Acorns offers a smartphone app that rounds up your debit/credit card purchases to the next dollar and invest those remainders in a portfolio of funds tailored to your risk tolerance and investment objectives.
The bottom line is that something is better than nothing, and even small amounts of money invested while you're young can add up over the years. Based on the S&P 500's historical average returns, every dollar you invest when you're 25 years old could be worth nearly $38 by the time you turn 65.
2. "I don't know about stocks" (21%) -- The stock market is not well understood by many people, but the reality is that you don't need a finance degree to be an effective investor. If you don't have the time or desire to learn how to evaluate stocks, you can invest in mutual funds or ETFs, which will do the work for you. For example, an S&P 500 index fund like the SPDR S&P 500 (NYSEMKT:SPY) takes your money and spreads it out across the 500 stocks in the S&P 500 index. Historically, the S&P has produced total returns of about 9.5% per year, so this could be a great way to set yourself up for successful investing without much market knowledge at all.
3. "I don't trust stockbrokers (or financial advisors)" (9%) -- It's completely understandable for investors, particularly millennials, to have a general distrust of the market and investment professionals. After all, in the past two decades we've experienced two of the worst market crashes in history. Plus, in the aftermath of the financial crisis, investment professionals weren't exactly portrayed in a positive manner by most media outlets.
However, the fact is that there are thousands of trustworthy financial advisors out there that can help you get started investing. A good place to start is to look for an advisor who carries the prestigious Certified Financial Planner certification, and the CFP board provides a search tool that allows you to do just that.
Of course, you always have the option to simply open an account at a discount brokerage and do it yourself. As I mentioned before, investing doesn't have to be complicated, and many people feel better knowing that they investigated and selected their own investments.
4. "Stocks are too risky" (7%) -- A common myth is that all stocks are inherently risky. Sure, there are many individual stocks that fit this description, but there are also lots of rock-solid companies that deliver consistent profits no matter what the economy is doing. For some more information on how to find stocks that will let you sleep soundly at night, check out these other articles here and here.
Having said that, stocks are certainly more volatile than say, putting your money in a CD or buying Treasury bonds, but history has proven time and again that stocks outperform every other asset class over long periods of time. To illustrate this, consider that if you had invested $10,000 in an S&P 500 index fund 20 years ago in 1995, it would be worth $67,800 today, and that includes the effects of the dot-com crash and the financial crisis.
Why it's so important
I've written several times about the importance of getting started as early as possible, and for good reason. The compounding effects of investing are exponentially more powerful over longer time frames.
Consider an example of two investors, both of whom plan to retire at age 65. The first starts investing $2,000 per year at age 25, while the second waits until they have more money to invest and starts investing double this amount in order to catch up -- $4,000 per year starting at age 35. Which investor will retire with more money?
It may surprise you to learn that the early investor wins -- and by a $122,000 margin, even though they would have invested $40,000 less over their lifetime.
Start small... but start
Investing in stocks, or stock-based funds, may seem risky, confusing, and expensive, but it doesn't have to be any of those things. History has proven that investing in stocks is the best way to build wealth over the long run, so it's important to get started as soon as you can, even if you just tiptoe into the market at first. Your future self will thank you.