How Risky Is The Stock Market?

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Have you ever thought about investing in the stock market? Maybe you have a cousin or a co-worker who’s always talking about how their “portfolio” is doing, and you think, “Maybe I should be doing that too.”

It reminds me of the time I walked up to a craps table in Vegas. The rules were so complicated and confusing—how could I justify plonking down my hard-earned money on a game of chance I barely understood? A lot of people feel the same way.

Half of Americans have nothing invested in stocks. Many of them don’t have spare money to invest, but some might think it’s just for risk-taking high rollers. But is the stock market just a big casino? Or is it something you should consider as part of your financial plans?

What Is a Stock?

What exactly is a stock?

The concept was invented in the 17th century by the Dutch East India Trading Company, which wanted to allow multiple investors to underwrite their expeditions. They sold shares, or percentages of the company. It worked out well for them, making them the biggest company in history—worth more in today’s dollars than Apple, Google, and Facebook combined!

Who Can Buy Stock?

Today, you can buy stock in companies of all sizes, betting that the business will do well and the value of your shares will increase.

Smaller, newer firms are riskier. While there’s a chance they could be the next Uber, there’s a much bigger chance they could go bust. Larger, established companies aren’t as exciting, but they’re a lot more stable. I mean, who doesn’t think Coca-Cola will still be selling soda tomorrow?

That sounds a lot like betting at a horse race. You can bet on the favorite to win a little money or go for the big bucks by risking it all on a long shot. So why not skip the brokerage fees and just go to the racetrack?

The Stock Market Up Close

When you look at the stock market up close, it can seem like a gamble.

For example, track one company’s share price over a year, and it looks like a wild ride. Who would put their savings on that roller coaster? But let’s take a few steps back.

Instead of looking at one company, let’s look at many. And instead of one year, let’s look at 90.

The S&P 500 Index measures the performance of 500 of the biggest companies over time. Since 1928, it has grown by an average of 10% per year. Sure, there are still ups and downs, but what looked completely unpredictable up close tells a different story from a wider perspective.

How to Invest

The two main tactics for investing wisely are diversification and long-term investing.

Stock diversification means owning stocks from different types of companies, which protects you from the volatility of any specific sector.

Long-term investing—owning stocks for at least 10 years—protects you from the volatility of any one bad day, even a really bad day.

When the market crashed in 2008, many people rushed to sell off their stocks, taking big losses. But those who held onto them eventually regained their money—plus some.

Behavioral economist Richard Thaler even recommends not checking your portfolio regularly. People who monitor their shares too often tend to panic and sell when prices dip, guaranteeing they sell for less than they bought—a classic stock market mistake.

These strategies highlight how different the stock market is from a casino.

Casinos in Las Vegas have payout percentages that average around 95%, meaning they return about 95% of the money that’s gambled. If you played Las Vegas like a stockbroker—diversifying your bets and staying in for the long haul—you’d steadily lose 5% of your savings.

It doesn’t take an economist to tell you that losing money and making money are two very different things.

Of course, there is still some risk involved. Even a diversified portfolio can take a hit, and when life throws unexpected expenses your way, you might need that money now—not years down the road when the market rebounds.

Is a Savings Account Safer?

Not playing the stock market carries its own risks.

As employer-funded pensions become less common, Americans are increasingly responsible for their own retirement savings. Meanwhile, as companies grow and the cost of living rises, savings that aren’t tied to economic growth may not keep up.

So, where do you start?

Brokerage Firms

Most people buy and sell individual stocks through brokerage firms. It’s easy to set up an account, and they offer investment guidance—for a commission.

Of course, you can pick stocks yourself, but if you’re new to investing, that can be as risky as playing the slot machines.

Mutual Funds

A more common way to own stocks is through mutual funds—you may already have some in a 401(k).

Mutual funds are pre-assembled bundles of stocks and other investments designed to be diversified, spreading out risk and reducing hassle.

We’ll be covering mutual funds in more depth in a future episode.

Like any big investment, the smartest first step is to seek advice from a fiduciary investment advisor who can help tailor a plan to your specific needs.

Remember, even if you keep your savings in cash under your mattress, you’re still part of the larger economy.

In a way, you’re already playing the game. So you may as well have a strategy.