Traders and investors are a large minority. It doesn’t really matter which country we talk about, but overall, based on the total world population, investors are a rare breed.
With my German background, I can say, that among my friends and colleagues there are only few who are active on any stock exchange and the majority still believes that the best investments one could do would be to buy a house or a condo. Or insurance.
I consider these ideas to be very flawed, but it’s hard to blame or to dispute them completely. At the end of the day, unless we have acquired the investor mindset, the biggest concern for us on what to do with our hard-earned money is to ensure it that it stays with us. It’s all about security.
People believe what they understand
Stocks are going up and down on a daily basis and therefore they don’t come across as a solid investment. A piece of land on the other hand, or a house, bricks, mortar, cement. Yep, this feels solid. Or is it?
I would attribute this bias mostly to the idea that people place their hopes in things they understand. Stocks and shares represent companies, and as an investor, we seldom really know what is going on inside a company. We have also limited influence on what the company does. A piece of land, a house or a condo is so much easier to see through and to understand what it does.
And yet, hardly anyone would dispute that stock investors are regularly among the richest people on the planet. So where is the connection? How come that those who try to play what is considered safe end up poor or at least not among the wealthy? My point of view: Because what most people consider to be safe is false.
Time is an asset
I am following a website called “Seeking Alpha” (SA) now for a while, which is an investment forum with the majority of its users being retired income investors. Income investors are people who invest in order to generate sustainable profits to secure their retirements. Many of them put their money in stocks that generate either high yield dividends or that pay out dividends on a frequent and reliable basis.
Since many of them are old and experienced, I like to read their comments. There are plenty of things to learn from the mistakes they made during their investment lives. Among their ideas, comments and yes, sometimes regrets, there is one constant note that comes up over and over again. The significance of time.
Warren Buffet said once that time is the investors single biggest asset. And he is absolutely right. No matter where we put our money in, a house, insurance or stocks, our expectation is that they either appreciate over time or generate profits. Time is the basis for every investment calculation and investment decision.
Time can be your friend, or it can be your enemy
For a house owner or condo owner, time can be tricky. Over time your property will need repairs, improvements. It will require you to add additional funds to it in order to keep it in good shape and to serve its purpose. This part is inevitable. On the other hand, over time your property can increase in value and hopefully this increase will over-compensate the need for your additional investments.
For an investor in the stock market, time becomes your friend the more you have of it.
I am not an investment advisor (yet), but I probably wouldn’t recommend a retiree without any prior stock market investments to move his/her assets into the stock market. The few years that this person may have left are simply not enough and uncertain to truly utilize time to its benefits. But if I meet a person in their 30s or 40s and they are not invested, then I believe they miss out on probably one of the best friends they may have out there.
History is shifting odds towards stock investors
Historically, any person who would be invested in the stock market for longer than 20 years would have ALWAYS benefitted from it. It doesn’t even matter when one would have invested the money. Even if one would put all his cash into one of the larger US or German Index funds and it would crash by 50% or 60% the next day – 20 years later the investment would have most probably not just paid off, it would have doubled or tripled.
With an average return on investment of 8% year on year, the value of stock investments is doubling every 7 years. So just think about it. Let’s say you are 37 years old and plan to retire at 65. Meaning you have another 28 years to go.
If you could now put 30.000 EUR into an Exchange Traded Fund (ETF) on any major stock index, and the historical trend would continue, then the development of your account could look something like the following:
2018 = 30.000 EUR (first investment)
2025 = 60.000 EUR (after 7 years)
2032 = 120.000 EUR (after 14 years)
2039 = 240.000 EUR (after 21 years)
2046 = 480.000 EUR (after 28 years)
I know, 2046 feels very far away, but if you are 37 now then chances are very high that you will get there. This 8% does not mean only the increase in stock value. It’s the whole package: Higher valuation, dividend payouts, dividend increases, etc. Now, what would happen if you don’t put 30, but 40.000 EUR in? Let’s take a look:
2018 = 40.000 EUR (first investment)
2025 = 80.000 EUR (after 7 years)
2032 = 160.000 EUR (after 14 years)
2039 = 320.000 EUR (after 21 years)
2046 = 640.000 EUR (after 28 years)
Only 10.000 EUR more for the initial investment will add another 160.000 EUR for your target date. This is ridiculous, isn’t it? And yet, this is how it works.
History doesn’t guarantee the future – but the trend is your friend
So yes, time is your friend and the sooner one starts to invest, the higher are the chances for a worry-free retirement.