There’s no such thing as “the stock market”
How many times have you heard something like, “If you’d invested just $10,000 in the stock market 20 years ago and let it grow, you’d have eleventy-zillion dollars today.” (Ok, so that’s a slight exaggeration, but you get my point.)
Statements like that are usually used as hypothetical examples that point out the wisdom of becoming & remaining invested in the stock market over a long period. The thing is, you can’t invest in “the stock market”. In fact for most of the stock market’s history, you couldn’t have even invested in index funds, since that “folly” of an idea didn’t come about until the early 70’s.
Plus there are a lot of people out there (myself included) that don’t have a spare $10,000 laying around that they’re able to just drop into “the stock market”. Of course, that also assumes that the $10,000 you’d have needed to invest 20 years ago for those hypothetical returns would be the same as $10,000 today. And it wouldn’t. Using this inflation calculator, I see that we’d need to invest $18,243.73 today to equal the buying power of that hypothetical $10,000 from 20 years ago. I don’t have that laying around either.
I have nothing against the stock market. In fact I’m having fun lately playing around with individual stocks, but that’s what it is — playing for fun. (Hey, I enjoy gambling small amounts.) And I DO think that index funds are a great idea. When I get my next spare $18,243.73, I might sit back and test out those hypothetical returns over 20 years. I just think it’s misleading to use examples that are hard for the average person to actually DO as a way to motivate people to invest. It takes advantage of people’s natural tendency to think “well, if so and so did such and such, then maybe I can too” even though they’re not in the same situation.
If I invest $400 in a mutual or index fund today (which is realistic for me) and then a month later I see that it’s only worth $330, it’s possible I might get discouraged. Where’s my progress toward those eleventy-zillion dollars? I might think there’s something wrong with the fund, or that I picked a bad time, or whatever. I might move in and out of the market at inopportune times. Even worse, I might sit and tell myself that “if I just hang on to this for 20 years, it’ll be worth a lot more.” And maybe it won’t be. I once invested $200 a month for a couple of months before noticing that I’d chosen a very, very, VERY bad fund. The key is to find the middle ground, balancing expectations and emotions with reality. Do your own careful research instead of blindly believing and acting on the hype or hysteria of others. Create your own plan, and test it. Do what’s realistic for you.
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