6 ways to see the risk of investing differently
One of my goals is to help as many parents as possible train their kids to follow the Three Rules of Wealth:
Spend less than you earn
Invest what you save
Be patient.
Out of these three rules, the most challenging one for parents is number two, ‘Invest what you save’. This is because most parents have never been taught about how to invest.
To help parents learn more about investing, I’ve written about how to teach your kids about the stock market, which means they benefit from compound interest and can generate passive income. Even though parents themselves may understand the benefits of investing, some may still be concerned about the risks of investing. I can appreciate where these worries come from as mainstream news and social media can make investing appear scary.
In this blog, I go through 6 different ways to think about the risk of investing to give parents the confidence to start investing for their kids so they can follow the second rule of wealth.
6 ways to think about the RISK differently:
1. Spending money is a risk
When you spend money, you are never going to see that money again. It’s gone with 100% certainty.
When you invest, the chances of losing all your money are much less than when you spend.
If you are happy to spend £50, you should be happy to invest £50. Especially as that £50 could be £100 in ten years, £200 in twenty years, £1,600 in fifty years.
2. Think of risk as a storm
“After a storm, a tree grows back stronger”
I often refer to a fall in the stock market as a storm when talking to my daughters. This quote really drives home that whilst a fall in the stock market might feel scary, it will pass. Just like it can feel scary if you are in a big storm, the storm will pass.
After a storm, we all know that trees grow back bigger and stronger. Imagine a world where no one planted trees as they were worried those trees would get damaged in a storm. That would be crazy. We need to think the same way about investing. We can’t be afraid of investing, just because there will be market falls from time to time.
The chart below shows the stock market (using the American one, S&P 500, as it has a long history). Each bump is a different storm and there have been plenty of them. This has not stopped the market continuing to grow.
The people who lose money are those that sell their investments during the storms. So to avoid losing money, make sure you don't sell your investment during the storms!
The US Stock Market (S&P 500) - (Using logarithmic scale so you can see the bumps)
3. Not taking action is a risk
Another way to think about risk is that you are losing right now if you are not investing. The longer you take to invest, the more money you are losing. As the previous chart shows, those that have kept their savings in a bank account have missed out on the upward trend in the stock market over many years. Therefore, miss out on years of compound interest.
On top of that, money not invested is being eroded by inflation. I’m currently writing a blog all about inflation, as it’s a hot topic right now, so make sure you have subscribed so you don’t miss that.
Essentially, the risk of not investing is likely to be larger than the risk of investing.
4. Bad investors are still better than non-investors
A lot of people are worried they don’t really know when to invest and exactly what to invest in. If this is you, just remember that a bad investor is better than a non-investor (someone not investing).
Don’t get me wrong, there are some really, really bad investors who lose all their money but this won’t be you if you make sure you:
Only invest the money you have, i.e. don’t borrow to invest
Don’t invest in just one or two companies, as they could go bust and then you’d lose everything
If you are worried about investing at the wrong time, remember, no one knows when the right time is. The best thing to do is invest regularly (monthly), rather than investing all your money in one go.
If you are worried about which companies to invest in, remember, no one knows which companies will do really well. The best thing to do is invest in lots of them. You can do this via an investment fund (essentially, a company will invest your money into thousands of different companies). This means if a company goes bust it won’t make a big difference. Also, if a new company does really well (the next Facebook or Google), you’re likely to be invested in that so it will benefit from their growth.
To start investing for yourself and your kids, follow our 3 step guide to opening an investment account.
5. ‘This time it’s NOT different’
When the stock market does fall, many people will say:
‘This time it is different, it will never recover’.
These people have always been wrong as the market has always recovered.
If there was a time in the future when the stock market fell and didn’t recover, it would mean the world had gone into an armageddon state and worrying about your money would probably then be the least of your worries.
As long as companies keep innovating (both in terms of their products / services and how they convince us to spend our money), companies will grow and the stock market will grow too.
6. Change ‘risk’ to ‘opportunity’
“Stock market down = The sales are now on!!!”
You should only invest money that you don’t need for many years (5+). With that mindset, if the stock market falls in the next week, month or year, you shouldn’t be worried as you don’t need that money then.
Therefore, instead of worrying about a stock market fall being a bad thing, think of it as an opportunity to invest at a discount, i.e. companies are cheaper to buy.
Imagine if you planned to buy a new TV and then realised there was a big sale on. You’d rush out to buy it whilst it was cheap. If you can have that same approach when investing, you will do better than most people who invest.
As I tell my girls, one of the best times to invest is when there is a storm. It’s like planting a seed when the ground is soft, wet and not too hot.
Talking to kids about the stock market
If you are investing for your kids, or are considering investing now you’ve read this blog, make sure you talk to your kids about it.
Just the other day I showed my girls a stock market performance chart (as we invest their savings). The chart was red as the stock market had fallen a bit.
I told them “It’s good when the chart is red as it means when we invest each month, we are buying companies when they are cheap”.
My eldest rightly said “Last time the chart was green, you said that was also good as it meant our money had gone up!”
Essentially, my kids will grow up not worrying about changes in the stock market over the short term and will just keep on investing.
I believe that if kids see short term changes in the stock market as a positive, regardless if the market is up or down, they will grow up to have a real advantage over most people who invest.
Summary
I can appreciate that to those of you who have never invested, investing can seem scary. I hope this blog has helped you see the risks in a different way and has given you the confidence to consider investing for your kids.
If you are new to investing, start small and top up each month. The important thing is to start. Follow our 3-step guide to opening an investment account.
This will allow your kids to follow the second of the three rules of wealth (“Invest what you save”) and give them a massive advantage in life.
Thanks for reading. Don't forget to share with other parents!
Will
P.S. I note that this blog is about investing in the stock market. Investing in things like Bitcoin is a different story. If you are thinking of ‘investing’ in those things (not my preference), make sure you have read my blog ‘How to teach your kids about The Greater Fool Theory’ first.
Disclaimer: This blog is for education purposes only.