Stock Market Risk: 5 Downsides to Investing
Over the last few weeks we discussed how to evaluate Securities investments, some good and bad strategies, and now we are going to bring it home by talking about some of the downsides and Stock Market Risk. For the record, there are a ton of upsides to Security investing too, but you can hear about those anywhere. I don’t see enough information about the downsides, which is why I’m focusing on that specifically in this article.
There are some great advantages to investing in the stock market. Over the long haul the market seems to average ~7% returns, which are pretty solid. At that rate, your money will double just about every decade, and if you start investing when you’re 20, that first dollar will have doubled four times before you reach 60. That means every dollar you invested when you were twenty should be worth around $8 when you turn 60. That is a lot of opportunities when you scale that amount to include more money invested!
Stocks can also be extremely simple, and do not require nearly as much work to manage as a real estate portfolio could.
All-in-all, the stock market definitely has a place in your portfolio. None-the-less, there are a few things that aren’t my favorite about the stock market. It is worth discussing these to ensure you’re getting the full picture.
I already talked about capital gains tax in the day-trading section, but just be aware that Securities investing has very few (if any) tax advantages, outside of tax-advantaged retirement accounts.
You can’t write off depreciation against your income like you can in real estate and you can’t take advantage of 1031 exchanges to mitigate your taxes either. (More on these in chapter X)
Depending on the method of Securities investing you choose, there could be some pretty costly fees associated with your trades.
You need to understand all of the fees you will accrue, and analyze how that will affect your returns over the long haul.
You can’t get a bank to lend you money for investing in the stock market. This isn’t necessarily a bad thing, but it is an advantage real estate investing has that Securities do not.
When you buy a property, the bank will lend you money. This allows you to buy a larger property, and benefit from returns on a larger investment than your personal cash would have paid for.
In the stock market, if you have $10,000 you can invest it, but you can’t use leverage, so you’ll only reap the return on your $10,000 investment.
People are Emotional
Another issue you may run into with stock market risk is that people are emotional. A company could be doing incredible, and still have the stock value drop if the public opinion on that stock goes down. A prime example of this is Tesla!
In September 2018 Elon Musk smoked a blunt on the Joe Rogan podcast. The next morning, Tesla stock dropped 9% in value because the public opinion of that incident was negative. Now, the stock recovered, but that is a pretty large dip in the value of your stock from something that you had no way to predict and no control of.
On the flip side of this, Tesla stock tripled in twelve months, and I haven’t been able to figure out how their earnings warranted that.
I am not a huge fan of the fact that Securities can fluctuate up and down this much without me having any control. One of the reasons I like real estate is that I have (at least some) control of whether the property goes up, or down, in value. There are renovations that can be done, rent that can be raised, tenants that can be vetted, etc.
Yes, things can always go wrong in either market, but I like having at least some control of the asset, which is something of a turnoff for Securities investments.
You Won’t Beat the Market
Is it possible to outpace the markets average return, yes.
Is it likely, not so much.
Look, there are very few investors that can consistently earn better returns investing on their own. There are investors that can do it, but they are usually professional investors who dedicate insane amounts of time to studying the ins and outs of the market.
The odds are, you don’t have this must time, and although you might get lucky, over the long run you most won’t beat the market, or at least not by much.
Spending hours and hours studying the market, and watching every investment, to only earn a few percentage points more is not worth it, in my opinion, unless you have hundreds of thousands of dollars in the account.
Also, don’t fall prey to people who sell expensive courses, claiming they can teach you how to beat the market. Not unless they are willing to show you their tax return, and/or personal transaction history. I know way to many people who sell these courses, and don’t actually make a lot of money trading.
A Wild Example
Hopefully, this will keep you skeptical enough to avoid these ploys.
I once heard a story about how an investor got an email list with 10,000 subscribers. He emailed half of his subscribers to say stock XYZ was going to go up, and they should buy, and the other half he told XYZ was going to go down and they should sell.
The next day, XYZ did go up, and the 5,000 subscribers who had gotten the correct email were happy.
This investor then ditched the 5,000 people who he had sent bad information to.
The next day, he did the same thing. He sent an email to 2,500 people saying that stock ABC was going to go up in value, and the other 2,500 people got an email saying ABC was going to drop in value.
Again, one of these predictions was correct, and he scrubbed the other 2,500 people from his list.
He did this three more times until he had 312 people left on his email list.
All 312 of these people have seen this investor accurately predict five stock trades that could have made them a decent amount of money (depending on how much they invested).
Next. The investor sent the remaining subscribers an email about a very expensive course he is selling to teach them how he predicts these stocks. A lot of these email subscribers bought his course because, in their minds, he had a great gift at predicting what a stock will do, and had mitigated a lot of the Stock Market Risk. This could prove extremely lucrative for them, so they bought in!
The 9,668 people who had received incorrect emails, were weeded out of his list, so the only people remaining were convinced that this investor had a gift for picking stocks.
In reality, he had been guessing and using the results of his random guesses to fool innocent people.
Unfortunately, these things happen. Don’t fall prey to this kind of stuff, and know that if the returns sound too good to be true, they probably are!
Also, this isn’t the norm, you can definitely make money with stocks, just be smart about who you take advice from. These kinds of “guru schemes” exist in the real estate world, and with every other investment strategy too. Just make sure you do your due diligence before investing a lot of money into any given strategy.
If you’ve been following along with me for any amount of time, you know real estate investing is my bread and butter. That being said, I have a large amount of money in my Thrift Savings Plan, some money invested in individual stocks, especially dividend stocks, and I can certainly understand the allure of Securities investments!