Why the Stock Market is NOT Like Russian Roulette | brokeGIRLrich

Occasionally I overhear things that make me cringe – or make me remember why I write this blog. The first day of rehearsals at my new job, I was busy setting up my rehearsal room and checking some final things while the cast were sitting around chatting.

The conversation to turned to saving and investing and my ears immediately perked up. One actress was saying that she had no idea how to invest in things and another actor was telling her she really needed to get into stocks. I thought… hmmm… that’s sort of interesting.

He then said it was like Russian roulette – throw some money in, pull the trigger and a few days later the money will grow and you’ll suddenly have $200 instead of $100, so you take it out and buy a new stock.

AHHHHHHHHHH. I wish there was a button for a sound effect that I could’ve pushed that goes wah-wah-wah-wah or “Danger, Will Robinson” or some sort of warning. I couldn’t exactly break away from notes from the director to go over and be like “what are you doing!?!?!?”

So I’m doing it now.

The stock market should not be like Russian roulette. I mean… it sure can be, if you do what my actor suggests. There are all sorts of get rich schemes associates with the stock market and they pan out just often enough that everyone thinks and hopes that they can work for them.

RUSSIAN ROULETTE

noun

1.

a game of high risk in which each player in turn,using a revolver containing one bullet, spins thecylinder of the revolver, points the muzzle at thehead, and pulls the trigger.

This is a terrible investment strategy.

To begin with, if you don’t know much about stocks, don’t invest in them! Start with index funds. Index funds invest in a wider variety of companies, mitigating a lot of the risk you’re taking by making sure all of your eggs are not in one basket.

A great index fund to invest in is one that covers the entire stock market like Vanguard Total Stock Market Index Fund, Dow Jones Total Stock Market Index, Fidelity Total Stock Market Index Fund or even something like the S&P 500 Index, which holds 500 blue chip, well established companies. Spread betting in commodities is a solid way to diversify and minimize your risk.

Why would investing in the entire (or large portion) of the stock market be a good starting place for an investor?

From 1928-2013, the average annual return on a stock market investment was 11.50%. That means that is you invest $100, after a year of doing nothing, you’re likely to have $111.50. Some years you’ll have more, some years you’ll have less, but that’s a pretty good return – especially considering the average return on every other investment vehicle: savings accounts, bonds, etc. doesn’t even come close to that.

Not gonna lie, some years the market is down. from 1928-2013 the market provided a negative return 24 years. 9 of those years were during the Great Depression. If you managed to continue investing a little while the market was plummeting during those years – bringing stock prices incredibly low, you would’ve seen amazing returns if you stuck it out those 10 years (which is the longest run of negative returns in the last 150 years), since returns during World War II were actually 19% in 1942, 25% in 1943, 19% in 1944 and 35% in 1945.

There’s a lot more green than red on this graph.

The trick is to invest slowly and steadily. Instead of trying to make a quick profit, slowly contributing regularly to the stock market is a great way to start saving for retirement or any big plans you have that are a few years off.

This makes as much sense as approaching investing like Russian roulette… but at least it’s funnier.

Another thing that get rich quick stock schemes don’t take into account is taxes. Money made from the stock market, or any investment, is a capital gain. Capital gains get taxed; however, you don’t get taxed until you sell the asset – so as long as you’re holding onto a stock and letting it grow, you don’t owe anything on it.

Long term capital gains tax rates are the taxes you pay on any asset you cash in on that you owned for more than one year. They are taxed at a different rate than your income. If your regular income tax bracket is 15% and under, you are taxed at 0%. If you are between 25-35%, you are taxed at 15% and if you are about 35%, you are taxed at 20%.

Short term capital gains are taxed as your regular income rate. So you can see you get a tax break by investing – as long as you keep your investment for a while. It promotes good save habits, but mostly it also just helps the economy.

Trying to invest in individual companies and make a fast profit can absolutely be like Russian roulette, but if you use the stock market’s historical performance to your advantage and invest in it as a whole with a long term plan in mind, it’s actually one of the best investment choices you can make.