A couple weeks ago, I posed a question: why are you hesitant to invest? At the time, the market was in turmoil, with huge volatile swings daily in the market. I got quite a few interesting responses, and wanted to share the reason about why you, the reader, don't invest or are hesitant to.
I was surprised to see how many of the responses fell into the following general bucks. Here are the reasons and my thoughts.
The Reasons Not To Invest
- Here's what you said: “the up's and down's are too much”, “the going is tough”, “600 point drops spook me”, “things seem so up and down”
- My thoughts: I think volatility can be a huge factor. However, it is the ability to buy assets low that give some people advantages over other investors. If you dollar-cost average into the stock market (maybe through a 401k), you would buy at the lows as well as the highs. Also, you invest for the long term. As such, you seek gains over long periods of time, not just the short term swings.
- What you said: “People are afraid of the unknown”
- My thoughts: I agree that people are afraid of the unknown. However, my challenge would be why is investing unknown? Lack of education, overwhelming options (the next fear), or maybe volatility (see above). Or maybe the uncertainty comes from a fear of how the markets naturally act. Asset prices rise AND fall, and I think too many people become complacent in rising prices.
- Overwhelming Options
- What you said: “People are overwhelmed with all the options”, “There is no education about what to do”, “I wouldn't know where to start”
- My thoughts: I agree that there are a lot of options out there with minimal education. Financial education in America is lacking at home and at school. As a result, too many people are making poor financial decisions. I think that both corporate America and government America need to work to improve the financial literacy of America. This means teaching basic finance skills (including investments), and legislating opt-out 401k enrollment (instead of the current opt-in system).
- Not The Biggest Priority
- What you said: “lack of extra funds”, “I still don't have enough of an emergency fund”
- My thoughts: This is a perfectly valid reason to not invest. Investing is a long term priority. You may need to pay off debt, or build an emergency fund, before you even consider investing. Plus, you should only invest with funds you don't need to access for a long time (say 20 years or more). That way, you can absorb the volatility in the market.
In this stock market, there are a lot of reasons to be hesitant to invest. However, by not investing in tough times, you usually miss the gains that follow during the “recovery” of the economy. If you don't regularly invest, you risk breaking the cardinal rule of investing: buying high and selling low.
If you think that education is a roadblock, read up! There are so many great resources available to get started. I wrote The College Student's Guide To Investing, which is a great start.
Finally, keep investing simple. You don't need crazy products or random specialty funds. Keep it to index funds that track the big names you've heard on the news. Only once you feel comfortable should you look beyond these choices.
Readers, what are your thoughts?