Recently, I was joking around with a father of three at our latest “socially-distant neighborhood happy hour” (basically yelling from driveway to driveway, up and down the street), that we needed him to organize a family basketball tournament that we could all watch and bet on, when a neighbor from down the street yells up that if I want to bet on something, I should try stocks. She went on to explain this new app she downloaded on her phone, and the stocks that she had “bet” on. I had two immediate thoughts. Initially, I thought how poorly I had done letting my neighbors in on my professional life. So much so, that a person I interact with on a daily basis was giving me misguided investment advice. My next thought was how little she knew about what investing, especially in stocks, truly means.
The two most basic investment vehicles in the world – stocks and bonds – are often the most misunderstood. Much like my neighbor, most people don’t necessarily know what they are buying when they invest in a stock versus a bond. At the most basic level, the choice is: do you want to be an owner or a lender?
· When you own a stock, you are buying a share, a small little sliver of the company. You receive the benefits of sharing in profits and voting on different facets of the company decisions.
· When you buy a bond, you have become the banker for the company. You loan them money with the promise of the money being paid back, usually with interest.
Investing in stocks is not gambling. For something to be considered gambling, you know that the odds are stacked against you. Casinos are so profitable because they always have the edge. Investing in stocks is the exact opposite. There may be periods, just like now, when stocks drop in price, but the reality is that they always recover and continue to grow. When you invest in the stock of a company, you aren’t rolling the dice if they are going to shutter their doors the next day. If there is an edge to be had, it’s held by the investor. Our edge is time. As a long-term investor, we know we can wait out times like these, we know that better times are ahead.
Stocks are important in the good times – and bad. Most people understand when the economy is humming, it’s great to own stock. The real secret to investing, and probably the most difficult part of investing, is what happens when the economy comes to a screeching halt. It certainly isn’t easy to watch the markets fall. It can be tempting to pull all of your cash out of the stock market in an attempt to salvage what is left. We all probably know someone that made that mistake in 2008. Someone who said “I’m getting out” and never bought stocks again. As ugly as the great recession was, had that investor known that by 2013 it would all be an afterthought, growing over 350% from the lows of 2009, they probably would have made a different decision. Had stocks been removed from their portfolio at that point and had they bought government bonds, or even worse, just stayed in cash, they still would not be back to the level they were pre-financial crises. Stocks are, and always will be, the fuel that will get your account back to where it needs to be. When you are watching the markets crash it’s important to remember that your long-term goals can handle this.
Ryan Flanders, CFA