A few weeks ago, I went to the Western Regional Dental Convention. Before hitting another 8-hour shift at our booth, I turned on the TV to listen to some market news. They were discussing the “trade” of the day, which would prevent investors from losing money and help them juice up their returns. The advice was heavy on emotion and light on common sense.
Can you really outsmart your peers, gain above-average returns, and avoid the pain of market downside? Nope. The truth about how the market works is much different than what you hear on TV. The real reasons you should invest in the stock market are often overlooked.
It’s true, we do invest money in stocks to gain a good return on capital, but you can gain a good return on capital from many different asset classes, like private business holdings, commercial real estate, farmland, precious metals, etc. Public markets (stocks, bonds, ETF’s, and mutual funds), however, carry unique benefits few other investments can provide.
Here are five often ignored facts about public markets. Let’s talk about why the benefits received from investing in stocks are important to dentists, specialists, and average investors everywhere.
Purchase in Small Quantities
I see many dentists make the mistake of holding on to excess cash for years waiting for the “right” investment opportunity, like a real estate development, small business, or start up venture, instead of investing small amounts of money each month, compounding into millions of dollars over time. This inconsistent investment pattern puts much of their capital at risk by investing in only one or two large projects.
Shares of public securities can be purchased in small quantities, which is ideal for someone with a profession like dentistry. Investing money each month is much more practical than waiting until you have large sums of money to invest in larger projects.
Investing regularly allows an investor to benefit from periods of economic stress (by purchasing stocks at low prices). They also get the benefit of having money invested over a longer period of time, increasing the effect of compound interest. You can build predictable wealth simply by investing money every month over a long period of time.
Public Markets Offer Immediate Liquidity
Investing in public markets allow investors to liquidate small amounts of money from their portfolio at any time. This is particularly useful when you’re retired. For example, if you have $250,000 invested in a mutual fund and need $10,000 tomorrow for an emergency, you can sell $10,000 of your fund and get the money within a couple of days. You can also borrow against your account at a competitive interest rate (margin).
However, if you invest the $250,000 in rental property, for example, you won’t have that level of liquidity. You’ll have a fixed, monthly income stream from rent, but it might not meet your immediate need for cash. While rental property offers some great benefits, liquidity is not one of them.
Public investments are much more liquid than private investments, and, consequently, there is a cost for this benefit; you have to deal with the up and down movement (volatility) of these investments.
Broad Diversification for Small Amounts of Money
Nothing can offer such broad diversification for such small amounts of money as public markets. This benefit cannot be overstated. A small portfolio can have exposure to thousands of individual companies and dozens of different types of investments. This can include large multi-national companies in the U.S., to small companies in Brazil, or bonds issued by the German government. You can build a portfolio that allows your investments to behave differently during various economic cycles. This helps protect your money and increase the probability of reaching your financial goals.
When Built Correctly, The Odds Are Always In Your Favor
Unlike gambling in Vegas, with public markets, the odds are always in your favor. A well-constructed portfolio has a positive, expected return. This means the probability of you making money on any given day is higher than the probability of losing money. This might sound simple, but many direct investments in small businesses or other private investments cannot make this claim. For example, from 1926-2014, U.S. Stocks earned 10% (S&P 500). This doesn’t mean the value of your portfolio won’t ever go down; there will be tough, bear markets (be mentally prepared for this by reading this article), but when investing in a broadly diversified equity market, the odds are always in your favor.
Public Markets Take Very Little Time
Many people discount the value of their time when looking at different types of investments. During your career, much of your time is an valued at $500 per hour, or more. I’ve seen dentists spend countless hours throughout their career and during retirement managing various investments. This time takes a mental and financial toll on the investor, but using a public stock or bond market doesn’t take much time at all. When structured properly, it can truly be a passive investment.
Public markets are awesome; they provide the promise of high expected returns over the long run, with many other benefits along the way. Rather than just focusing on “returns” offered by the market, try to keep in mind all the attributes that make it an excellent investment option for average, ordinary people like you and me.