It’s a well-worn expression and one my mother-in-law often used, “When you assume, it makes an ass out of you … and me.” Maybe that’s a reason why assumptions are sometimes called “the mother of all mistakes.” I believe assumptions are dangerous because people commit to a frame of reference without having any real evidence to validate their point of view.
It’s unfortunate, but most people have negative assumptions about public investment markets. Personally, I think public markets are one of the most compelling ways to build wealth. And I want to explain why.
The Case for Public Markets
A public market is a place where investments are traded for cash—almost in an instant. Also referred to as a stock exchange, stock market, or the market, stocks are only one of the investments you can buy in a public market. There are many other types of investments you can purchase—bonds, commercial real estate, farmland, precious metals, or even cows or pigs.
You will undoubtedly put money into private investments as well, like your own practice, a rental property, or your building. But I’d like to share five reasons why public markets are perhaps the best place for a dentist to put their hard-earned money.
1) You Can Invest In Small Quantities
You don’t have to commit significant lump sums to get started. Investing money each month is much more practical than waiting until you have large sums of money to invest in bigger projects.
You can actually build predictable wealth simply by investing small amounts of money every month over a long period of time. Plus, it helps you build really good habits and it conditions you to manage your investing emotions. When you make investing a habit, you’ll be in a stronger financial position down the road as you become a more mature and more capable investor.
2) Liquidity (Access to Cash)
Investing in public markets allows investors to liquidate small amounts of money from their portfolio at any time. As a small business owner your practice should have an emergency fund—a certain amount of fallback money. But you may also need access to a larger portion of your savings at some point.
Hoarding only cash does you absolutely no good—there are a lot of conservative investment options to pick from within the public financial markets. You can construct a portfolio of investments that offers you the liquidity you need, plus puts your money to work generating even small returns with the right investment mix.
No other investment can offer such broad diversification for such small amounts of money. A small portfolio can have exposure to thousands of individual companies and dozens of different types of investments—large multinationals in the U.S. to small companies in Brazil to bonds issued by the German government.
With public securities you can also put together a portfolio that allows your investments to behave differently during various economic cycles. This helps protect your money and increases the probability of reaching your financial goals.
As a company grows there are several ways management can involve shareholders in that growth. Some companies reinvest all or most of their profits back into the company (Apple and Google for instance) so they can grow even more. Some stocks choose to distribute a portion of their earnings to shareholders as dividends (Johnson & Johnson).
Dividends can be useful for people who are looking to generate income, as opposed to only waiting for growth. Dividends tend to be paid by larger companies that have a stable earnings history. These companies don’t appreciate as much on average, but they do offer more stability. And dividends can offer a revenue stream when you’re at the stage of life where you want to replace the income from your practice.
When you save money or invest it, the money earns more money through either dividends, interest, and/or appreciation. That means the next year your money is now earning more money on the interest or appreciation you earned the previous year. And the next year is compounding on the previous two years—and on and on. Hence the snowball effect. Once you get it rolling, it gets bigger and bigger and bigger.
For compounding to work, it requires two things: 1) the reinvestment of interest and dividends; and 2) time for the initial investment to grow. Starting early is especially helpful because it puts the power of compounding to work for you.
Conclusion—Do What Savvy Investors Do
Quite simply the reason expert investors invest in public markets is they provide great benefits. Stocks, in particular, offer one of the highest potential returns available. In the long term, no other type of investment tends to perform better. If you take the S&P 500 (the largest 500 stocks in U.S. public markets) since 1926, those stocks have returned an average close to 10% annually.
Just remember, market swings might make you nervous, but over the long haul it’s worth the ride when you consider all the awesome benefits.
Reese Harper, CFP® is host of the Dentist Money™ Show, a weekly podcast dedicated to helping dentists make smart financial decisions. He is also founder and CEO of Dentist Advisors, a registered investment advisory firm which focuses exclusively on dentists and specialists. His trademarked planning methodology called Elements® is used by dentists all over the country to plan, invest, and retire better.