I’m a HUGE fan of Lonely Island. Came across this awesome music video titled YOU ONLY LIVE ONCE, feat Adam Levine and Kendrick Lamar (who?).
I love it because it makes fun of people who take risk a little too seriously (“Two words about furniture: KILLING MACHINES!!”).
But while we scoff at the idea that we should stop going to clubs because loud music is bad for your ears, it amazes me that so many young people adopt that very same mindset when it comes to investing.
Here’s an interesting thought: Investing in the stock market is risky in the short run, but it’s the safest investment you can have in the long run.
The stock market is risky in the short run
Let’s tackle the first half of that last para first. Check out the returns from the stock market’s five worst years, from Financial Ramblings:
- 1931, -52.7%
- 2008, -33.8%
- 1930, -33.8%
- 1937, -32.8%
- 1974, -27.6%
So yep, in the very short term, buying and holding stocks is risky. Based on what history tells us, you could lose as much as half of your portfolio in a single year – Investors sure as hell weren’t popping champagne in 1931.
But it kicks ass in the long run
But it’s a very different story when you’re holding stocks for long periods of time.
Jeremy Siegel (whose classes I used to crash in college to leech off his market insights – woot woot!) argued in Chapter 2 of his book Stocks for the Long Run, that with a sufficiently long holding period, stocks are actually less risky than bonds.
According to Wikipedia, “During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable.” Bonds, however, once fell as much as -3% per year below inflation.
In short, Siegel found that if you held stocks for 17 years or more, you never lost money even in the worst case scenario.
Okay, so critics might claim that his findings are way too optimistic, and that the stock market’s prosperity in the 20th century may not necessarily repeat itself. But what’s the alternative? Investing in scammy gold buyback schemes?
The truth is, based on any historical record so far, the safest, and best, long-term investment for most young people has clearly been a diversified portfolio of stocks. Yes, even after you account for the stock market crashes in the past couple of years.
Young Heart, Run Free
And therein lies the awesomeness of being young and sexy – as young people, we have the luxury of having enough time. Enough time for a long career of earning money ahead of us. Enough time to hold on to our stocks without worrying about their fluctuations in any given day/month/year, knowing fully well that in the long run, we’ll come out on top.
So please. Stop getting intimidated by the stories of banks failing, and quantitative easing, and Justin Bieber’s Twitter account getting hacked. These are all short run risks (especially if you’re Justin Bieber), which are irrelevant if you’re holding out for the long term.
Take a little bit of risk in the short run to enjoy some awesomeness in the long run.
You only live once.
Image credit: TheOnyxBirmingham