Starting Out – How much should I invest? Why?

Let’s discuss the ability to begin – Not worry about the minutiae or little things, but to actually start – Let’s focus on this for Sept, 2020 – BEGIN, START!!

Now that we’ve covered the topic of investing multiple times on this blog, let’s rewind the conversation again to see how to begin and why.

See the links below for additional details of what do do with your emotions, what to do when the market makes huge negative moves, what to do during chaos and how to meet your goals with 70% less effort.

As we have seen since March 2020, the stock markets have recovered from a 30% drop in value back to historic highs – So should we now start or stop investing?

Starting Out – Reasons For Investing

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Let’s discuss the reasons why we should start investing in the first place:

Investing provides an actual return on your money – Currently, bank rates are at multi-decade historic lows and it’s not uncommon to see even “high interest” savings accounts paying customers between 0.25% or 0.5% – Almost nothing paid by the banks for the privilege of handing over your hard earned money. If we look at the S&P 500 return YTD for 2020, we are up 8.6% – Amazing return, all while bouncing back from a 30%+ loss in March. If we factor inflation into the equation (commonly 3%), we see that the 0.25% return for saving is actually a -2.75% return vs a 5.6% net market return – Overall a 8.35% decision including inflation!!

Investing provides heavy lifting on your savings efforts – Based on our earlier article – Saving VS Investing – How to Meet your goals with 70% less effort?. During our analysis for this article, we saw that the required savings rate to meet a $10k goal was 19% using only a brute force savings method vs 5.86% with both saving and investing. This is a very sizable difference!! If we refer to the OECD data on savings rate, we see the personal savings rate for USA at 6.9% (2017) and CAD at 1.97% (2017) – Therefore much more achievable goal to stretch your savings rate to 5.86% vs 19%. Our example showed, if we apply the OECD savings rates of 6.9% USA ($3,622.52/year saved) and 1.97% CAD ($1,034.25/year saved) to the $10k hypothetical goal, we see that based on Savings Rate alone we can achieve our hypothetical $10k savings goal in 2.76 years (USA) and 9.67 years (CAD).

Investing provides income replacement in the future – If we take the simplest investment to make, an S&P 500 ETF fund – Say, VOO as an example – Vanguard S&P 500 ETF (VOO), this fund tracks the corresponding index and yields 1.88% return right now, 7.5X better than a 0.25% interest rate in the bank. Well, you might argue that you could potentially lose money if the market slips again. Good point, then you could try another fund like a bond market fund – Say, BND as an example – Vanguard Total Bond Market Index Fund ETF Shares (BND), this fund tracks the corresponding index and yields 2.5% return right now, 10X better than a 0.25% interest rate in the bank. So now, investing $10k or $100k in the markets could yield $2,500 on 100k invested vs $250 from the bank. Couple these returns with a long term time horizon and your investment will grow, providing a stable sizable return to replace your income.

Roadblocks – Reasons For Not investing

If we look on the opposite side of the equation, we can see some common roadblocks for not investing.

Fear of losing money – This is the most common reason for not investing; doing it “wrong” or losing money by starting at “the wrong time” – Both of these reasons are based on a negative or fear based money mindset; difficult to overcome but not a valid reason to begin – Instead of fear, try to adjust your though process to write down the reasons why you would not want to start and research ways to overcome these fears; look into examples online of those who have invested successfully into the market. Look at books from Amazon, Audible or the local library on investing – There are great resources that aren’t expensive or even free to overcome your fear of investing. Moreover, as we metioned above, if we factor inflation into the equation (commonly 3%), we see that the 0.25% return for saving is actually a -2.75% return vs a 5.6% net market return – Overall a 8.35% decision including inflation!! This means by not investing, at current interest rates, you are already losing money to inflation.

Mental Roadblocks – Fear of doing the Wrong Thing – Instead of focusing on doing the “wrong” thing, let’s focus our efforts on being positive and channel our efforts on overcoming these roadblocks – Getting over a Mental Roadblock offers the following assistance: Control your state, focus on the present, recognize signs of a breakthrough, reprogram your mind and calm your environment. Additionally, as mentioned above, you can look into great resources on mental health through Amazon, Audible or your local library as well as professional services like CAMH – http://www.camh.ca/. Doing the wrong thing is akin to analysis paralysis or having too many options available leading to excessive deliberation of each potential path – Best to pick a Robo-advisor that invests in ETF funds and just begin – USA – https://www.forbes.com/advisor/investing/what-is-robo-advisor/ – CAD – https://www.moneysense.ca/save/investing/best-robo-advisors-in-canada/

Conclusion

Therefore, if we go back to our original argument, now is a great time to start investing – The market has just proven that it can rebound from a 30%+ decline and even bounced 8% higher in a matter of months. This is very short term proof, but coupled with the historic return data of the S&P500 (see below), we can see that there is a strong upward bias or tendency for the stock markets to continue to grow over longer periods of time. This means that if you are going to leave your money alone for long periods of time and not sell at any sudden drop, you have a strong likelihood to make money over any 10, 20 year period of time.

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If you want to support our efforts at http://www.personalfinanceexperiment.com, please leave a comment, hit the like button and subscribe to the blog.

Also, if you like what you read – Please consider supporting us with a coffee – https://www.buymeacoffee.com/PFExperiment