How often have we heard that markets are volatile, and you simply need to stay invested rather than panic? To the average investor, the answer is likely countless times. So how reliable are such cliché like statements about investing? The answer is; extremely reliable, so long as you don’t attempt to out think financial markets.
Novice investors sometimes equate the stock market with some form of a casino in which only the “house” can win. Nothing could be further from the truth. As it pertains to the stock market, there is no independent “house” as is the case with a stay at a casino in Las Vegas. Ownership in a stock is no different than ownership in any business, large or small. If you as an investor were to invest your own dollars into a bakery, you may be highly successful, or perhaps not. Hopefully, before you made the decision to invest in this bakery, you evaluated the local marketplace, the cost to run the store, the insurance coverage required, etc. If you failed to address these necessary concerns adequately, the business venture may not be as successful as you had initially hoped. The novice observer would likely simply equate the failure and corresponding financial loss to either poor planning, or some unlucky set of circumstances. However, the “house” is never to blame for some reason.
Investing in the stock market is simply investing in a business as a silent partner. You the investor will take a minority stake in a company, and in return you share in the success or failure. Aside from the tax treatment a small business owner realizes, the only fundamental difference between the publicly traded stock and the bakery investment is you exercise no operational control. Like investing in the bakery, it is prudent to complete your own due diligence before placing your hard earned dollars into any investment.
Investing in the stock market offers far greater opportunity in the way of risk diversification via various solutions. An investor can utilize mutual funds for professional investment management, or simply gain broad access to financial markets via index funds/ETF’s which invest directly into a broad market index at once.
It should be noted that investing in actively managed equity mutual funds have most often consistently underperformed direct investments into their corresponding index fund counterparts.