The opening chapters of Larry Harris’ 2002 textbook Trading and Exchanges paint a bleak reality for the average retail investor…
Calling your broker on the phone, wondering if he’ll act in your best interests, and then paying a hefty fee if your order gets executed isn’t my idea of a good time or a system that is welcoming to new investors.
Warren Buffett: If You Own A Good Business, Keep It
Thankfully, electronic trading has changed markets dramatically in the last fifteen years.
So why does such a small subset of the population invest?
Only about 4 in 10 Americans and only 1 in 3 Millennials have money in the stock market. The most common justification – that those who don’t invest simply don’t have the money – doesn’t cover all the bases.
What governs the behavior of those who have the money and choose not to invest is fear.
To a seasoned market participant, the fact that everyone with the means to invest doesn’t invest is baffling, but the implications are far more dire than just missed opportunities.
Many Americans’ financial futures are uncertain, not because they don’t have the money, but because they don’t know what to do with it. Innovations and market events of the last decade haven’t dramatically improved financial literacy or investor confidence either.
The first and most populous category of should-be investors will instead spend disposable income on disposable goods.
While this isn’t what I would call prudent behavior, it’s what makes the economy function.
If everyone was as disciplined and as frugal as some of the self-help books suggest, the world would be drastically different. Not to say that Rolex Submariners and $100 power lunches would cease to exist, but entire segments of certain industries would be forced to consolidate.
It’s important to realize that there are countless entities that have a vested interest in getting the general populace to spend and consume more: from your neighborhood burger bar, to American Express, to the United States government.
While the “working poor” expand their lifestyles to match discretionary income, many share the same insecurity: a bleak financial future.
Within the scope of saving for retirement, we know that regularly investing money through tax-advantaged accounts is the tried-and-true way to do it.
However, for those in the heavy spending group, this is a wake up call they just don’t want to answer.
Whether 25 or 45, it isn’t easy to confront the realities of what it takes to build up a nest egg, achieve financial independence, or even take up investing as a hobby, when your current lifestyle is unsustainable.
The other group that doesn’t invest is much harder to categorize.
This group has disposable income, spends some of it, but then parks all excess funds in a checking account, savings account, or perhaps even an asset with an extremely low yield.
In general, this group tends to be financially secure but, over time, shuns opportunities to invest in assets with higher risk profiles and higher average rates of return.
The tragedy here is that this is often due to feelings that the market is unapproachable, that it is difficult for investors to come out ahead, or even the narrative that the investor at one time suffered a crushing loss and that that will be indicative of future performance.
In reality, it has never been easier or cheaper to invest. Furthermore, over any sufficiently long period of time, investment returns in the United States have been overwhelmingly positive.
While this group would benefit the most from financial literacy campaigns, swaths of people will never purchase stocks, bonds, or other investments, and we’ll forever be stuck trying to figure out why.
So… What Are You Waiting For?
Having disposable income and managing disposable income are two prerequisites for those looking to start investing.
However, to overcome fear and simultaneously take care to not blow your life’s savings, it is necessary to spend time forming a basic understanding of how markets operate and all the options available to you.
If you want to get started investing today, then you can start by reading the Vintage Value Investing 101 series: How to Start Investing.
Remember, its never too late to begin your journey!
Article by Vintage Value Investing
This post was written by Tim O’Hearn (Guest Contributor). Be sure to check out his awesome blog right here, where Tim writes about entrepreneurship, business, technology, programming, algorithms, and the many books he reads!