Time in the market is your money’s best friend.
I’ve been talking to two interesting people lately.
I interviewed a bloke called Tom for an upcoming episode of my podcast and he had a lot to say about investing in individual shares and why he used to buy them, but now no longer does. He is now mid 60s, having retired a couple of years ago and has worked himself into an extremely comfortable financial position due to some astute investments. I thought I was finally going to learn how to pick shares, something I have avoided simply because everything I have read tells me I would suck at it, but as we chatted he went on to explain that he was also complete rubbish at picking shares, even after years and years of trying. Over the years he had researched and created detailed spreadsheets of companies he was interested in and each year he even took note of stock picks that investing “gurus” made in January, only to follow them up in December, at which point he realised that most of them were rubbish at picking company performance as well. So instead he took the advice of a good friend when she told him, back in the 1980s, just buy into today’s equivalent of an index fund and let time in the market be your money’s best friend. Low and behold, she was correct.
I then caught up with a close friend recently, we live a long way apart now so seeing each other in person is more of a rarity these days. In her mid 40’s she became mortgage free recently, making her completely debt free for the first time in her life, which is quite a milestone. I sent her wine to celebrate, of course! So I tentatively asked her how her bank account was looking now and she was pretty amazed at how quickly money starts to grow when you are not sending it off to the mortgage each month. It’s like getting a very generous pay rise. But when I asked her what she intended on doing with her cash as it began to pile up, I was dismayed by her answer.
She was building up a cushion in case trouble hit (wise plan) but then savings accounts and term deposits were the options she felt comfortable with investing in and although they have their place in a diversified portfolio, my suggestion of the share market was met with an absolute NO!
Wondering why, she explained to me that she saw family members lose their shirts when the New Zealand stock market crashed in October 1987. Off I went to research this and found that after a huge one day fall New Zealand shares continued to dive and were down 55% from their pre-crash peak by February 1988.
We suffered far more than the rest of the world did in that crash. Even though this crash happened 32 long years ago when we were both 14 she would not have understood what was really happening, but seeing her family traumatised and financially decimated has been enough to be permanently put off the share market.
Now I understand her reluctance.
My own memory of that time was that had nothing to do with the share market, I had no awareness of what that was, but it pushed our economy into a recession and that is the bit I remember while growing up. My Dad lost his job and there was no money to spare in our household. The sharemarket did not enter my thinking, but knowing my parents were struggling sure did. It is that experience that has lead me TO the sharemarket, so that I could provide a more secure financial future for myself and my family.
I found this excellent article about what happened before, during and after the stock market crash of 1987 and it is really worth reading: NZ Herald: The Crash
Learning about that time I can see that a lot of people borrowed money to invest, often borrowing against their own house or farm, with interest rates in the 20% range (stop and think about that for a minute, 20%!). And when markets plunged they were still liable to repay that money so the follow on was that people lost their own homes and business and the economy slowed down. One quote that stands out in the above article is “What surprised me and frightened me was that everybody thought that it was easy to make money, so they were buying shares on the assumption they’d go up automatically, with little research” (Des Hunt, founding member of the NZ Shareholders Association, NZ Herald)
It was apparently a very speculative share market with people dumping money in, watching it rise and taking it out again, or if they got the timing wrong, losing the lot.
This Jo Kennedy anecdote comes to mind: “You know it’s time to sell when the shoeshine boys give you stock tips. This bull market is over”. Everyone was talking about the stock market and if they were not in it, they knew people who were.
There were not the controls in place that we have today and insider trading was actually legal at the time! When you read the above article you can really appreciate that people were climbing all over themselves to get into shares, but the knowledge of what they were doing was just not there and people took huge risks in the hope of huge returns.
Me suggesting to my friend that she invest in shares rightly has her worried and investing is all about risk, well this is just far too risky for her, which I now understand.
But need she be so hesitant in today’s economy and is she missing out on future returns?
This is what I think of when I think of the stock market. Lumps, bumps, dips and blips but a rise overall and a crash at some point:
She, on the other hand, sees this, a sudden drop and no recovery:
So, how can I get my friend to see that she might want to reconsider that long held view?
I did point out to her that her KiwiSaver likely has shares in its mix but my friend knows her own mind and she has never been one to be influenced by the opinions of others and I am not an overly persuasive character, never have been.
People are greedy and will chase the next big thing, it seems to be in our nature and she is rightly concerned that’s what I’m up to now, but I’m not. Tom, who I mentioned at the start methodically researched and invested in the share market over many many years, picking, buying and selling shares in a range of individual companies. It never worked out for him and it took an enormous amount of time and effort to realise that he couldn’t do it. So he switched to buying into a broad based index fund instead. He no longer buys one or two companies he buys 10’s or 100’s at a time. And this is what I’m proposing she consider doing as well.
When I hear a story like his, I know that his investing philosophy makes sense and he is setting a good example for me to follow and I continue to have an interesting and positive experience as an investor. Time is money’s best friend and I have to be consistent and patient. Unlike the chaos of 1987, he is not chasing a rise in share price and a quick sale. He has invested month by month, into what has been a rising market (with some notable dips) and he has been doing it over the last 30 years. And it has worked, he has not lost his shirt, instead he has slowly but surely increased his wealth. It’s kinda boring when you think about it.
And it is working for me too. Here is the Sharesight graph of my holding in the NZ Top 50 Fund:
For three years, I’ve invested in New Zealand’s Top 50 companies, never missing a month, watching a gradual increase in the share price, with some dividends paid out along the way. No stress, no drama. Companies go into business to succeed and they make up this index and by investing in this index, I’m supporting those companies. Some will succeed beyond their expectations and others will lose value and drop off. If that happens they are replaced on this index by the next high performing company. I’ve heard an index described as “self cleansing” and an index fund simply tracks the 50 top performers. And one of the best bits is that I can do this myself, no help required.
My friend is never going to take it from me that by leaving her growing pot of cash in poorly performing term deposits (3.5%) or terribly performing bank savings accounts (3%) is going to leave her worse off in retirement. Or that investing in the stock market by way of one or two low fee index funds over the next 20 years will lead her into a comfortable retirement but she is an intelligent woman who, if she can find the time, will let someone like JL Collins author of The Simple Path to Wealth coach her gently into understanding that the stock market can work for her.
The Barefoot Investor is a book she has already glanced over and maybe it might pique her interest to read a little deeper? One of his online articles quickly details what the best stock picker in the world, Warren Buffett is advising his wife to do with his money when he dies: Warren Buffett’s plan for his money when he dies
Or maybe none of this information will and like the people who heard that the Titanic sunk and never got on another boat, maybe the risks will always remain too high for her? It’s hard to change the habits and mindset built up over a lifetime and in order to change your mind it’s essential that you find information relevant to you, but I certainly want to really really encourage my friend and anyone else reading this who has their doubts to read widely and educate themselves thoroughly before dismissing the share market entirely.
Notice I don’t tell her what to buy? Someone who does not want to do something does not want to be told how to do it! Instead, here are some more great resources to help her decide if it is for her or not:
An oldie but a goodie: Mr. Money Mustache - How to make Money in the Stock Market
One of the best podcasts you will ever learn from: Choose FI - 019 JL Collins - The Stock Series - Part 1
And if she does want to dabble, here is where she can go to actually start investing. Just pick one (you only need to choose one provider) and get started:
www.sharesies.nz (this is the most user friendly for beginners)
When all is said and done and if I have failed to convince her to convince herself that the share market has the ability to make her money grow, then as long as she invests heavily (and I mean really heavily because it will take a long time for her money to grow) into her term deposits and savings accounts and saves for her future then that’s better than doing nothing at all. If that is the level of risk she is willing to take on, then that’s OK too, because she has to feel entirely comfortable with what she is doing with her money and that’s why this blog post does not tell her WHAT to do, just offers some suggestions as to how to learn more about it.
I want her to be comfortable in retirement for purely selfish reasons. When I’m ready to cruise the Caribbean while sipping margaritas, I want her to come with me! I want the two of us and our families to be MORE than comfortable so at the drop of a hat, we can do whatever we fancy and in order to do that we have to build the foundations of our retirement right now, in our forties, while we have the earning ability to do it.