You must have skin in the game - shares are a beautiful thing with a sometimes nasty bite
The real benefits (and risks) of shares comes when you have lots of money. A 10% increase on $10,000 might pay your rent for a couple of weeks, the same % on $1,000,000 might pay it for 4 years. When you start off investing you probably only have a small amount of money, but you definitely have bills and unforeseen expenses that can come out of nowhere. So why trade off the flexibility of cash in the bank for investing in something volatile and not as easy to access like shares if the rewards aren't very big?
Because you need to take your bruises. The most important aspect of investing in shares is to train yourself to be able to ignore the entire world telling you that you must sell your shares. This happens VERY regularly. There is always a reason to sell, and the media and your well-wishing friends/families/acquaintances will look very concerned when they tell you the sky is falling.
Seneca: "Be deaf to those who love you, they pray for bad things with good intentions."
If you start investing $1000 per month, every month, for 5 years in shares there's around a 1 in 10 chance you will have LESS at the end than you put in. There's also a good chance you will see your investment reduced by 20% or more in that time period, with a small chance you will see half your savings disappear. This seems like a horrible outcome, but this is actually a good thing. This is your training! When this happens you ignore the media and don't listen to anyone telling you anything about selling shares. This is your discount sale! Would Maria sell the Urban Coyote clothes she already has when they are having a 20% off storewide sale? That would be crazy. Same thing applies here. You can make a little "hrumph" sound, but do no more. Don't sell, keep buying. Stick to the plan. Once you've done this a few times it DOES NOT become easier, as you will likely have much more money at stake. Felt like you got punched in the stomach when you saw your $10,000 turn into $6,700 during a 33% decline? Try watching $600,000 turn into $400,000. If you stick with the plan one day you will. But it will become easier once you've done it for decades, as odds are the numbers become so big that in reality they don't really matter? $2,000,000 turns into $1,340,000? That sounds horrible, but to get to that point you would have made a lot of gains along the way. This is the essential part. Investing takes decades of practice, some big losses, and hopefully some much, much bigger gains. It's inhuman not to worry about the potential for some big losses in your investments, but every time you do you have to invert and think about the alternative - the potential for big gains. If you are worried about losing money in the next year remember this: In the last century USA and Australian shares have been more likely to go UP more than 20% in a year than go down by any percentage. When shares go up they tend to go up HARD AND FAST. It is common for investments to go up triple or more in a decade. In the last 50 years the average annual return for USA shares over a 10 year period has been 11.18% per year.
That is nearly tripling your money in a decade. Think about tripling your money every 10 years means:
In 10 years your original $10,000 turns into $30,000
Ten years later that $30,000 is $90,000
Ten year after that your $90,000 is $270,000
Ten years after that $270,000 is $810,000
Ten years after that and the acceleration has really happened - your $810,000 is $2.43 million
That's if you don't add any money at all after the original $10,000. But what happens if you consistently save and invest some of your money into shares? What if it is just a relatively small amount? Maria decides to invest $1000 every month into shares for the next 19 years (bringing her to age 41 - wonder why I chose that age?). Let's look at two ways that could work out:
1. She has HORRIBLE timing! Maria starts investing at the end of the tech bubble in 1998 so gets none of the rapid rises, then gets hammered by the GFC in 2008 where her investments get cut in half again! She doesn't take notice of any of this and just invests her $1000 every month until the end of 2016. At this stage she checks and sees that the $228,000 she has invested over this time is now worth $629,000. Even adjusting for inflation it is worth $420,000. Out of curiosity she compares it to what she would have made if she had saved it in a bank account earning the average interest rate over that time period. It would now be worth $319,000, which doesn't sound horrible...except when you adjust for inflation it would be worth only $213,000 which is LESS than the money she had saved and invested. Even in this horrible timing situation, which is one of the worst in history, the outcomes were still very good for shares.
2. She has GREAT timing! Maria starts investing in 1980 (the greatest year for things to be born - I wonder why I picked that one?). In 1998 she checks her account and it is now worth $1.97 million dollars. Even after adjusting for inflation it is worth $921,000. Interest rates were higher back then so had she been in cash it would have been worth $635,000....but interest rates were higher because inflation was too. Adjusting for this it would have been worth $297,000. A massive difference.
Moral of the story: If you can hold on for the long-term and handle the bumps in the road you will likely do very, very well regardless of what is happening in the markets. That takes training to see if you can do it, and it's best to do that when you don't have a lot of money on the line. Take your hits when you are young and don't have much money on the line. Then when you are older with a lot more money the big hits don't hurt as much!
"I am not an optimist, I am a very serious probabilist." (paraphrased from Hans Rosling). If you are thinking long term (20+ years) so far throughout history shares are a heck of an investment method.
This is a brilliant set of rules for investing in shares. 20 Rules for Markets and Investing - 2020 Edition - Compound Advisors
This is a great, easy read about investing in shares. He talks a lot about how to get through market crashes and ignoring the media hype cycle. Stock Series - JLCollinsnh