Money Matters - What People Get Wrong About Investing in the Stock Market

 By Steve Davis, CEO — Total Wealth Academy

The number of Americans investing in the stock market is on the rise. According to recent statistics, 61 percent of people in the US own stocks, which represents the highest number of investors in the last 15 years.

One factor behind this surge in investing is being done as part of retirement planning. Americans looking to leave the rat race as they enter their 60s see stocks as a safe bet for building wealth. 

The problem, however, is that the market is not nearly as safe as they think. In fact, there are a number of things that people get wrong about investing in the stock market that could have a significant impact on their retirement plans.

Market volatility is more dangerous than you think

The standard line that financial planners give to their clients is that the market is always headed higher. While they admit that there may be periodic short-term setbacks, they all but promise that if you just keep your money in long enough, you will see a healthy return. As a result, investors wrongly believe that the money they have invested in the stock market will be there when they are ready to retire.

The truth is the stock market crashes regularly. Over the past 100 years, it has crashed 18 times — an average of once every six years.

So, what happens if the market crashes the year you are ready to retire? With the average retirement lasting 20 years, there is a good chance that your stock portfolio will take a major hit at least three times during that season. 

The reality is that market volatility can leave you with a negative return just when you need it most. Most people get that wrong about investing in the stock market.

The average return will not be enough

Another thing people get wrong about investing in stocks involves the rate of return they expect to see. Most people mistakenly believe the average return the market provides is enough to build wealth that will fund their retirement. The numbers, however, tell a different story.

Over the last century, the average rate of return on stocks has been 10 percent per year. However, that doesn’t mean investors are seeing a 10 percent increase. First, there may be fees removed by the advisor managing the portfolio. Then, depending on the type of retirement account being used, there may be taxes. Finally, the rate of inflation, which has recently gone as high as 9.1 percent, must be factored in.

When all of those losses are subtracted from the gains, it becomes clear that very few people will ever get rich by investing in the stock market. In fact, it gives the average investor little hope of even making enough to retire.

Retiring rich should not be the goal

Maybe you have had a financial planner tell you that if you put a certain amount from each paycheck in the stock market, you will have more than $1 million by the time you are 65, but I didn’t want to wait until retirement age to be rich — I wanted to be rich while I was young. 

If you want to have a million dollars in your 401K when you hit 65, the stock market might get you there, provided you contribute enough money for enough months. If you want to be rich now, the stock market can’t help you.

Many see stocks as a safe and secure investment, but the mechanics of the market just don’t support that position. You only make money when the market goes up, and you lose when it goes down. That is gambling and nothing more.

There are more reliable investment strategies — the best of which involve investing in real estate or other income-producing assets — that can fund a better life before and after retirement. The key to building wealth for your retirement is increasing your financial IQ, looking beyond the common assumptions about investing, and committing to a sound strategy that involves more than speculation.

– Steve Davis, CEO of Total Wealth Academy, has spent three decades helping Americans, as well as those outside of the US, become financially independent. Through his Total Wealth Academy, which teaches people how to build a second stream of income with active and passive real estate investment, Steve has trained hundreds of thousands of people seeking a practical path to financial empowerment.