The True Cost of Skipping Stocks

Can you afford to not invest? Are you sure? Unless you starting saving at age five and are presently making a killer income - consistently and year after year - most people will have trouble saving enough for retirement without investing at least some of their savings.

When advised to start looking into the stock market, have you ever thought something along the lines of, “This is all our retirement money, we can’t afford to lose it?" If so, you’re not alone and I get it. I know planning for your future can be scary. Pair stock market volatility with the 24-hour news cycle and it’s no wonder the fear of watching your hard earned money turn into a big fat pile of nothing looms large. (For related reading, see: Finding Your Investment Comfort Zone.)

Reality Check:The Risk of Risk Free

But first, let’s take a look at living off the interest from a bank account over a 30-year retirement. Guess what kind nest egg you would have to have to get $100,000 annual income from a bank at 1% (which is, by the way, more than many bank accounts are currently paying). The days of double digit interest on CDs are long gone.

The answer? You would need a cool $10 million in savings to generate $100,000 of income per year at 1% and that is before taxes. In plain English, you don’t get to keep the whole $100,000 because bank interest is taxed as regular income rather than capital gains. Ten million in the bank to earn a net of around $65,000 stops looking so secure now, doesn’t it? If you had $10 million saved, I’m going to guess you won’t be happy living on just $65,000 per year.

Will Safety Kill Your Security?

Since American life expectancies are growing by leaps and bounds, fear of going broke in your golden years may feel logical. But let me ask, how do you actually see that happening? If your dread is because of “stock market risk” you are falling for one of the biggest traps keeping many Americans from achieving financial independence. Very few people really understand the difference between stock market investment risk and volatility and it’s this understanding that can make the difference between a prosperous retirement and a grueling exit from this mortal coil. (For more, see: The Lowdown on Volatile Stocks.)

Stock Market Risk vs. Volatility

  • Stock market risk is the probability or likelihood of losses relative to the expected return on any particular investment. For example, a risky stock is one that could pay out big but has a greater potential to be a loser. A risk is a chance that may, in some cases for some investors, be worth taking.
  • Stock market volatility is just another way to say unpredictable fluctuation. In reality it shouldn’t have any positive or negative connotation attached to it. It simply refers to the natural movement of the stock markets both up and down, and up and down again. For example, if a stock is particularly volatile that means its value has moved around a lot, not necessarily going anywhere. It may just be going around like a Ferris wheel, up and down but always ending in the same place.

What this means is that temporary fluctuations in an investment value is completely different from a permanent loss. Don’t be afraid of volatility - for those still accumulating wealth it really can be your friend. 

Seeking Help

The stock market rollercoaster ride may be scary, but the odds of achieving financial independence without investing - right up there with winning the lottery or someone leaving you millions - are virtually non existent.

Remember, no one is saying you have to take on stock market investing by yourself. I am recommending reassessing your attitude towards it. And of course, you should make all investment decisions based on your own personal financial goals, time frames and tolerance for risk. Perhaps if you know where you are going and how your investments fit into the picture, small stock market fluctuations won’t seem so scary. Facing your fears and taking proactive steps will help you make smarter financial decisions over time. Small, smart improvements in your financial choices today will have compound benefits in the long run. (For more from this author, see: Planning Financially for Today and Tomorrow.)