You hear it all the time that if you want to become rich, you must invest your money. While there’s no doubting the fact that to build true wealth you have to have your money work for you, I think that buying stocks may be the wrong move for most people. Now, for those shocked that I just made that remark, let me now get into why I believe you shouldn’t buy stocks in 2022!
As you already know, one of the most common pieces of financial advice floating around these days is the notion that you must invest your money. It seems like every finance video you watch and money blog you read is preaching the importance of investing early to maximize your lifetime returns and they aren’t wrong. It’s true that 99% of people need to invest their money to ever have a chance at amassing a nest egg large enough to carry them through their retirement years.
Mistake #1
Now, obviously not everyone who hears this advice puts it to good use or maximizes their investing returns. For instance, I’m sure we both know someone who’s said they were going to start investing years ago yet they still have yet to open up a brokerage account. Then there are others who invest but only every time there is a full moon. Finally, we have those who do buy into the market but obsess over every market movement and give themselves hypertension in the process. This is all to say that many people make a run at investing but most don’t maximize the returns they receive due the lackluster approach they are taking.
Now, I will give credit where credit is due because at the very least, these people do want to see their money grow and understand that stashing your money in a bank account is like slowly setting it on fire and as inflation rates rise higher over time, the burning only starts to speed up. Therefore, yes, investing is essential in growing your wealth, however if you ask me there is still one mistake people make that we need to talk more about.
In my opinion, one of the best pieces of financial advice investing magnate Warren Buffett has ever given is that as an investor, you should never invest in something you don’t understand. It’s funny that this concept, that many would see as common sense, is really not so commonly applied. I mean, if you’ve ever talked to a casual stock investor, you’ll know that their typical investing game plan relies on watching CNBC or scrolling through Twitter to see which stock they should go after next. Now, this isn’t to say that these investors aren’t taking their time to do their due diligence on the companies they are buying but I’d be willing to bet that a quick scan is all they do before buying into these funds they come across.
As you can guess, when you invest blindly, things aren’t going to turn out well. It’s like trying to hit a target with a blindfold on, unless luck is on your side, you’re likely going to lose. This is why at a bare minimum, more experienced investors will advise that you understand all aspects of a company before you buy into it. At a bare minimum, I think you should understand the fundamentals of the business, it’s strategic plan for the future and assess the quality of management who are ultimately going to be responsible for leading the company towards future profits which for you as a shareholder is what you truly care about.
Now, again I know for most people, the thought of doing all this homework seems like a hassle and this is why many skip out on doing it and just risk it for the biscuit by buying stocks sight unseen. As much as I hate to admit it, I totally get why people skip over this important step because if you aren’t very experienced in investing or simply hate numbers then this is going to be as fun as going to a dentist. Therefore, the first reason why I think most people should steer clear of investing in stocks in 2022 is because most are putting their money at risk by buying into companies they don’t understand.
But, let’s say you do take Warren Buffett’s advice and do the proper due diligence when investing in stocks. You listen to earnings calls, do your own technical analysis and know every management member’s name, their horoscope sign and the street they grew up on. Good work! You’re now one step closer to making a wise investment decision and reaping the benefits of all the hard work you’ve put in. However, after all that work, how much are you actually getting in return?
Here’s where we dive into the second and final reason most people shouldn’t buy stocks in 2022 and it comes down to the cost benefit trade off of your stock investing process.
Mistake #2
You see, when most people think about the cost of their investments, they only think about the price they paid to acquire their stock. Now, of course this one element usually makes up a large part of the overall cost but let me tell you right now that if you are doing the proper due diligence required to buy winning stocks then the cost is actually much greater.
You see, one concept I talk about a lot when comparing those who get ahead financially and those who don’t is how they value their time. Those who get ahead the most tend to place extreme value on their time versus those who will live in financial mediocrity have no problem wasting numerous hours of their waking day. This time, when factored into the cost of your acquisition in new stocks, is a cost that most people overlook. However it can be one of the most important factors in your overall return calculation.
Now, let me share with you an example so that we can really see the true cost of the investments you’re making.
Let’s say that last year you bought $10,000 worth of stock in Company XYZ. Company XYZ had a good year and as such you realized a 10% return on your investment which in simpler terms means you would have received a $1,000 gain. Seems pretty good right? Well, it depends how you look at it. If you bought the stock sight unseen, which most people do,then yes that seems like a nice return for the minimal effort involved. However, this really isn’t investing but more gambling and in this case your return was more likely based on luck than it was proper due diligence and strategy.
Let’s say instead that you took Warren Buffett’s advice and actually took the time to do your proper due diligence before buying into Company XYZ. When all is said and done, you spent 20 hours researching the stock before its purchase to give yourself the best chance possible of buying a winner. When this time is factored in, you have now invested 20 hours of your time and $10,000 of your hard earned money to earn that $1,000 return.
If at your job, you earn $25 dollars an hour then these 20 hours you put in picking that stock would equate to a $500 cost of acquisition which then cuts your overall return in half. When you factor in this time, it really starts to water down your returns don’t you think?
However, what about the numerous times a day that you check your investing app to see if Company XYZ is up or down for the day or the hours you spend reading Reddit posts about the company? All these activities have a time cost as well and I don’t have to quantify them for you to realize that they will only bring down your net returns even more.
Therefore, I hope you are starting to see that while I still stand by the fact that you should be doing your homework before buying any stock, there is a cost involved when making a purchasing decision beyond the financial outlay.
Now, I know that some people are going to argue that this notion of limited net returns starts to fall apart as you invest more money and this is true. If you are investing $100,000 into a stock for example and it costs you $500 worth of your time to get a $10,000 return then yes those costs are rather inconsequential. However, who do you know that is actually investing that amount of money on a regular basis? I know I’m not and I would guess you aren’t either.
The reality is that most people aren’t investing large sums of money which makes their time investment an even larger cost relative to their returns. Also keep in mind that in my example, I was generous in using an example of a 10% return. I know in today’s day and age a 10% return seems low compared to the returns we’ve seen in the crypto and NFT worlds however most experienced investors would jump at the opportunity for a 10% return any day of the week. And, as you would imagine, in cases where your returns are lower, when your time is factored in, you run the risk of only breaking even or worse seeing negative returns.
At this point, you’re probably feeling like I am dissuading you from investing and let me tell you what is the last thing I want to do. As I already said, investing, for most people, is the only way they will ever achieve higher levels of financial success so yes you must keep investing. However, I believe that most people would be best off investing using a more passive approach so let me explain what I mean by this and then I will share my own personal investing strategy.
The Solution
I’ve mentioned the name Warren Buffett a few times already and one of his more popular forms of advice comes in the investing approach he wants his estate to use upon his passing. He advises that 90% of his money is invested in low-cost index funds and as you may already know, these funds are rather passive in nature. Most index funds require much less research than when you are buying individual stocks and given that most people buy and hold these assets, the maintenance of them in your portfolio will not consume any time at all. Why does this matter? Because as I just went over, it’s not just the monetary cost of the assets that you acquire that factor into your returns but the time cost as well. This means that if you invest $10,000 and get a 10% return, you are entitled to more of the $1,000 in profits than you would have been had you spent hours upon hours researching and buying a single stock instead.
So with all this being said, you are probably wondering how I myself use this approach to maximize my investing returns so let me share my approach right now. The first thing you need to know about me is that I am ruthless in how I manage my time. I rarely waste even a minute of my day and am regimented in scheduling out my daily activities. As such, I place a high value on my time and given that now I am making more money than I ever have before, my time is worth more as well which in the context we were just talking about means that spending endless hours researching a new stock would come with a hefty price tag.
Therefore, my investing approach is as streamlined and as simple as can be. Every year, I spend one or two hours reviewing the index funds I own to identify any changes in fees or holdings that I may not be comfortable with and that’s it. That is all the work I do in reviewing what I buy. Then every week, I have an automatic contribution set up to buy more of my preferred ETFs. My time involvement in this process? None. Finally, given that I am investing for the long-term, I’m not affected by the day to day market swings. Unlike many single stock investors, I’m not trying to time the market so these minor movements don’t really matter. By using this approach, in the year if I have a 10% return, I know that it’s a real 10% return given that not only am I minimizing my fees by investing in low-cost assets but am not spending an overt amount of time researching every asset I acquire.
Therefore, should you be investing? Of course! However, when you start to understand the true cost of your investments you will start seeking out ways to maximize your returns and become a more successful investor too!