Lesson 2 From the Finance World

You must invest your money in the stock market--this involves risk

I am an extremely boring investor. I stick everything in an index fund. (This is not me giving advice. I am not licensed to give recommendations on stock picking, although I am a licensed security trader.) I am not saying that you should be boring in your investments, but mostly because I am not licensed to tell you what to do with your investments.

An index fund is a kind of mutual fund, which means that it is a basket of funds, in this case a basket that is tied to the market itself. You can choose an index fund that is tied to the S&P500 or to the NASDAQ. You can choose a tech mutual fund or one that is environmentally safe. But the key here is that you are spreading your risk over multiple different company stocks so that if one stock goes down, you do not lose everything.

I can have a long argument with my siblings about how much to put in an international index fund or energy funds. I can also have an argument about ETF’s versus mutual funds. Exchange-traded funds are a newer vehicle than mutual funds and sometimes have lower fees. They also have the advantage of trading immediately whereas mutual funds now take a full day to turn into cash (they used to take two days).

I feel a little weird throwing around these terms so casually since five years ago, I would have been uncomfortable with any of them. Although I did read Rich Dad, Poor Dad when my kids were tiny and invested a small amount of money in Krisy Kreme after skimming some of their financial reports. I thought this meant I was a savvy investor. It did not mean that. It meant that I lucked out and that was it. I do not do this kind of thing anymore. It is too risky. I do not like risk.

I am aware that I have to take risks to get the gains the stock market promises. But if you are investing directly in any single stock or if you are invested in your own company’s stock to any great degree (more than maybe ten percent), you are probably facing too much risk.

I do not trade in the market very often. Yes, I do occasionally feel the urge to sell when I feel like the market gets too high. Mostly I try to avoid doing this, although the advice not to look at the market except once a year isn’t practical for me, since, well, it’s my job to look at the market and know what’s going on in it and to help customers with trades when they ask me to do so.

I try to avoid the temptation to keep all of my money invested in the market. I try to make sure I have an adequate emergency fund. For me currently, I estimate that I need about twelve months of expenses on hand in a high yield savings fund. My investment firm happens to automatically invest it there if it’s not in stocks or mutual funds.

I once asked my financial advisor (before I joined the financial world myself) what kinds of projections he could offer for something worse than the Great Depression. I believe he said, “We don’t have a model for the Zombie Apocalypse.” Which, fair. How would you model that? I’m not saying there won’t be a zombie apocalypse. I’m just saying there are some things that you can’t plan for. I once thought divorce was one of those things, but actually, divorce is very common and can easily be planned for, at least financially. I just didn’t think to do it.

All of this is to say that yes, the stock market has risks. Life has risks. The stock market isn’t one of the largest risks you will face as a human and you can mitigate the risks with some fairly predictable strategies. Heartbreak and loss of faith in your religion of origin are much harder to mitigate against. But here we are.