Why Investing Your Money in the Stock Market Isn’t As Risky As You Think

Written By Veronica Grant

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A few months ago, I posted a story on TikTok about how it's usually not smart to quickly pay off a low-interest mortgage if it means you'll put off investing. 

Someone immediately wrote in one of the comments that I was wrong and that houses are a safe investment because you own something at the end of the day, while the stock market is akin to gambling. 

I understand people have emotions around investing, and there are ways to invest that are like gambling. I include day trading and buying individual stocks in that. But the way I invest in the stock market, and the way that most responsible financial experts do is one of the safest things you can do to grow your money, not to mention the most effective. 

This isn't my opinion. It's also not the opinion of other experts. It's just the numbers. 

Before we get there, let's make sure we're on the same page. Suppose I own a lemonade stand. My lemonade stand is doing quite well, and I want to expand. But I need some money to do that. One way to do that is to go public, meaning I will open up my lemonade stand to outside investors to get a big flux of money and purchase a second location to open up my lemonade stand. 

 My lemonade stand is worth a thousand dollars, meaning if I was going to sell the lemonade stand, that's about how much I could get. 

But because I want to open it up to investors instead, I'll break up my lemonade stand into what's called shares, little pieces of my business. I'm going to break it up into ten shares, and because I think my lemonade stand is worth a thousand dollars, each share will cost about a hundred dollars. 

So I can bring in these investors to buy a share, and now I've gone public. Now, I can join other companies that have done the same thing, and we are all trying to sell our shares to each other or the public in what is called a stock market. 

Let's say you decided to invest in my lemonade stand, and you wanted to buy three shares. So you paid $300, hoping you would make that money back and more because my business would grow. You would get approximately 30% of those profits. Right? That's how it works. 

Then, I went out of business. You would lose whatever you invested if you bought shares in my lemonade stand. So, buying any given stock is risky because I can fail. 

When you buy one stock, you bet that that company won't fail but will grow. And no one can predict this. For example, there was a time when Sears felt like a staple of American life. It sold products that every American needs, including washing machines, dryers, refrigerators, and more. Yet here we are. If you had invested in only Sears, you would've lost money. 

Here's another way to look at it. What would you guess if I were to ask you the top-performing stocks from 2010 to 2020? I'm being serious. Take a moment to guess. 

I thought Facebook, Apple, and Amazon. If you guessed those stocks, you would also be wrong. The best-performing stock of the 2010s was Netflix, which definitely makes sense. 

But number two was Domino's. Yes, Domino's Pizza. The rest of the top ten are healthcare and financial companies that aren't household names. You likely wouldn't have heard of those companies unless you're deep in those industries.

Now look, if you want to buy an individual company's stock, have fun. But I'll tell you what I tell people going to the casino: Have fun and don't gamble. Anything more than you can't afford to lose. 

There are thousands of stocks in what we call the stock market. Various indexes track the different aspects of it. One of the most popular is one you may have heard of, the S&P 500.  

The S&P 500 tracks the stocks of the 500 largest companies on the stock exchange in the US. Another famous one you've heard of is the Dow Jones, which measures 30 of the largest traded companies. 

Since its inception in 1928, The S&P 500 has grown 9.28% per year on average. In 1957, the S&P 500 became essentially what it is today. Based on that, the average annual return since 1957 is 10.15%. This doesn't mean that the stock market goes up yearly. 

You'll see some years where the returns are over 40%, and some years the losses are over 30%. Remember 2008 or 2020 at the beginning of the pandemic? 

But if you add up the gains and losses between 1957 and the end of 2022, that averages out to be 10.15% year over year. 

While the exact numbers vary, the conclusion remains the same if you look at other indexes. When you buy a large collection of stocks, it generally goes up.             

The beauty of index funds

 In the 1970s, a man named James Bogle popularized the idea of the index fund, which is a collection of stocks that seek to match an index. 

When you buy an index fund, it's like buying a basket of different stocks. If we return to my lemonade stand example, instead of only buying shares at my lemonade stand, you decided to buy an index fund that tracks all the lemonade stands in the US. 

So my lemonade stand shares are in this index fund, as are Mary Lou's and Betty Jane's, and all these other people's lemonade stands' shares. This mitigates your risk and losses when my lemonade stand goes out of business.   

The other thing you need to know about index funds is that their goal is to track whatever index they follow. Our imaginary lemonade stand index fund aims to grow at a similar pace to the lemonade stand industry as a whole. 

One of the most popular index funds is called the Vanguard 500 fund. It tracks the, you might've guessed it, the S&P 500. So the Vanguard 500 is a collection of stocks that try to match the S&P 500. 

Since the Vanguard 500 funds inception in late 2000, the fund has a yield AKA return of 7.55%. The S&P 500, since late 2000, has had a return of 7.58%, so pretty close. 

If you invested $10,000 in the S&P 500 at the beginning of 2000, you would have about $48,000 at the end of 2023, assuming you reinvested all the dividends. 

This is a return on your investment of 379.64% or 6.9% annually. There is no other investment, I repeat, no other investment that has these kinds of returns. This is where people will often start yelling at me about real estate as the best investment. 

It's just not true. Don't yell at me. I'm just the messenger because the numbers don't lie. I'm not saying that real estate isn't a good investment, but it's not as good as the stock market. Period. According to a New York Times article, since 1983, home prices have risen about 500%. The stock market has risen about 2800%. 

If you bought a $100k home in 1983, it would be worth about $500k. And now. But if you put $100k in the stock market in 1983, you would have $2.8 million. 

Real estate can be a good investment, but it's not the financial slam dunk that the American Dream or real estate agents want you to think it is.  

James Bogle popularized the index fund because there truly is nothing better out there. Even Warren Buffet, the investing billionaire, said this in 2016:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsize profits, not the clients. Both large and small investors should stick with low-cost index funds.”
— Warren Buffet

I hope I've been able to convince you that while there are certainly some risky things you can do in investing, investing in index funds is a relatively low-risk thing you can do with your money. It's also a pretty smart thing to do with your money to secure your financial future. 

I’ll say this. 

Emotionally, owning stocks is harder because you see prices go up and down when you log into your bank account. I think this is why people think houses are a safer investment. 

No one comes to your house daily to tell you how much your home is worth. Also, it doesn't matter how much your house is worth if you don't plan on renting or selling it anytime soon. 

You also have to consider that there are more expenses when it comes to your house. Even if you bought a $100k house worth $500,000 now, you must consider taxes and the upkeep. 

With index funds, the "upkeep" is your expense ratio, a small percentage, far less than 1%. 

One last thing:

I'm not saying investing in index funds is no risk.

My point is that it's low risk. 

There is risk in any choice you make. You can keep your money in a high-yield savings account, but the risk is you don't even keep up with inflation, so your money loses its value. 

You can keep your money under a mattress, but it'll definitely lose value to inflation there, and your house could burn down. 

Investing is risky (albeit low with index funds), but choosing not to invest carries risk, too.

A well-balanced portfolio of index funds is one of the most effective and safest ways to grow your money. 

If you want to learn how to invest, sign up for the waitlist for the investing class I'm teaching next month. I will also send you an investing cheat sheet when you join the waitlist.     

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Veronica Grant
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