Only 17% of American consumers completely trust the stock market, according to a recent survey from MagnifyMoney. The No. 1 reason why: "confusion about how [the market] works."
"You can't trust what you don't understand," says MagnifyMoney's Sarah Berger.
But it's not wise to give up on the stock market simply because it may seem confusing, Berger notes: "This [mistrust] is concerning because investing is a key component of wealth over the long term."
As early retiree and millionaire Steve Adcock puts it, "Nobody ever became rich just by saving money." The key to growing your wealth is investing, and that means understanding how the market works so that you're not put off by the short-term ups and downs. It can also mean understanding that the downs are an opportunity to buy at lower prices.
Berger has encouraging words for people who may feel anxious. "If a lack of trust in the stock market is keeping you from investing, you're really holding yourself back. It's important to understand that every setback in the history of the stock market has eventually recovered."
Luckily, there are ways to overcome some of these concerns so you can better understand the stock market and invest with confidence.
A quarter of consumers in the MagnifyMoney survey said the top thing they wish they knew about investing is why the stock market can be so high when average Americans are struggling financially.
The short answer, says Neal Solomon, a certified financial planner and the managing director of WealthPro in Gloversville, New York, is that "the stock market and the economy are different animals. They do have a relationship, but it's not always what people think. The stock market is forward looking — it anticipates the future. The market is betting that there will be an 'after Covid-19' next year sometime."
Berger notes that the coronavirus crisis has exacerbated this view. "There have been wild fluctuations in the market" during the pandemic, she says. "People don't understand why some people are doing well and some are doing badly. Unemployment is high, but the stock market is rising. This leads to overall confusion."
Indeed, the pandemic has led a third of consumers to trust the stock market even less, the survey found. And about a quarter (22%) of the respondents who mistrust the market say their main reason is that "it favors the interests of the wealthy."
However, when it comes to investing, getting preoccupied with other people's money doesn't help much. "Separate your politics from investing," advises Solomon. "Instead of worrying about 'the rich getting richer' — why not learn the behaviors that over time may help you become wealthier? Throughout history people have built their own financial security by owning quality assets."
"Experienced investors know, because they have learned through experience, that declines in the market are often the best times to be accumulating shares," says Solomon. "When you buy during a dip, you're essentially buying on sale, which helps you grow wealth when the market recovers, which it always has."
It can be challenging to be an investor in tough economic times. "Our human brains are wired wrong for investing," Solomon says. "When shares are 'on sale' with low prices — the customers run away from the 'store.'" In other words, when it comes to everyday consumer items, people might flock to buy a computer or a pair of shoes on sale.
Video by David Fang
But when it comes to the stock market, behavior changes. Plummeting prices can make people panic. They get jumpy to sell what they have and don't want to buy more.
Ideally, consumers should approach the stock market the way they approach a bargain: "Buy on sale," says Solomon. "When do you think the sales are? In the market, the 'sales' are when many other investors are fearful and panicking."
This is how Solomon describes his investing philosophy in a nutshell: "Successful long-term investing, the type we professionals try to help people do, is about discipline, diversification, and time. Patience is a virtue."
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