Investing is NOT GAMBLING

Apologies, i know this is long overdue, I've promised I will explain why index will always go up, that was 2 months ago. I finally got around to do it.

A lot of people (my wife included) has the common misconception that investing in the stock market is no difference than gambling. We hear plenty of horror stories where people wiped out their entire life savings in the stock market. They are not entirely wrong, and those stories are true. MOST retail investors lose money in the stock market.

So why am I so convinced that, when DONE RIGHT, investing IS NOT gambling? Because I’ve learnt and seen the data, the statistics that goes back for decades to justify investing. As I have mentioned all over my previous posts-> Link, One of the easiest and ‘safest’ way to invest while enjoying a decent return of about 8% on average is to dollar cost average into index fund (ETF) for the long term (10 years-20 years)

Huh, what is ETF? Didn’t your read my previous post? 

Fine go back here for brief intro on ETFs

Got it? So ETF is an index fund that tracks the market index

Huh? What is market index? ... uggh remember Google is your friend

So can I move on now?!

Why Most Index fund will always go STONK?

1. Index will ALWAYS include the ‘best’ and ‘biggest’ companies in the market.

Be it S&P500, Nasdaq, Dow Jones. These indexes gets updated regularly. Companies get replaced when they no longer considered to be representative of the market as a whole. So basically, the experts have done their work in selecting the better companies out there for you.

 

2. Business Growth

All businesses will and should grow over time, if they are not growing, they will probably get kicked out of the index anyway.

 

3. Population Growth

The world population keep going up as a whole. Simply put, more people equals more consumption, more spending, contributing to the growth of businesses. Population also causes the next reason:

 

4. Inflation

Your cup of coffee is more expensive than it was years ago. Everybody complains that everything gets expensive over time. You know what goes up as inflation goes up? The index follows because businesses grow with inflation as they charge higher price for their goods and services. Our salary increment? Sadly… don’t always beat inflation

BUT do note, indexes are not created equal, for the same reasons listed above. For instance, Japan Population has been declining, and that somewhat affects how the Nikei index performed as a whole. Another example, US, HK index tend to have more growth compared to say Singapore index because of what companies are in the US and HK index (FB, microsoft, tencent, alibaba, you get the idea?).

 

Quick google on the comparison between the global equity markets: 

So From the historical chart, I think it is quite clear that US would be the safer choice for index fund ETFs. There are abundant data out there on the index performance, and depending on your timeframe you will get different average return, but generally, if you invest in the long term, you will make money. As mentioned before, my preference is with US and China/HK, and that's where my ETF portfolio is focused in.

Ok you convinced now? Don't be. I'm not done with you yet

SCENARIO 1:

 Dollar cost average monthly at $100 into SPY (S&P500 ETF) for 20 years from Jan 2000 to Jan 2020

You end up almost tripling your investment amount (300% return!), and calculating backwards we get a simple p.a. return of about 15% on average in 20 years. 

SCENARIO 2:

Dump the same amount of money at the start within the same time frame

We do end up with higher return, but we'd also be more exposed to risk of timing of our entry and the volatility of the market. Taking a closer look to the chart, we actually end up being in the red for the first 10 years of our investment. Can you really stomach such drawdown? looking at your llump sum life savings decrease in value for 10 years. This is why I champion DCA as a safer method, because it is never easy to time the market and try to go YOLO on an investment.

Above simulations from https://www.buyupside.com/ You can play around with their many calculators.

Conclusion

DCA on ETFs that track index fund with good returns is something you should look at for investing, this is the easier and safer choice to start investing. Don't expect to be rich overnight, this is a very long haul game 10 years+, So do set aside a sum every month, and you'll thank your younger self when you grow old.

And please please don’t tell me you don’t have enough money to invest. If your expenses is higher than your income, then something is really wrong. You have to relook your whole life style and spending. 

I can never say this enough, when you are young, Time is your friend, never underestimate the power of compound annual growth. You have to start somewhere, else whatever you have will forever be small, and eventually be worth less due to inflation. 

Remember! Ferry is not a licenced financial advisor nor a millionaire (yet!) so do you your own due diligence! Provided data are purely based on historical records and may not guarantee future results. Follow my advice at your own Risk!