How Risky Is The Stock Market?

Summary

The video explores the stock market, debunking the myth that it's just a big gamble like a casino. It explains how stocks work, the importance of diversification and long-term investing, and highlights that while risks exist, smart strategies can yield steady growth. It also contrasts stock market investing with gambling and saving money in a bank, emphasizing the need to stay involved in the economy. Mutual funds and investment advisors are introduced as tools to help new investors. Ultimately, viewers are encouraged to invest strategically for long-term financial success.

Takeaways

• 💡 Half of Americans have no money invested in the stock market, often due to lack of funds or fear of risk.
• 📈 The stock market, unlike a casino, offers opportunities for long-term growth, especially through diversification and patience.
• 📜 Stocks originated in the 17th century with the Dutch East India Company, allowing multiple investors to fund expeditions.
• ⚖️ Investing in smaller companies is riskier, while larger, established companies offer more stability.
• 🌳 Tracking individual stocks short-term can seem unpredictable, but looking at broader indices over decades shows steady growth.
• 🛡️ Diversification and long-term investing are key strategies to mitigate risk and take advantage of market growth.
• 📉 Selling stocks in a panic, especially during market crashes, often leads to losses. Staying invested allows for recovery.
• 💼 Behavioral economists recommend not tracking your portfolio too frequently to avoid rash decisions.
• 🏦 Keeping money solely in savings accounts may lead to falling behind economically as the market and prices grow.
• 📊 Mutual funds offer a simpler, more diversified investment option for beginners compared to picking individual stocks.

Q & A

What is a stock?

A stock is a share or percentage of ownership in a company. By owning stock, you essentially own a part of the company and have a claim on its earnings and assets.

Why do some people compare the stock market to gambling or a casino?

The stock market can seem like gambling because of its volatility and the chance of losing money. However, unlike gambling, the stock market tends to grow over time, and strategies like diversification and long-term investing can reduce risks.

How did the concept of stocks originate?

The concept of stocks originated in the 17th century with the Dutch East India Trading Company, which sold shares to multiple investors to fund expeditions. This allowed the company to raise money while spreading risk among investors.

What is the difference between investing in smaller, newer firms and larger, established companies?

Smaller, newer firms are riskier because they might go bust, but they have the potential for high returns if they succeed. Larger, established companies are more stable, making them safer but generally offer lower returns.

What is the S&P 500 Index, and why is it important?

The S&P 500 Index tracks the performance of 500 of the largest companies. It provides a broader view of the market's overall performance, showing an average growth of 10% annually since 1928. It's often used to measure the health of the U.S. economy.

How do diversification and long-term investing help reduce risk?

Diversification spreads your investments across different companies or sectors, reducing the impact of a single company's failure. Long-term investing reduces the risk of short-term market volatility, as stocks tend to recover over time.

Why do behavioral economists recommend not checking your portfolio frequently?

Frequent portfolio checks can lead to impulsive decisions, such as selling stocks when they temporarily dip in value. This behavior often results in losses, as people tend to sell at a lower price than they originally bought.

How does the stock market differ from a casino?

In a casino, the odds are typically against the player, and the house always has a slight advantage. In the stock market, while there is risk, proper strategies like diversification and long-term investing can lead to steady gains over time.

Why is keeping all your savings in a bank or cash risky?

Not investing in the stock market means your savings won’t grow at the same rate as the economy. Inflation can erode the value of your money over time, leaving you with less purchasing power in the future.

What are mutual funds, and how do they simplify investing?

Mutual funds are pre-assembled bundles of stocks and other investments. They offer instant diversification and are easier to manage compared to selecting individual stocks, making them a popular choice for investors.

Outlines

00:00

💡 Introduction to Investing in the Stock Market

The video begins by introducing Curiosity Stream as a sponsor and poses the question of whether or not investing in the stock market is something to consider. Many people may feel overwhelmed by financial jargon, likening it to the confusion of gambling at a Vegas casino. This apprehension may contribute to half of Americans having no investments in stocks, despite some misconceptions about stock market risks and accessibility. The narrator questions whether the stock market is akin to a casino or something more beneficial for financial planning.

05:04

📈 What is a Stock? A Historical Perspective

The concept of stocks is explained, tracing its origins to the 17th century with the Dutch East India Trading Company, which allowed investors to purchase shares and fund expeditions. This practice made the company the largest in history, even surpassing modern giants like Apple and Google. In today's market, buying shares allows individuals to invest in companies, with newer, riskier firms offering potential high returns, while larger, stable firms offer more reliable, steady growth.

🎲 Stock Market vs. Gambling: Risk and Reward

The stock market is compared to betting at a horse race, where investors can either play it safe with established companies or take risks with smaller ones. The narrator addresses the common perception that the stock market is a gamble, noting that while individual stocks may seem volatile in the short term, long-term trends—like the S&P 500’s 10% annual growth since 1928—demonstrate a more stable and reliable pattern over time.

🔄 Diversification and Long-Term Investment

The key to successful investing is diversification and long-term strategies. By owning a variety of stocks from different sectors, investors can mitigate risk. Holding these investments for at least 10 years helps cushion against market volatility. The example of the 2008 market crash shows that those who stayed invested eventually recouped their losses. Behavioral economist Richard Thaler suggests that checking stock prices too often can lead to panic selling, which is a major mistake in stock investing.

🎰 Stock Market vs. Casino: The Difference in Outcomes

The stock market is different from a casino. In Vegas, the house always wins, with payout percentages set to ensure the casino profits. In contrast, the stock market—while not risk-free—offers a chance to build wealth over time through diversification and long-term investing. Casinos guarantee losses over time, whereas the stock market, when approached wisely, offers the potential for gains.

⚠️ The Risks of Avoiding the Stock Market

While investing in the stock market carries risks, avoiding it altogether has its own dangers. With employer-funded pensions becoming less common, Americans increasingly need to save for their own retirement. Simply putting money into a savings account could result in losing purchasing power as the economy grows. Investing in the market helps keep savings aligned with economic growth.

🏦 How to Start Investing

To begin investing, most people use brokerage firms, which provide guidance for a commission. Another common method is investing through mutual funds, such as those found in a 401(k), which are pre-assembled bundles of stocks designed to be diversified and low-risk. For beginners, seeking advice from a fiduciary investment advisor is recommended to develop a strategy suited to individual financial goals.

💼 Conclusion: You’re Already in the Game

The video concludes by reminding viewers that everyone is already part of the larger economy, so it makes sense to participate with a strategic approach to investing. Even keeping savings in cash under a mattress is a form of economic participation, but investing with a clear strategy can potentially lead to financial growth. The narrator invites viewers to post questions or share their experiences with investing.

🎥 Thanks to Curiosity Stream

The video ends with a thank you to Curiosity Stream, a streaming service offering documentaries and non-fiction content. Viewers are encouraged to explore more about the stock market through titles like '1929,' which delves into its history. A special code 'twocents' is provided for signing up, and viewers are encouraged to engage by sharing their stock market questions or experiences in the comments.

Keywords

💡Stock Market

The stock market refers to the collection of markets where shares of publicly traded companies are bought and sold. In the video, it's presented as a place that might seem risky and complicated, like a casino, but with the right strategies, such as diversification and long-term investing, it can be a part of one's financial plan.

💡Portfolio

A portfolio is the collection of financial assets, like stocks, that an individual owns. The video discusses how building a portfolio by diversifying across different companies can help reduce risk and increase stability over time, contrasting with the randomness of gambling.

💡Diversification

Diversification is an investment strategy that involves owning a variety of different stocks to reduce risk. In the video, this concept is emphasized as a way to protect oneself from the volatility of any single sector or company by spreading the investment across different types of businesses.

💡Long-term Investing

Long-term investing means holding stocks for an extended period, typically over a decade, to ride out market fluctuations. The video stresses that by keeping stocks for the long term, investors can avoid reacting to short-term volatility and benefit from the overall growth of the market over time.

💡Mutual Funds

Mutual funds are pre-assembled bundles of stocks and other investments managed by professionals. The video mentions mutual funds as a convenient way for individuals to invest without picking individual stocks themselves, offering diversification and less hassle for beginners.

💡S&P 500 Index

The S&P 500 Index is a measurement of the stock performance of 500 of the largest companies in the U.S. The video uses this index to illustrate how the stock market has grown on average 10% per year since 1928, showing that despite short-term volatility, the market has long-term growth potential.

💡Fiduciary

A fiduciary is a financial advisor who is legally required to act in their client's best interest. The video advises viewers to seek the help of a fiduciary when making investment decisions, ensuring that they receive trustworthy and objective financial guidance tailored to their situation.

💡Behavioral Economics

Behavioral economics studies how psychological factors influence economic decision-making. The video refers to behavioral economist Richard Thaler, who advises against frequently checking one's portfolio to avoid emotional decisions like selling stocks during temporary downturns, which could lead to losses.

💡2008 Market Crash

The 2008 market crash was a significant financial crisis that caused the stock market to plummet. The video uses this example to show how investors who didn't panic and sell their stocks during the crash eventually recovered their losses and gained more, highlighting the importance of staying invested long-term.

💡Brokerage Firms

Brokerage firms are companies that facilitate the buying and selling of stocks for individuals. The video mentions them as a common way for people to invest in the stock market, providing services like investment advice for a commission.

Highlights

Curiosity Stream supports PBS Digital Studios and offers educational content related to the stock market.

Half of Americans have no investments in the stock market, often due to financial constraints or the belief that it's only for high-risk takers.

The stock market is compared to a casino by some, but long-term strategies reveal its value as a financial tool.

Stocks were first introduced in the 17th century by the Dutch East India Trading Company, allowing multiple investors to share in the profits.

The Dutch East India Company became the largest company in history, valued more than today’s Apple, Google, and Facebook combined.

Investing in smaller companies carries more risk, but could yield high returns if the company grows rapidly.

Investing in large, established companies is generally safer, as they tend to be more stable over time.

The stock market may seem unpredictable in the short term, but historically, the S&P 500 index has grown by an average of 10% annually since 1928.

Diversification and long-term investing are key strategies to minimize risk in the stock market.

Diversification involves investing in a range of companies to protect against volatility in any single sector.

Long-term investing helps to avoid reacting to short-term market fluctuations, which can lead to poor financial decisions.

During the 2008 market crash, many who sold stocks took significant losses, but those who held onto their investments eventually recovered their losses.

Checking your stock portfolio too frequently can lead to panic-selling, which behavioral economists advise against.

The stock market differs from casinos, as long-term investing in stocks historically results in gains, whereas gambling typically leads to losses.

Although a savings account seems safer, failing to invest can result in falling behind as the economy grows and prices rise.

Mutual funds are a common way to invest in stocks, offering pre-assembled, diversified portfolios that reduce risk for investors.

Transcripts

Thank you to Curiosity Stream for supporting PBS Digital Studios!

Have you ever thought about investing in the stock market?

Maybe you have a cousin or a co-worker who’s always talking about how their “portfolio”

is doing, and you think “Maybe I should be doing that, too…”

But then you do a little research and it sounds like this:

[CACOPHONY OF RAPID FIRE FINANCIAL CABLE SHOWS CLIPS WITH LOTS OF CRYPTIC JARGON AND ALARMIST WARNINGS] WARNINGS]

Yikes.

Y’know, it reminds me of the time I walked up to a craps table in Vegas.

The rules were so complicated and confusing, how could I justify plonking down my hard-earned

money on a game of chance I barely understood?

A lot of people feel the same way.

Half of Americans have $0 invested in stocks.

Many of them don’t have spare money to invest, but some might think it’s just for risk-taking

high rollers.

But is the stock market just a big casino?

Or is it something that you should be making a part of your financial plans?

[MUSIC]

What exactly is a “stock”?

The concept was invented in the 17th century by the Dutch East India Trading

Company which wanted to allow multiple investors to underwrite their expeditions, so they sold

shares, or percentages of the company.

It worked out well for Dutch East India, making them the biggest company in the history of

the known universe, with a value greater in today’s dollars than Apple, Google and Facebook

combined!

Today you can buy stock in companies of all sizes, betting that the business will do well

and the value of your shares will increase.

Smaller, newer firms are more risky, because while there’s a chance they could be the

next Uber, there’s a much bigger chance they could go bust.

Larger, established companies aren’t quite as exciting, but they’re a lot more stable.

I mean, who doesn’t think Coca Cola will still be selling soda tomorrow?

That sounds a lot like the odds at a horse race.

Bet on the favorite to win a little bit of money, or go for the big bucks by risking

it all on a long shot.

So, why not skip the brokerage fees and just go to the racetrack?

When you look at the stock market up close, it can sure seem like a gamble.

But you might be missing the forest for the trees.

For instance, track one company’s share price for one year, and it looks like a wild

ride.

Who’d put their savings on that roller coaster?

But let’s take a few steps back.

Instead of just one company, let’s look at a bunch of companies, and instead of one

year, let’s look at 90.

The S&P 500 Index is a measurement of how 500 of the biggest companies have performed

over time, and since 1928, it grown by an average of 10% per year.

Sure, there are still ups and downs, but what looked completely unpredictable up close,

from a wider perspective tells a different story.

So how do you get your portfolio--the collection of stocks you own--to mirror that steady increase?

The two main tactics are diversification and long-term investing.

Stock diversification means owning stocks from a lot of different types of companies,

which protects you from the volatility of any specific sector.

And long-term investing, owning stocks for at least 10 years, protects you from the volatility

of any one bad day.

Even a really bad day.

When the market crashed in 2008, many people rushed to sell off their stocks and just ate

the losses.

But those who could stay in eventually made that money back--plus some!

Behavioral economist Richard Thaler actually recommends not even tracking your portfolio

at all.

People who check the price of their shares regularly tend to get spooked and sell them

when they temporarily dip, which is basically guaranteeing that they sell them for less

than they bought them--the number one no-no of playing the stock market!

These strategies reveal how different from a casino the stock market actually is.

Casinos in Las Vegas have payout percentages that average in the mid-90s, meaning they

pay back in winnings around 95% of the money that is gambled.

So if you played Las Vegas like a stockbroker, diversifying your portfolio by playing a bunch

of different types of games, and long-term investing by keeping your money on the table

whether you win or lose each day, you can be fairly certain that you’d steadily lose

5% of your savings.

It doesn’t take an economist to tell you that losing money and making money are two

very different things.

Of course, there is still some risk involved.

Even a diversified portfolio can take a dive, and when life deals you a bad card, you might

need that money now, not 5 or 10 years down the road when the market goes back up.

So is it smarter to just keep your money in a savings account?

Well, not playing the stock market carries its own risks.

As employer-funded pensions become less and less common, Americans are increasingly on

their own when it comes to saving for retirement.

And as companies continue to grow and everything gets more expensive, if your savings are not

somehow tied to the overall growth of the economy, you can get left behind.

So...where do you start?

Most people buy and sell individual stocks through companies called brokerage firms.

It’s actually pretty easy to set up an account, and they offer guidance on how to invest your

money… for a commission.

Of course, you can always pick stocks yourself, but if you’re new to it, that can be as

risky as a slot machine.

Another, more common way to own stocks is through mutual funds--you might already own

some in the form of a 401(k).

These are pre-assembled bundles of stocks and other investments that are designed in

advance to be diversified, which spreads out the risk--and makes them less of a hassle.

We’ll be covering mutual funds in more depth in a future episode.

Like any big investment, the smartest first step is to seek the help of an investment

advisor who is a sworn fiduciary, who can help you make a plan that best fits your unique

situation.

Remember, even if you keep your savings in cash under your mattress, you’re still a

part of the larger economy.

Which means, in some sense, you’re already invested in the game.

So you may as well be playing with some strategy.

And that's our two cents!

Thank you to Curiosity Stream for supporting PBS Digital Studios!

Curiosity Stream is a subscription streaming service that offers documentaries

and non-fiction titles from a variety of filmmakers, including Curiosity Stream Originals.

For example, you can watch 1929 to hear more about the ups and downs

of the stock market.

You can learn more at curiositystream.com/twocents,

and use the code "twocents" during the sign-up process.

Do you have more stock market questions? Post them in the comments and we’ll try to answer them!

And if you have your own experiences with investing in stocks, we’d love to hear em!