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!
