Overcome your fear of the stock market

Almost all of us need to invest stocks. But unfortunately, many people have a fear of the stock market.

For author and behavioural investment coach MIKE LeGASSICK, this is essentially a framing problem. People are conditioned to think of the market in terms of risk and volatility. But for Mike, the stock market is a distraction. In essence, he says, investing is about sharing in the profits of the world’s best businesses. And instead of looking to buy those stocks and hold them temporarily, you should buy and hold them for ever, or at least for a very, very long time.

This article is an extract from Mike’s forthcoming book, Mind Over Markets. In the article he explains how he himself, at the age of 57, is 100% invested in equities. To be clear, everyone’s situation is different, and, although it’s right for Mike, for the vast majority of investors in their late 50s, 100% is too much. We would urge anyone who’s unsure about their asset allocation to consult a qualified financial adviser.

We can, however, highly recommend Mike’s book, and we sincerely hope that it helps many, many people to overcome their fear of the stock market.

“The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.”

— Bertrand Russell

From my earliest encounters with the stock market, I found myself deeply intrigued by the widespread belief that it carries a deep inherent risk. This fascination prompted me to delve into the subject, determined to elucidate its true essence and debunk the prevailing myths surrounding it. In my pursuit, I have crafted an explanation designed to shed light on the reality of the stock market, presenting it in a way that leaves no room for ambiguity. I can only hope that my efforts have borne fruit and that my elucidation proves both comprehensible and eye-opening to all who come across it.

When given a choice between high or low investment risk, nearly everyone opts for low risk. But when the choice is a high or low return, people’s answers often differ. This dichotomy reveals an inconsistency in how we approach investment decisions. We shun risk yet crave return. As we plan our financial futures, goals should steer us more than generic risk ratings.

Rather than focusing narrowly on a 1-10 risk score, our priorities and desired outcomes should drive investment selection. A retirement plan centred on funding a comfortable lifestyle will likely demand bolder choices than

one content with preserving wealth. Defining objectives first brings our true risk tolerance into clearer focus. What we want to achieve gives meaning to risk, not the other way around. With purpose as the compass, we can navigate the investment terrain and select a wise path forward.

How rational is a fear of the stock market?

For novice investors, investing in the “stock market” is perceived as “volatile and risky”. But it isn’t in the way you might think it is when you understand what the stock market is and how it works.

Consider a hypothetical conversation about investments. You might ask me how I invest my money. In response to your query, I might suggest that my fundamental strategy is “to possess a diverse collection of shares in nearly 30,000 of the largest, most reputable, financially stable, profitable, and innovative companies on the planet. Companies we engage with daily without a second thought.”

If I’m not mistaken, you’d likely find this strategy appealing, sensible, enticing, and perhaps even reassuring. Now, what if I had responded to your identical question simply by stating, “I invest in the stock market?”

I suspect your immediate reaction might lean towards, “That seems excessively risky, particularly for someone who isn’t particularly young.” In the first scenario, I was indirectly referring to owning a number of globally diversified index tracking fund such as the Standard & Poor’s 500-Stock Index (comprising the 500 largest US companies).

As already alluded to, the collective value of the 500 companies comprising the S&P 500 reached approximately $35 trillion in 2023, which accounted for around 83% of the total value of all publicly traded companies in the US. In essence, both responses yield nearly identical outcomes. Through owning portions of its 500 largest and most stable constituents, I would be investing in virtually the entire stock market. Furthermore, by investing in nearly 30,000 companies, I am also gaining a stake in other great businesses worldwide.

100% in equities

I have no problem whatsoever sharing with you that my portfolio consists entirely of equities. Yes, you did read that correctly; 100% of my money is invested in a huge collection of the greatest businesses on the planet. When I tell people this, I typically get one of two reactions:

That sounds really risky.
It’s because you’re young, right?

But believe me, it’s neither about my appetite for risk or volatility, nor my age. For the record, I am 57 at the time of writing this book. It’s about my 30-plus years in the business and my understanding of how this stock market investing game works. I guess you could say I’ve been around the block a few times.

I recognise that incorporating assets that could potentially lower my expected future returns will delay my financial goals or require additional savings. Given this mindset, I see an all-equities portfolio as a purely rational investment approach.

For those of you still sceptical about the long-term wealth potential of investing in thousands of the world’s top businesses, I urge you to carefully examine this graphic showing the performance of the S&P 500 index:

Equities: growth and income

Having observed the S&P 500 performance graphic spanning over six decades, the evidence is palpable. This time-tested index, representing some of the most influential businesses globally, showcases the inherent strength and resilience of diversified investing. Not only has it demonstrated a consistent upward trend over the long run, but it has also significantly trounced inflation, preserving and enhancing the purchasing power of its investors.

It’s not about isolated years or short-term fluctuations, but the overarching trend, which has consistently moved upwards over the long run. For any long-term investor, this graphic should serve as both a confirmation of the power of persistent investing and a reassuring testament to the potential of building wealth when anchored in such proven market pillars.

My investment strategy

Here’s a simplified breakdown of my investment strategy:

For long-term objectives — lean on long-term assets (equities)

For short-term needs — opt for short-term assets (bonds/ cash)

Apart from keeping a healthy cash emergency fund, I don’t have any short-term goals, so why would I hold any short-term assets? It wouldn’t make any sense and would only dilute my potential returns over the long haul, especially considering the typically lower yields of these assets compared to equities over extended periods. I do however hold a cash buffer for emergencies and unforeseen events.

I’m a Forever Equity Holder

The most effective trick in successful investing is seeing yourself as a Forever Equity Holder. When you adopt the mindset of a Forever Equity Holder, external media chatter diminishes.

You transition from reacting to acting. From a trader’s stance to an owner’s. From a doubtful view to a hopeful one. Headlines merely become side notes.

The power to tune out distractions comes from one potent concept: Forever.

As a forever holder, you understand that daily, weekly, or yearly events are trivial in the grand scheme of things. Because, over an extended period, the majority of things perceived as crucial lose their significance. What truly matters is time. Being a forever holder grants you the greatest gift: ample time to let scenarios unfold naturally. This viewpoint aligns with historical accuracy. Instead of attempting to outmanoeuvre or surpass the market, focus on mastering your behavioural instincts.

Embracing the forever holder mindset safeguards us from the behavioural pitfalls that often disrupt investment strategies.

Businesses shape our lives

It is an undeniable truth that the businesses surrounding us shape our daily lives. From banks and insurance companies handling our financial matters, to utility providers keeping our homes running smoothly, and technology companies revolutionising the way we connect and interact. The influence of these corporations is omnipresent. Despite our significant reliance on these entities, there exists an astonishing aversion among many individuals towards investing in the stock market — the very platform that fuels the growth of these great businesses. But why is this the case?

They might not have taken the time to contemplate the true nature of the stock market, which is likely why they hold such a perspective.

Let us embark on a thought experiment. Take a moment to glance at your recent bank statement. Where does the lion’s share of your hard-earned money go? It likely flows towards banks, insurance, shopping, utility companies, fuel, technology, and food providers. Most of your remaining expenses are likely to be allocated to discretionary activities such as purchasing from online retailers like Amazon, subscribing to streaming services like Netflix, enjoying television services like Sky TV, and indulging in holiday experiences.

Now, pause and ponder: Who benefits the most from this financial exchange, you, or the companies from which you are purchasing? Undoubtedly, it is the companies. They thrive because of our continuous reliance on their products and services. Yet, despite this reality, many of us hesitate when it comes to investing in these very same companies — the ones that billions of consumers use effortlessly in their everyday lives.

The fundamental principles of investing arithmetic are incredibly straightforward. What’s intriguing, however, is that many investors struggle to acknowledge what is glaringly evident, right within their field of vision.

Alternatively, it seems even more prevalent that they intentionally overlook reality because it contradicts their ingrained beliefs, biases, excessive self-assurance, and unquestioning adherence to the conventional functioning of financial markets, which appears to have persisted for an eternity.

A typical day

So, let’s walk through a day in the life of a typical UK consumer and how this translates to investing. Picture yourself or your neighbour in this narrative.

Your alarm goes off from you Apple or Samsung smartphone and you will probably check for any calls or messages. If you are on social media, you will almost certainly check your Facebook and Twitter accounts and might take the time to look at a mildly amusing video of a cat on YouTube that a friend has sent you. You’re far from alone in this, with over 2.2 billion iPhones sold by Apple and 1 billion by Samsung globally.

Your provider might be Vodafone, a giant in the telecom industry, servicing millions of customers who pay them monthly.

Perhaps the first thing you do is adjust the thermostat in your bedroom. Odds are, this thermostat is produced by Honeywell, the world’s leading thermostat manufacturer. Their thermostats are a common sight in many households and you’re tapping into British Gas.

As part of your routine, you might set off on your morning run, lacing up your Nike trainers. As reported by Matt Powell, an industry analyst at The NPD Group, Nike sells an impressive 25 pairs of shoes every second. You might jog alongside your neighbour, who happens to work for IBM, a multinational company employing hundreds of thousands globally.

After your run, you prepare for the day. You might use a Gillette razor, shower with Dove soap, and use Head and Shoulders shampoo. Brushing your teeth with Colgate, you’re one of the billions of consumers purchasing Unilever and Colgate-Palmolive products daily.

Dressing for work, you switch on Sky News to find out what is going on in the world, where you are bombarded with advertisements from a multitude of other household name brands that you use regularly. A commercial with a well-known sports personality discusses the benefits of Humira (AbbVie), a drug used by thousands globally to combat arthritis.

Your using electric to brew your Nescafé coffee and you have a bowl of Kellogg’s Cornflakes.

On your way to work, you stop for petrol at your local BP station, a multinational oil and gas company headquartered in the UK.

There’s some roadwork happening, and you wait while a JCB digger is unloaded from a lorry. JCB is a world-renowned manufacturer of construction equipment.

Before you go into work, you get your latte from one of the 33,833 Starbucks stores.

Arriving at work, you boot up your computer running on a Microsoft Windows operating system, used by over a billion people worldwide. The computer’s processor is likely manufactured by Intel, the world’s largest semiconductor manufacturer.

Your company’s networking system might be manufactured by Cisco, a global leader in networking for the internet.

An email comes in from your insurance broker about your buildings and contents renewal policy with Aviva. Aviva operates in 16 countries, serving over 33 million customers. They’re also contacting you with information about a Bupa healthcare policy, a leading private healthcare provider in the UK.

Lunchtime arrives, and you might grab a meal from McDonald’s, joining the millions who purchase meals there every day. You might also enjoy a Coca-Cola, with 1.9 billion cokes served daily worldwide.

Post-lunch, you withdraw cash from an HSBC ATM. HSBC is one of the world’s largest banking and financial services organisations.

You stop at Boots to pick up a few essentials. Boots has thousands of stores in the UK, visited by millions of customers every day. While you are in there you might buy some Scotchguard Spot Remover, Post-It Notes, and Scotch Tape, all produced by 3M. It’s a fun fact that Post-It Notes were invented by accident. You might also grab some plasters, a Johnson & Johnson product. This iconic brand’s logo has been used for over a century. At Boots, you also fill a prescription for a cholesterol medication like Lipitor, made by Pfizer.

Pfizer is one of the largest pharmaceutical companies in the world, employing over 90,000 people worldwide.

You initially planned to pay cash but decide to conserve your notes and instead use your credit card — either your Visa or Mastercard. Visa is a widely used credit card network globally, while Mastercard has over 290 million cards issued. These credit cards are being used by consumers every day paying for goods and services and lining the pockets of businesses all over the world.

On the drive home, you decide to finish the patio project you started two weeks ago. So, you swing by B&Q to pick up some necessary supplies. B&Q is the biggest home improvement retailer in the UK. They are owned by Kingfisher plc, an international home improvements company with over 1,900 stores.

You look forward to finishing the project before your sister and her husband fly in on a British Airways flight over the weekend. British Airways is one of the UK’s largest airlines.

Your final stop before heading home is at Tesco. This multinational grocery and general merchandise retailer are one of the largest in the UK, with millions of customers visiting its stores every day.

After loading up your car, you grab a pizza for family night. The plan is to watch a film on Netflix or Amazon Prime. These streaming services are used by millions worldwide. Something catches your eye and you hit the pause button to order it from your smartphone on Amazon.

Don’t just buy from them — invest in them

As you unwind from the day, I want you to remember that the companies you interact with daily, from Apple to B&Q, are not just businesses you buy from, but also potential investments. So how many of these great companies did you and everyone else use today? Most people easily engage with 20 to 30 through both necessity and choice. Now multiply that by the billions of consumers on planet earth. And yet many people still think the stock market is very risky. I beg to differ. The companies we’ve discussed today are familiar to us all, represent the strength of the global economy, and continue to operate regardless of market fluctuations.

These companies continuously strive to innovate and increase their profits year after year. So, as the global economy experiences tough times, I encourage you to have faith in these corporations.

Holding a share in these formidable businesses is not akin to gambling with a lottery ticket — it signifies part-ownership of the company. Provided our foundational analysis of these businesses remains steady, doesn’t it seem logical to own a stake in the companies we utilise daily, often without a second thought, and stay invested in them even during challenging times?

Owning a piece of greatness

Consider the sheer magnitude of the corporations we interact with daily. They span across various sectors, ensuring that even during challenging economic times, some businesses flourish while others endure temporary setbacks.

Investing in the stock market should not be seen as a risky endeavour, but rather as an opportunity to own a small piece of hundreds, if not thousands, of the greatest businesses on the planet. By becoming an investor, you are effectively claiming a stake in these enterprises and participating in their success.

Diversification and resilience

One of the fundamental principles of investing is diversification — spreading your investments across multiple companies and sectors. This strategy safeguards your portfolio from the volatile nature of individual businesses and allows you to benefit from the collective resilience of the market as a whole. While certain sectors may experience turbulence, others may thrive, creating a balancing effect that can mitigate risks and provide stability to your investment journey.

As we navigate through our daily lives, we often overlook the powerful tapestry of industries and brands that support our routines. These companies, with their expansive global presence, are not just products or services we casually engage with; they’re the backbone of the modern economy and a testament to the potential of long-term investing. Next time you sip your morning coffee or tune into your favourite show, remember: you’re not just a consumer, but a potential shareholder in a grand global narrative. It’s time to think beyond the purchase and see the bigger picture — the vast world of investment opportunities that’s interwoven with our everyday.

Being in fear of the stock market simply isn’t rational.

ABOUT THE AUTHOR

Mike LeGassick is a behavioural investment coach and lifestyle financial planner with Manning & Company, based in Devon. His new book, Mind Over Markets, is about to be published.