I have decided to start the Young Investor Series to encourage and educate more young students and adults to invest in stock because I have believed in the merits of starting young. While I am obviously way too inexperienced, it has been a very meaningful journey for me thus far especially since I started my journey at this time of uncertainty and turbulence. In fact, I believed that I have learned much more than I will have from having started in this current mild bear market. From getting very excited at how the price tick when I first began, I will only get as excited now when I discover a company of great fundamental.
The first reason why you should invest in the stockmarket is that while cash is king, it is never wise to have 100% of your wealth in cash (other than possibly waiting for the next huge financial crisis) because cash has proven to be a depreciating asset due to inflation. Inflation results in the erosion of wealth as the price of goods increases but your cash remain the same. Your 50 dollars note will only provide you with $50 of value next year even if your chicken rice costs you an additional 50 cents. Average inflation has been around 3.5% for the last 100 years, this may seemed little but in fact it is very scary if you will to compound the 3.5%. Using the rule of 72, your wealth will be depleted by 10% every 3 years and half every 20 years. The total amount of inflation from 1913 to 2006 is at a staggering 1929%. Neither should you expect the inflation trend to discontinue as it was only during the Great Depression of the 1930s that you have a long period of deflation.
On the other hand, stockmarket has generated an average of 9% return over 100 years. The key is 100 years, which means such a return is likely only if one invest with a long term outlook. Thus, it is wise to have some of your wealth invested in stockmarket be it directly or indirectly through some form of stock mutual fund or ETF. The stockmarket has over the long term be able to deliver a return that way exceed the inflation rate. One need not put all its wealth into it in order to combat inflation as putting 30% of it in stockmarket will be sufficient to avoid erosion of wealth. This is especially true in Singapore where our bank pays a meagre amount of 0.125% interest on deposits. For every $1000 that you have, the bank will pay you $1.25 yearly.
While many might have heard stories of people going bankrupt from PLAYING with the stockmarket, one can choose to be a passive and defensive investor which does not requires much of your time and effort to be.
In conclusion, one's wealth will be drop by an average of 3.5% yearly if one does not take any action to protect it. Part 2 will be on the magic of compounding interest and why the younger you are the better a magician you are.