More than one-third of Americans do not own stocks, and a new BlackRock survey reveals that the holdouts cite a lot of reasons for not being in the market.
In its People & Money report published on Thursday, BlackRock listed some of the reasons people who don’t invest say they stay on the sidelines.
Among the most common are not having enough money, not feeling like they know enough about investing, and being afraid of losses.
Those are all fair explanations for not putting your money to work. But there is one simple piece of advice from investing icon Warren Buffett that offers a solution to each one of them: invest in an S&P 500 index fund, a product that tracks the performance of roughly the 500 largest stocks in the US.
“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior,” Buffett said in his 2017 letter to Berkshire Hathaway shareholders. “My regular recommendation has been a low-cost S&P 500 index fund.”
So, let’s go through each of the above reasons, starting with the toughest: not having enough money. If you’ve never done it, investing is something that can feel like you need thousands of dollars saved up to start. In reality, there are some very low-cost entry points. For example, the Schwab S&P 500 Index Fund (SWPPX) trades at around $17 a share. You can also buy fractional shares of funds that trade at a higher price level, but it’s more or less all the same in the end.
While investing small amounts may seem futile, it’s more about getting started and building habits — after a few years, if you keep at it, you’ll have built up a chunk of money thanks to both your contributions and compounding returns.
Second: not feeling like you know enough about investing. Financial markets can feel daunting, but like anything, once you do it, it gets easier. Plus, the beauty about buying an index fund is that you don’t really need to know much about investing. Your money will passively sit in a diversified group of stocks for years.
If you really feel that you have questions that need to be addressed, however, you can always visit a physical branch of an advisor like Charles Schwab or Fidelity, said Chris Chen, a certified financial planner and founder of Insight Financial Strategists.
“They have people at the counter there who are waiting for them to invest their money and answer their questions, and they’re basically free,” Chen told Business Insider.
Finally: being afraid that you’ll lose money. It’s what keeps even the most successful investors up at night.
But the reality is that, if you have a long-term time horizon and resist the urge to sell at the first sign of trouble, the S&P 500 has historically recovered from its pullbacks.
Earlier this year, Yale economist William Goetzmann told Business Insider that investors tend to overestimate the odds of an imminent stock market crash and tend to forget that such crashes don’t last.
Goetzmann’s research shows that when the market plunges after a big period of returns, there’s a 99% chance those losses have been recovered five years later.
“If you wait five years after this event, you’re going to be better off. That’s what I’m telling you,” he said.
Of course, S&P 500 index funds aren’t the only products out there. Jason Draho, the head of asset allocation Americas for UBS Global Wealth Management, said that he would rather people invest in an all-world index fund — one example would be Vanguard Total World Stock ETF (VT) — as S&P 500 valuations are high and the index is heavily concentrated in a select few stocks.
US stocks have outperformed the rest of the world over the last decade and a half. Since the March 2009 market lows, the Vanguard Total World Stock ETF is up 423% while the S&P 500 is up 800%. So far this year, however, the US has underperformed international stocks, and some Wall Street analysts see global markets beating the US in the coming years.
There’s also something to be said about the visibility of the S&P 500 — it’s the benchmark that US investors tend to follow, and you can track its performance on the nightly news.
But in the end, it doesn’t matter all that much — it’s more about getting the ball rolling.
“The important part for someone who is just starting is to start,” Chen said.
