EP47: 5 Reasons You're Scared to Invest on Your Own

What's holding you back from investing, even though you know it could lead to financial freedom? Today I'm going to address these fears, from the unpredictability of the stock market, to the psychological factors like greed, fear, and impatience that often cause irrational investing decisions. Using real-life examples, such as the fluctuations in Pepsi's stock price, I'm highlighting the importance of a long-term approach and the reality that stock prices do fluctuate. I also dissect the concept of FOMO (Fear of Missing Out), which can push individuals to buy stocks when prices are high.

I also cover the following topics in this episode:
- Risk Aversion
- Pepsi stock's 20 year performance
- Psychological Factors
- Lack of Time
- Perceived Complexity
- How a $2775 investment in McDonald's grew to over $34K
- Lack of knowledge & Confidence

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Transcript

Speaker 1: 0:00

In this episode, you are going to learn the top five reasons why people don't invest in stocks. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we are going to cover the top five reasons why most people don't invest in stocks. We're going to start off with reason number one risk aversion. Then we'll take a look at reason number two psychological factors. Then we'll take a look at reason number three lack of time. Then we'll take a look at perceived complexity People seem to believe that investing is very complex and then, finally, reason number five a lack of knowledge and confidence. Let's get started with the first one. What is risk aversion? It means to shy away from risk, or, in other words, avoid any type of risk. So if you are uncomfortable with the inherent volatility of the stock market, you're just not going to invest, or the fear of losing money can also deter you from investing in stocks. And finally, if you believe that investing is risky, then you're not going to invest. But is that the right approach? I don't think so, and I've been doing this for over 20 years as a dividend investor. So let's take a look at a real life example using Pepsi.

Speaker 1: 1:44

Everybody has heard of Pepsi. Everyone is familiar with this company. The company was founded in 1898 and they have over 315,000 employees worldwide. So if we take a look at Pepsi and we look at their stock price from 2008 to 2009. So that's a very short period of time, that is one year and we're going to look at the stock price and you can see it up on the screen here and pretty much the stock hasn't done anything. If you look at from November 2008 till 2009,. August of 2009. And you can see that it's pretty much. It kind of went down, came up a little bit, then it's down again. However, this might scare a lot of people. When you look at this graph on the screen, you can see that in September of 2008, the stock price was over $70 a share and then in August of 2009, the stock price dropped to $56. So this can seem significant and stock prices go up and down all the time, and that's why you can see the graph it's just going up and down, up and down, up and down. We don't have a straight line and so that's the volatility in the stock market and, in this case, the volatility in Pepsi's stock price. So when you look at such a short window of time and in this case we're looking from September 2008 till August of 2009,. It does seem risky and it does seem like this was probably not a good investment.

Speaker 1: 3:26

However, the key here is to zoom out. We want to look further back. What is Pepsi's stock price? What has it done, let's say, since 2003, until today, in 2023? So now, instead of looking at it for just a one year period of time, we're going to zoom out and look at 20 years.

Speaker 1: 3:51

So what has Pepsi's stock done in the last 20 years? And now you can see it up on the screen that the graph is steadily going up the line. The stock price is going up, up and up. The trend is upwards, and so you can see back. In 2004, the stock price was below $60 a share, and today the stock price is at over $180 a share.

Speaker 1: 4:20

So when you zoom back and you look at the last 10, 15, 20, 30 years, that is going to give you a better indication Whether or not this investment is worthwhile. So nobody can predict the future. I don't know what's going to happen with Pepsi's stock tomorrow, next week or next month, but when I take a look at the last 20 years, I can have a high degree of confidence that the company should continue to do well. Now there's other things we're not looking at here, and that's one of them is the dividend. The company has paid a dividend for many, many decades and has increased the dividend for many decades, but for now, in this, we're still at risk aversion. What I just want you to take away from this is, when you take a long term perspective, you can see that the risk doesn't seem so bad, and in fact, you can lower your risk when you invest in quality companies for the long run. So keep that in mind.

Speaker 1: 5:25

Now we're going to move on to reason number two psychological factors, and these are very real. So emotions like greed, fear and impatience can influence your investing decisions, and this applies not just to stocks, but even to mutual funds, index funds, etfs, even term deposits. So any kind of investment is going to be influenced by emotions like greed, fear and impatience. And another one is the fear of missing out either on potential gains or the fear of market downturns can again lead to irrational decisions. Now let's take a look at this here.

Speaker 1: 6:12

Like I said before, stock prices go up and down all the time, and I'm going to show you an example of what not to do when it comes to investing. So when stock prices are going up and they're steadily rising and we're in a what they call a bull market, so the stock market is going up, which means the majority of stocks that trade in the market are going up in price, and you'll see this happen all the time. When prices are going up, either your friends or your colleagues at work or family and you're going to hear about this online and you're going to hear it from people and you're going to see your friends or coworkers buying a stock for twenty dollars on a Monday and selling it for thirty five dollars on a Friday. And then you say to yourself well, I can't lose, everybody around me is making money. And that's when people get greedy. And you can see on the graph, there's the text there. It says buy.

Speaker 1: 7:17

And then so people will start to buy stocks and when this happens, obviously due to supply and demand, stock prices are going to go even higher, and then more people will start to buy, stock prices go even higher and more people start to buy again because they think that they can't lose and they can make a quick buck overnight. And so that is when you have the mentality of the investors is it's greed? And so greed is pushing people to buy and buy and buy, and you don't want to do that. That's the exact wrong time to buy when stock prices are high and we call them overvalued. The stock price is overvalued, it's priced too high and you don't want to buy when it's priced too high, so don't do this.

Speaker 1: 8:06

And the opposite happens is when stock prices start to drop, and again so people there's fear comes into play. So then people will start to sell their investments, and again it could be individual stocks, could be mutual funds, index funds, etfs, and people will start to sell those, either themselves or you call your mutual fund company and you say you want your money back, so they will sell the stocks on your behalf. And when that happens, again, due to supply and demand, stock prices will start to drop and then people will panic even more and they will want to sell, and then panic some more and sell again. And I understand this. When you're looking at the value of your investments and let's say it was $10,000 and now it's worth 8000, and now it's worth 7000. You go into panic mode and then you just want to sell whatever you have and take all the cash that you can get. And again, this is the wrong time to sell because now the stock price is too low and we say here that the price is undervalued. And that's the wrong time to sell, because when you sell here, you solidify your losses Right. So let me give you an example If you bought a stock for $10 a share and now it's worth $5, how much money did you lose? Well, you haven't lost anything if you haven't sold it. So sure, the stock price is down, but you still own those shares and if those shares are paying dividends, they will continue to still pay those dividends. So the worst time to sell is when prices are low.

Speaker 1: 9:47

Now, in anything in life, when it comes to groceries, food, clothing, electronics most times people will wait for things to go on sale, and when things go on sale, you generally tend to buy more and stock up. People do the exact opposite when it comes to investing in the stock market. They buy more when prices are going up and then they start selling when prices are going down. So don't do this. So don't let fear guide you. Instead, use logic or a checklist, and I'm going to get to that later on in this episode.

Speaker 1: 10:24

One perfect example here is when is a stock priced low? So, in fact, we want to buy stocks when prices are low, not when they're high. You don't want to overpay for your investment, so you want to buy when the stock is priced low. So how do you know when a stock is priced low? Well, I can tell you right now. It's up on the screen here. Take a look at the current dividend yield for that stock and if it's greater than the company's 20 year average dividend yield, then you know that the stock is priced low. Now for more information on that and I go into a lot of detail with real-life examples please go back and watch episode number one, and I talk all about how to know when a stock is priced low and how to know when a stock is priced high. So we cover that in episode one.

Speaker 1: 11:16

Okay, so now we're going to move on to reason number three a lack of time. Now, most people believe that investing takes a lot of time. You have to spend hours and hours and hours every day and every week to research what stocks to buy went, to sell, what to hold, and that is a misconception. Now, of course, if you're doing day trading which I don't advocate but if you're doing day trading, that is going to consume a lot of hours in your day. So that's not what we're talking about here, right? I've been, and still am, a dividend investor, a dividend value investor, for over 20 years, and to do the type of investing that I'm talking about does not take a whole lot of time.

Speaker 1: 12:03

Now, investing doesn't have to be time consuming, but it'll feel that way if you don't know what you're doing. Now. This is important. You only need to spend time on research when you have money to invest. So if you're only going to invest once a year, well then that's when you have to sit down and go through some of the rules and I'm going to talk about them later in this episode the checklist and go through that and figure out what to invest in place the order and purchase those investments. If you're going to invest twice a year, then you do that twice a year, but this is not something you have to do every single day, every single week or every single month. So, remember, you only need to spend time on research when you have money to invest. Now, my students spend on an average of 45 minutes to 75 minutes a year on their investments, and that's it. So how can they do that? How can they spend so much, so little time on their investments? And the reason is they use the 12 rules of simply investing to save time, and I'm going to cover those towards the end of this episode, so hang in there. Let's move on to reason number four.

Speaker 1: 13:21

There seems to be this perception of perceived complexity. People seem to believe that investing is complicated, and I'm here to tell you that it's not rocket science. It doesn't have to be complicated and it isn't complicated at all. You don't need a fancy degree in accounting or in economics or in finance to be a successful investor. In fact, I've taught people from all walks of life, from 14 year olds to 80 year olds, on how to be successful investors. In fact, my kids started. Both of my kids started investing when they were nine Dividend investors since nine years of age. Here's a quote I want to share with you from a very famous investor, peter Lynch, and Peter says 20 years in the business convinces me that any normal person using the customary 3% of the brain can pick stocks just as well, if not better, than the average Wall Street expert. So how? How can you do that? How can Peter Lynch say that? And that's because and I'm going to go into jump into my approach here my approach to investing is to keep it simple, avoid using technical jargon.

Speaker 1: 14:47

And the third piece of advice I want to share with you is to ignore the noise. There is a lot of noise on social media, on online news, radio, print, doesn't matter. There is a lot of analysts and experts and journalists and everyone who's giving you information. So remember, when they're giving you information from these outlets, their number one goal in life is to they're all corporations. So their number one goal in life is to make money for the corporation, first and foremost. Their goal is not to make you financially successful. So you need to ignore the noise because it's just going to confuse you and then you won't know when to buy, when to sell, when the price is low, how to figure out when the price is high. That's just going to confuse you. So keep it simple and I don't use any technical jargon in any of my episodes that you've seen up until now, or any future episodes the investing course itself, the investing platform I don't use any technical jargon. I just keep it simple and ignore the noise and you will do fine. So I want to share with you an example of simplicity.

Speaker 1: 16:07

So let's take a look at McDonald's Again. Everybody knows about this company. Everyone knows how this company is making money. So let's take a look at McDonald's. Let's say, for example, in 2005 you purchased a hundred shares in McDonald's for $27.75 each. Okay, so that's simple. The share price was $27.75 each. Multiply that by a hundred shares. Your total investment at the time, back in 2005, would have been $2,775. So that's your total investment. Do you think that investment is going to be worth more or less today? So let's take a look.

Speaker 1: 16:56

So back in 2005, mcdonald's was giving a dividend of $0.67 per share. Now, a dividend is simply the company sharing its profits with you, the shareholder. So the company made earnings profits and they took a portion of that in this case $0.67 per share and gave it to the shareholders. And in this example, you own a hundred shares. In that year, in 2005, you can see it up on the screen you would have received $67 in dividends, and the dividends are deposited as cash automatically into your trading account. So you can spend that money if you wish, or you can reinvest it. It's entirely up to you. So that's not a huge return on investment, but nevertheless it is what I like to call free money.

Speaker 1: 17:54

$67 came to you. You didn't have to work extra hours to earn that and you didn't have to buy more shares. So the company increased its dividend the year after that and the year after that, pretty much every year we're going to jump to 2010. So in 2010, the dividend now was $2.26 a share and remember, you still own the hundred shares. So that year you received, instead of $67, you received $226 in cash dividends. So that's how much money you received. Again, the company increased its dividend every single year we're going to jump to 2015. The dividend at the time was then $3.44. Again, you own 100 shares. You made $344 in dividends. Company increased the dividend again in 2020. So you can see it's $5.04 and increased it again today as of this recording, in 2023.

Speaker 1: 18:56

The dividend for McDonald's is $6.08 a share. Remember, you still own 100 shares. So this year you would make $608 in dividends Not bad from $67 in dividends and now you're going to make $608 in dividends. All for doing what? For owning the shares. Again, you didn't have to buy more shares. You didn't have to sell any shares. You didn't have to work extra hours to earn that money and the money just comes to you as a shareholder in the form of dividends. So, interesting fact McDonald's has had 46 years of consecutive dividend increases. Think about how many market crashes we've had in the last 46 years, how many market downturns we've had in the last 46 years. But McDonald's has continued to increase its dividend every single year for 46 years.

Speaker 1: 19:55

So let's go back to our example. Remember your original investment. You bought 100 shares back in 2005. And your original investment was $2,775. Well, since then you would have received over $6,200 in dividends alone. That's incredible. Look at your original investment $2,775. And now you've received over $6,200 in dividends alone, and you still own the shares. You didn't have to sell any shares to make that money. The story gets even better because today the shares are worth $284 each. So if we multiply that by 100 shares, you can see that the shares alone in this example are now worth $28,400. Now let's add in the dividends and you can see that your total investment Remember original investment was $2,775. Today, that investment would be worth over $34,600. So that's a pretty good return on your investment. And it is simple. We didn't have to do any complicated math, we didn't have to talk about technical terms, financial terms at all, and we kept it simple. In this example, the person bought 100 shares in McDonald's back in 2005, held on to them and today the investment would be worth over $34,600.

Speaker 1: 21:39

Let's move on to our last topic in this episode lack of knowledge and confidence. So that is something else that keeps people from investing in stocks. When you don't know how to invest, investing seems complicated and time consuming, and that leads to a lack of confidence, and without confidence, you won't invest. So then what's the solution here? Well, the solution is to start small, but first learn how to invest. So learn how to invest and then start small. You don't have to invest 5,000, 10,000, 20,000 dollars right away. Start with $500, start with $1,000 and invest and I'm gonna show you how to do that and then hold on to those quality stocks for the longterm, collect the dividends, see the dividends coming in, track the dividends, and that's going to build your confidence that what you're doing is you are on the right path and you're growing your investments slowly, but over time. It always starts off slowly.

Speaker 1: 22:57

When you talk about dividend stocks, the dividend income is gonna be small in the beginning, and then over time we're talking years and years and years and decades. Over time it will start to snowball. So today we have students who are making 20, 30, 40, 50, 60, $70,000 a year in dividends. So now, if you reinvest that every single year back into other stocks that pay dividends, your dividend growth is then going to accelerate. When you're only making $60, $80, $100 a year, well, that isn't a whole lot, but you have to start somewhere. So start small, and that's gonna build your confidence. It's also gonna build your knowledge. So let's get back to the point of learning how to invest.

Speaker 1: 23:48

So my approach, and what I've been teaching for over 20 years, is to invest safely and reliably for the longterm, regardless of what happens in the stock market. Stock prices go up and down all the time. Stock markets go up and down all the time. So even when there's a market downturn, we wanna ensure that our investments are going to generate enough dividend income. So our focus is on the dividend income more than it is on the stock price itself. So how do we do that? How do we invest safely and reliably? Well, we do that by investing in quality dividend stocks, so not just any stock quality stock when it's priced low. So how do you know when you're looking at a stock anywhere in the world? When you're looking at a stock, how do you know that it's priced low and it's a quality stock?

Speaker 1: 24:39

So to help you with that, I've created what I call the 12 rules of simply investing and you can see them up on the screen here and, for those of you on the audio version, I'm gonna read them out in just a minute. So, if you're interested, we cover these in detail with real life examples in the simply investing course. So this is your checklist. I referred to this in the beginning of the episode. This is your checklist.

Speaker 1: 25:05

Before you invest in any stock, make sure that it passes all of the 12 rules of simply investing. Not just eight out of 12 or seven out of 12, all of the 12. If there's even one failure, skip it, move on to something else. So rule number one do you understand how the company is making money? If you don't skip it, move on to another stock.

Speaker 1: 25:28

Rule number two 20 years from now, will people still need its products and services? Rule number three does the company have a low-cost competitive advantage? Rule number four is it recession-proof Again if it's not, skip it, move on to something else. Rule number five is the company profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Because if not, we don't want to be investing in that company. Rule number eight is the debt less than 70%? Rule number nine we want to avoid any company with a recent dividend cut. Rule number 10, does the company buy back its own shares? Rule number 11 is the stock price low?

Speaker 1: 26:10

So we check for three things here. We're going to look at the P e ratio, want to make sure it's low. We want to check the current yield compared to its 20 or average yield, which I talked about in the beginning of this episode. So if you want to learn more, take a look at episode one. And then we also take a look at the price to book value, the Pb ratio. I want to make sure that number is also low. So if all those three conditions are met, then the stock passes.

Speaker 1: 26:34

Rule number 11, and we know that the stock is priced low. And rule number 12, keep your emotions out of investing. And we talked about the psychological factors when it comes to investing greed, fear, panic. So we want to keep all of that out and that's why we have this checklist, the 12 rules. So you can you have to be very systematic about it and just go through the rules, okay.

Speaker 1: 27:01

So one last thing the simply investing course is available. It's online, self-paced. You can take your time doing it. You can repeat any of the modules. There's 10 modules. So we cover the investing basics, then we cover the 12 rules, then we show you how to apply the 12 rules and I provide you with a Google sheet that you can use to fill in the 12 rules, and the Google sheet will automatically highlight which of the rules have the company's past and which of the rules the company has failed. So you know which companies to avoid and which ones to consider.

Speaker 1: 27:34

The next module I show you how to use the simply investing platform, the module. After that, I will take you through your first stock order, step by step. The next module after that is building and tracking your portfolio. After that, we take a look at learning when to sell, which is just as important as knowing when to buy. And the module after that is reducing your fees and risk, especially when it comes to mutual funds, index funds and ETFs. Module number nine is to look at your action plan. I'm going to give you an action plan to get you started right away. And module number 10, I will answer your most frequently asked questions in module 10.

Speaker 1: 28:17

For those of you that are interested, I also have the simply investing platform, which took a little over two years to build, and the platform is a web application that applies these rules to over 6000 companies in the US and in Canada every single day.

Speaker 1: 28:32

So you just log into the web application. It does the work for you. You can see which companies passed the rules, which companies failed the rules, and it identifies the rules individually, which ones passed or failed, and you can get a list again of companies to avoid and which ones to consider. So if you're watching this or listening to it, make a note of the coupon code save 10 S A, v E, one zero. So this coupon code is going to save you 10% off of all of our products and services. That includes the course, the platform and coaching calls with me, where we do a personal assessment, so you can save 10% off all of those products. If you enjoyed this episode, please click on the subscribe button so you'll get notified automatically when we have new episodes out every week. Hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.