Two Cents

PHILIP OLSON: Have you ever thought about investing in the stock market?

Maybe you have a cousin or a coworker 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-- Dow's worst week.

Buy, buy, buy, buy, buy.

Well, there's a lot of risk out there.

Vortex of volatility.

Oh, yikes.

You 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 plunking down my hard earned money on a game of chance I barely understood?

PHILIP OLSON: A lot of people feel the same way.

Half of Americans have zero dollars invested in stocks.

Many of them don't have the 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 playing] 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 for percentages of the company.

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 company will do well and the value of your shares will increase.

Smaller, newer firms are more risky because while there's a chance that 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 are 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 that 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 just get 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 want to put their savings on that roller coaster?

JULIA LORENZ-OLSON: 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 has 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 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 very rarely checking in on your portfolio.

People who regularly track the prices of their shares 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 pay out 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 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 five 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 fits your unique situation.

Remember, even if you keep your savings in cash under your mattress, you are still 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.

BOTH: And that's our $0.2.

Do you have more stock market questions?

Post them in the comments and we'll try to answer them.

And if you'd like to share your own experiences with investing in stocks, we'd love to hear them.

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