Whenever I talk to friends about taking some of their savings out of their bank and into the stock market, their #1 friction is “the stock market is risky”.
Some of us are used to average returns and opportunity costs. Others are not, and focus on worst-case scenarios instead.
This graph shows the distribution of real outcomes of investing money at any time in history and exiting after a certain time horizon – based on the actual historic data of the S&P500 for the last 100 years, including the Great Depression.
The red dashed line is what those friends are all about: the unluckiest 2% of the cases.
Here’s what it shows:
Investments of 15 years or longer produced earnings even in the unluckiest cases.
Investments of 21 years or longer produced higher earnings than banks even in the unluckiest cases.
This is the chart and the discussion points I use with friends who’re stuck in fear.
I complement the conversation by saying:
This is the data and what happens in reality
If this trigger an interest in you, you’ll explore this further. My blog has more material about it.
If it doesn’t, there’s a strong emotional degree in your management of personal finance, so investing is probably unsuited for you – stick with a 3rd pillar.
How do you approach this conversation with your most financially-shy friends?
I try to approach this with a mathematical/scientific way with proven statistics and science articles but I won’t pressure them to invest. Either they get it and profit or they don’t and pay for it. It’s their decision and not mine.
I don’t try to convince them either. I think it takes time and effort to learn the hard way yourself. There is no shortcut.
You have to know how much risk tolerance you can handle by investing it and experiencing it.
My only advice is to think of their current global allocation (by aggregating all their various accounts) and ask them to define their target allocation (in %).
I am also careful. People have different risk tolerance and I don’t think it’s a good idea to push people to invest in stocks if they are reluctant to it: they may sell at the worst moment.
If anything, to somebody risk averse with markets, I would just recommend to invest something like 5% in stocks with the rest in cash and short-term bonds, to boost interests while staying very conservative.
Probably better - and easier - to convince them to invest in a monthly ETF savings plan.
And then just forget about it and not look at the results for a couple of years (many people are lazy, so won’t bother anyways). By then, they will probably be in the green due to cost averaging, even after starting out their plan in a downturn.
It also removes the psychological „anchor“ of an initial investment start price and/or date.
It also good to notice when someone ask for advice or not.
Most of the cases, colleagues or friends share their finances or money related decisions but do not ask for advice.
I always refrain myself of commenting nor giving tips when they most likely do not want to consider any advice or recommandations (bcos they did not ask for it).
I realized that I am not good at convincing irrational beings to do the most rational and unemotional thing.
So I don’t try to convince them. I just tell them what I would do and they usually don’t take the advice.
I was acutally surprised to see that it took - in the worst case - 21 years to get even. That’s quiet a long timeframe. And yet nobody knows if in any point of time this is going take even longer.
Therefore, I wouldn’t try to convince them. It’s their money.
My strategy regarding this topic is pretty simple:
I make sure my friends tend to know that I am knowledgeable regarding the finance topic
If they come with financial questions, I will make myself available and answer their questions putting myself in their shoes. I don’t give the same answer to the same question based on their knowledge level.
I make sure I don’t proactively give non-sollicited advice to my friends, I wait until they come to me
If I sense that they are really into the financial rabbit hole, I can discuss this for hours with them and make sure to ask them a lot of questions
I never recommend stocks but rather point to sources (blogs, books). I prefer to be the sparring partner regarding the topic vs the guy that made them lose a fortune
In my experience, you better wait until your friend is in a “receptive” mood as opposed as being the lame guy that always speaks about finance. A few of my friends are now investing thanks to discussions with me and I am quite satisfied with my “influence”
As for this topic than any other that is money related , I don’t try to convince friends .
I don’t want to manage the eventual problems in after-sales.
I may give them my opinion , if they ask for it , but I’m leaving them free to do what they want
I have been on the other side of this equation. I was ‘that friend’ of yours who was not the most financially savvy one, reluctant to dip into the market, keeping a large pot in cash.
Several of my friends work in the financial market; I am the odd one out. When a couple of them tried to tell me how I could manage my money, I was reluctant to heed their advice - mostly because i found it overwhelming, not having done my own research.
Had a wake up call post divorce - read a lot, and then proactively reached out to one of my friends for advice.
So I’d suggest wait for your friends to come to you. Share your experience with them so they know you ‘know’ about this space.
I have managed to get about 6 people to invest some money into stocks who previously did not want to know anything about it.
One thing I did: I invited my friends to a dinner with a small presentation on the possible performance of stocks vs. Bank account.
So it was fun for them anyway, and only those who cared to know came.
Calculated with a return of 5% for a 100% stock portfolio. Even that shows an nice curve and it’s realistic. If I did that now, I’d go with 4%.
I stressed that you should only invest money not needed in the next 5-10 years.
Start small with 200-300 per month with a standing order and see how that feels.
Invest in a RoboAdvisor like Selma or TrueWealth because it’s super easy and they create a tax report for you. Hassle free.
Buying your bank’s funds with at least 80% stock is also better than doing nothing.
Those who wanted could contact me for further advice. Some did. I told them about ETFs.
Basically, I showed them ways of how to dip their toes in the water and see how it feels. I believe I did it in a responsible way.
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