Why fear keeps millennials from financial freedom

Welcome to the letter this week.

What do most people think of when they heard the words “stock market”?

Risk, volatility, and complexity are a few things that come to mind for millennials when they think about the stock market. It seems to them like a gamble, or at least a major risk.

Something that has changed my financial trajectory and decision making is the understanding that the market is the safest place for money long-term.

My aim in today’s letter is to explain this idea and encourage my generation to act courageously for their financial freedom.

The emotions of the market

Warren Buffet’s mentor, Ben Graham, introduced the world to the analogy of Mr. Market. Picture Mr. Market as your business partner. Each day, Mr. Market shows up and offers to sell you a business. He offers you the same business every day. However, the price of this business changes daily based on how he is feeling. If he is joyful, the company is expensive; if he is sad, the company is cheap.

Nothing about the business changes from day to day, but the feelings of Mr. Market set the price each day.

This is why people fear the stock market: it’s irrational in the short-term. Daily stock prices are driven by emotion.

Let’s take COVID as an example. In the spring of 2020, the market tanked. The market value for US businesses declined rapidly based on fear of the unknown coronavirus.

The market hit the bottom in March 2020. By April 2020, it was already on its way back up. By August 2020, it surpassed pre-COVID levels.

We didn’t know how bad COVID was going to get at the beginning. The fear and panic were real. But we can learn from this event is the price drop in the market was driven by fear, rather than by concrete changes to the businesses that comprise the US stock market.

The only way to have lost during COVID was to sell during the drop out of fear. This is why Warren Buffet says to do the opposite:

Buffett took the analogy of Mr. Market seriously and became one of the most successful investors in history by making decisions based on logic rather than emotion.

We can follow the teachings of Buffett to move past our emotions and make decisions for our financial future based on actual data.

Gradual gains, sudden drops

The most significant event in the stock market for millennials was the 2008 financial crisis. I’ve heard Tony Robbins argue that the ‘08 financial crisis hit at a pivotal time in the lives of millennials. They saw their parents lose homes and retirements. The message they learned was, “Here’s what you get when you play in the stock market.” It injected fear into their view of the stock market.

As always, the market rises gradually and drops suddenly. We remember sudden drops like 2008. We are not good at recognizing gradual years, where the market quietly gains.

In 2008, the S&P 500 lost 37%.

But it wasn’t really lost. Again, you only lose if you sell when things drop, which many did. However, for those that didn't, the next five years of the S&P 500 returned the following:

• 2009: 26%

• 2010: 15%

• 2011: 2%

• 2012: 16%

• 2013: 32%

All positive, money-making years. This is the market. And this was not an isolated event. All of the major stock market crashes in the US have been followed by years of positive gain. The proof is in the numbers: the US public stock market has averaged a 10% return over the last 100 years.

Here’s why this helps us: we have more data available to make an informed decision than anyone in history. Prior generations and societies have not been able to look back like we can and see that all the major crises in the market have been followed by times of prosperity that have outweighed the losses. They did not have the luxury of knowing their financial system returned 10% per year over the last 100+ years.

And as I mentioned in The Millennial Retirement Guide, 10% of compound interest over time will make all the difference for your financial freedom.

What this means: put your money in the market, leave it there for 20-30 years and let the compound growth flourish.

All it takes is to remember to invest courageously and not on emotion when the market is declining. This will set you up for financial freedom.

How to win

If you, were to lay out all your options on the table for where to put your money, being in the stock market is the safest place for it. There is no other return on investment that is as proven over 100 years. (You can make an argument for real estate, but that’s another topic. Investing in realty is not nearly as accessible or liquid as the stock market.)

To many, a savings account feels safe. But the only reason you would allow the majority of your money to sit in savings is fear. Stashing money in savings is playing defensively, playing to not lose.

Our goal is not to just not lose. Our goal is to win. Only in this game, you don’t have to beat someone else to win. There is room in the market for anyone to win.

Look at this winning strategy in the market:

When you are willing to trust the market’s proven returns over time, your money starts to work for you. This is how you build assets.

When you let it sit in savings, the only thing working for you is your paycheck. When you stop working, the increase stops. And increase is never meant to stop. Financial freedom comes when your investments grow and become self-sustaining without a paycheck.

Getting in

When it comes to finances, I often see two things: fear and indifference.

I see indifference when people have no plan for their financial future and worse, no desire to create one.

I see fear as I have described in this letter. My generation will benefit in 20 years from moving past fear, developing a financial plan, and putting their money to work in the market for them.

I hope to continue tackling both fear and indifference by sharing what has helped me. I started at 22 with little understanding of finances and no plan. I’ve learned over the last 10 years how possible it is for anyone to make significant changes in their lives through simple financial decisions today.

For anyone looking to take practical next steps to get into the market, I’ve outlined the step-by-step process I used in A Millennial’s Guide to Financial Independence.

P.S.

I’ve been heavily influenced on this topic by Tony Robbins’ book Unshakeable. If this resonates with you and you want more information from an expert on why and how to get into the stock market, read this book. It’s a game changer and it will set you up for success.