A lot of new investors have come into the stock market since the beginning of 2020. My guess is that they would have done well to have first read Brian Feroldi’s new book Why Does the Stock Market Go Up? Everything You Should Have Been Taught in School, But Weren’t.
Brian (@brianferoldi) is a financial educator, YouTuber, and author whose goal is to ‘spread financial wellness.’ Brian has been busy doing a virtual book tour including stops on The Long View, Infinite Loops, and Portfolio Rescue.
I had to the pleasure to ask Brian some questions about the book. Below you can find my questions in bold. Brian’s (unedited) answers follow. Enjoy!
AR: It’s clear that a lot of new investors made mistakes over the past couple of years. So who is this book for and what do you hope they will get out of it?
BF: The book was created for stock market beginners. I was in that position 18 years ago. I vividly remember signing up for a 401(k) at my first job and I had no clue what I was doing. I had so many basic questions that I couldn’t answer such as: What is the stock market? What is the Dow Jones Industrial Average? Why does it go up and down? I’m naturally interested in money & investing, so I answered all of these questions for myself by reading dozens of books. I’ve wondered for years why there wasn’t a simple book that just answered all of the simple questions about the stock market that I had at the start of my investing journey. I wrote the book to teach new investor everything they need to about the stock market in an easy-to-read format.
AR: Part 4 of the book talks about why the stock market moves on a daily and yearly basis. Is anything about the past few months in the stock market surprising?
BF: Yes. The volatility that we have seen in the last few months has been jaw-dropping, but that’s just how the stock market works sometimes. Sentiment drives short-term price movements. We’ve seen a huge shift in sentiment over the last year. That leads to huge volatility which can be unnerving, especially for new investors. However, history is full of surprises. If you want the long-term returns that equities provide, you have to be ready, willing, and able to handle that volatility.
AR: Part 6 talks about why the economy, and earnings, go up over time. The Fed is barely mentioned. So why do pundits spend so much time on the Fed?
BF: There’s no doubt that the Fed has a huge impact on the stock market in the short term. Small changes to interest rates can cause big swings in asset prices. It makes sense why so many pundits focus their time analyzing the Fed’s policies. However, over long periods of time, it’s the earnings power of businesses that drives stock prices.
AR: Chapter 35 makes a very important point: you don’t need much money to getting started. Why is it important for investors to start with real money early in their investing life?
BF: Time is the biggest factor that will determine how well you do as an investor. A few extra years of investing can lead to a six or seven-figure difference in an investor’s net worth. This is why getting started early is so critical. Yet, many new investors think that you need a lot of money to get started. That’s just not true. You can open an account and start investing even if you can only afford to invest $50/month.
AR: You mention that buying individual stocks need not be a all-or-nothing proposition. Why is that?
BF: I’m a big fan of passive investing. Dollar-cost averaging into index funds is the best strategy for the vast majority of investors. However, if an investor has an interest in individual stocks, there’s nothing wrong with them allocating a portion of their portfolio into individual stocks. Some people believe that’s a mistake and that 100% indexing is the only option. I don’t think it has to be an all-or-nothing decision.
AR: Everyone at some point would do well with professional financial advice. What should people know about hiring a financial advisor?
BF: Hiring a financial advisor can be a good choice for anyone that doesn’t want to manage their own money or wants a second opinion. However, not all financial advisors are created equally. It’s critical to hire a financial advisor that is a fiduciary. It’s also important to understand how the financial advisor is compensated to make sure there are no conflicts of interest.
AR: Chapter 45 asks a timely question: what should you do if the economy tanks? What should you do?
BF: It’s natural to think that you shouldn’t invest when the economy is doing poorly. However, history shows that this can actually be the best time to invest. Investor sentiment is usually low when economic data looks bleak. That, in turn, leads to low asset prices. Buying those assets when they are out of favor has been a great move because asset prices gradually recover as the economy and investor sentiment improves.
AR: You have a number of pieces of advice for your younger self. Which one do you think is the most universal?
BF: Saving is more important than investing. Focus your time on making more and spending less. Increasing your savings rate by a few hundred dollars a month can have a massive difference in your net worth later in life.
AR: Your book is all about stocks. However what should new investors understand about bonds?
BF: Inflation and rising interest rates are bad news for bonds. Bond prices and interest rate move in opposite directions, so the next few years could be tough for bond holders. Still, bonds have a role to play in many investor’s portfolio. Broadly speaking, stocks are for growing your wealth, but bonds are for preserving your wealth.
AR: As a book bonus you write about your biggest investing mistake. Any lessons you can share?
BF: All of my biggest investing mistakes boil down to me being in a rush to earn big returns. I sought out investing short-cuts. I bought penny stocks, then high-yield dividend yields, then options. I made a lot of expensive mistakes along the way. In truth, there are no investing shortcuts. My returns improved dramatically once my mindset shifted from “build wealth quickly” to “build wealth slowly.”
AR: Thanks Brian for your time. Good luck with the book!
*Full disclosure: Brian was kind enough to send me an electronic copy of his book.