Ep 17 | Investing for the Risk-Averse

If you’ve ever thought, “I’m too risk-averse to invest,” this one’s for you. In this episode of The F. Word, Priya Malani breaks down one of the biggest myths in personal finance—that investing is inherently risky. Spoiler: it’s only risky if you’re doing it wrong. Priya explains the difference between investing and gambling, why long-term investing is actually perfect for the risk-averse, and how even Wall Street’s so-called experts get it wrong most of the time. With stories, stats, and a Warren Buffet mic drop, this episode makes the case that boring investing is the most powerful kind.

Tune Into This Episode to Hear:

• Why “investing is risky” is one of the most misunderstood ideas in finance

• The difference between gambling and true long-term investing

• What a Fidelity study and a Warren Buffet bet reveal about the best investment strategy

• How to know when to save versus when to invest—based on your actual timeline

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Transcription

For those of you out there who are like, “Yeah, I’m risk averse. Don’t like risk. Don’t wanna be involved,” neither does Warren Buffet. And he won in the end.

So you don’t like risk. Should you invest?

There’s a big misunderstanding that investing is risky — and it makes sense. If you’ve ever watched Wolf of Wall Street or any other finance movie, or if you’ve just, you know, lived and watched the stock market go up and down, um, it can feel like investing is so, so risky. However, investing is only risky if you’re investing for the short term — like a quick flip, a quick return, if you’re trading in and out of the market, if you’re trying to time the market, if you’re trying to pick a stock and hope it does well. Investing is gonna feel risky because the way you’re doing it is so risky.

But I’ve got news for you: that’s not investing. That’s gambling. Anytime you’re looking to get a quick return on your money, that’s not investing. When you go to Vegas and you play the slots, you’re looking for a quick return, right? Investing is a way to build your wealth over time, not overnight. If you’re trying to use investing as a tool to build your wealth overnight, you’re not thinking about investing — you’re thinking about placing a bet and hoping it pays off.

Investing only works if you stick with it for the long term. That sucks. It’s boring. It’s like watching paint dry. But it’s the only way you should be investing.

So that’s good news. If you feel like, “Investing is risky and I don’t like risk, so maybe I shouldn’t invest” — over the mid and long term, the markets have shown consistently that they move up and to the right. On average, if you are invested properly, in a diversified fashion, 7 to 8% annualized per year. Right? So like, if you invest for 10 years, 15 years, 20 years, your portfolio, your investments, will gain 7 to 8% per year. Only when you look back in 10 years. You can’t look at it every single day, or every single month, or every single year and expect it to be up. It will go up and down — but over the long term, it goes up.

And that’s why it’s okay if you don’t like risk. You should still be investing, but you shouldn’t look at it all the time.

In fact, I’ll tell you a fun story. A couple years ago, Fidelity did, uh, like, they analyzed all the accounts that they manage — they’re a big broker-dealer, they have millions of accounts under management — and they looked to see: “Okay, which of our accounts actually perform the best? Which ones have the best returns?” And they found that for most people, the best-performing account was their 401(k). So they did a little more digging. They were like, “How come it’s the 401(k)?” And they found out that, for most people, the reason their 401(k) is their best-performing account is because you forget your password. Literally. By forgetting you have that money invested, it’s the best way to ensure that you do well with investing.

Now, I’m not taking away from the fact that it is really fucking scary when you’re investing and you watch your investments go down. But the important thing to remember is that you haven’t actually lost any money until you sell it. So if your investments go down, that doesn’t mean you lost money. Intrinsically, you’ve lost money, but you haven’t actually lost any money — because when it goes back up, when the markets recover (which they always do), your money goes right back up with it.

So I hope it gives you some peace of mind that there’s a difference between investing and gambling. And if you feel like investing is risky, it’s only risky when you’re trying to bet on the market to make you a great return in the next week or month or year. Some people get lucky, but investing properly isn’t about luck. It’s about staying the course — boring ass, don’t pay attention to it, ignore it — and it will go up over time.

So, for most people, can you save enough to not have to invest? Not even bother with it at all?

It’s a good question, because I can imagine people who feel like, “Ugh, it’s just too risky. Don’t wanna get involved,” might think, like, “I’ll just save my way to retirement savings.” Yeah, you actually can — if you make a shit ton and save the majority of your income. You might be able to build up enough to live off of, right? Because that’s the point of investing for most people. You’re investing so that your money can grow, work harder for you, and then you have access to it later in life when you’re no longer earning an income.

Let’s just take one use case, which is retirement — which we all face, right? We all know that someday we’re gonna stop working and we’ll no longer have income, and so we will be pulling from our savings. And if that savings hasn’t grown enough to sustain you pulling income from it for 20, 30 years — then no, you have to invest.

A lot of people in the FIRE movement are okay living on just a fraction of what you earn. You might actually be able to save up enough that you never have to get involved with investing. On average, when you’re invested for the long term and invested properly, your investments will gain 7, 8, even 9% per year annualized over the long term.

Right now we’re at a period where high-yield savings accounts are generating 4%, 4.5%. But that’s not always the case. If the Fed cuts rates, that interest rate’s gonna go down, and now your money might only be making 1% or 2%, whereas in the markets it’s gonna be making 7%, 8%. So it’s just growing a lot faster in the market — which means you have to do less of the savings. If it’s not growing as fast and it’s just sitting in a savings account, you have to do more of the stashing away.

So yes, it is possible. But it would require tremendous sacrifice in the short term for the ability to ensure that your savings long-term can generate enough income for you to live off of until you are no longer needing it.

So when should you save, and when should you invest?

It’s a really good question, because there’s, I think, a lot of confusion. People think like, “Oh, I have a little money leftover. Maybe I should invest it.” Or, “I’m starting to sit on cash in my checking account. Maybe I should invest it.” Well, no, you shouldn’t. You should start by thinking about when you’ll need that money.

So if you think you’re gonna need that money in the next two to three years, you shouldn’t invest it. Two to three years is not enough time for you to invest your money and know that it’ll be available for you when you need it. Keep that money at an online bank in a high-yield savings account.

Investing is really a way for your wealth to grow over time — not overnight. So the good delineator is two to three years. If you need the cash in two to three years — ’cause you’re putting a down payment on a home — keep it in cash. Keep it at an online bank in a high-yield savings account.

But if you don’t need that money for a while and you have goals that are a little further out, you have time for that money and the market to work in your favor. And that money can actually grow in the market.

So typically, we won’t let you even think about investing if you need that money in the next two to three years — you’re buying a new car, you have a down payment, baby fund, going back to school, upgrading your rent situation — whatever it is. If you need that money in the next few years, you don’t wanna invest it.

Investing is really a strategy for your mid- and long-term goals. It’s a way to allow your money to grow and work harder for you when you won’t need it for a while.

There’s no doubt that psychology plays a huge role in most people’s desire — or lack of desire — to get involved with investing, right? Because we’ve seen a shit show repeatedly. In my time, you know, I was on Wall Street during the 2008–2009 crisis. Brexit — the markets tanked, nobody knew what was gonna happen. And then COVID — markets blew up, down almost 40%.

So in a short period of time, there have been a lot of shit shows. And it’s very easy to appreciate and understand why that has made most of us be like, “Oh no, thanks. Not for me.”

But again — short-term dips that the market takes are inevitable. I’m not saying they’re not gonna happen. I’m just saying that they don’t matter to you if you’re invested for the mid and long term. You cannot allow the news today, what’s happening in the short term, to impact a long-term strategy.

There’s a really great quote: “Everyone wants long-term returns, but no one wants to wait for them.” What’s happening in the short term is no doubt scary, but it is not at all impactful — if you’re invested for the mid and long term.

You have to stay the course. You have to kind of tune the news out. Tune out the headlines — which is really, really hard, ’cause it’s very easy to let emotions get involved when it’s your hard-earned money.

But back to that Fidelity study: the people who forgot their password, forgot they even had an account — had the best-performing accounts at one of the largest financial institutions.

So yeah, psychologically, we’re all a little fucked up because so much shit has happened — and that’s understandable. But you have to zoom out. You don’t have to — but if you want to grow your wealth over time, investing is one of the best ways to do that.

So I’ll give you a fun fact. Nine outta ten times, studies show that the most qualified money managers on Wall Street — I’m talking hedge fund managers, asset managers of some of the biggest financial institutions — 80 to 90% of the time, a diversified portfolio beats their predictions of what the markets will do in the future.

Which is wild, right? These people get paid a shit ton of money to tell us what is going to happen — what will happen in the future with the stock market. And I’m talking the people who have the algorithms, the hedge fund managers — and 80 to 90% of the time, they’re wrong.

Warren Buffet, a couple years ago — no, it was about a decade ago — Warren Buffet did a bet. It’s called the Million Dollar Bet. And you can listen to a podcast episode — it’s Planet Money, for you nerds out there. Planet Money episode 688 is The Million Dollar Bet that Warren Buffet made with his buddy, a hedge fund manager.

He said, “Ten years. We’re gonna make an investment. I’m gonna pick mine. And you go do all your fancy stuff — all your algorithmic trading. Get all your quants to analyze all the things. And in ten years, let’s meet back and see who wins.” So — I’m gonna spoil it, although you should go listen to the episode.

Ten years later, Warren Buffet had picked the S&P 500 — a simple diversified portfolio — and it beat his hedge fund buddy. The guy who was paid millions of dollars to be able to do all of his smartest trading — and Warren Buffet beat him.

Episode 688. Planet Money. Brilliant vs. Boring. That’s the title of the episode. And I highly encourage you to listen to it. If I haven’t convinced you here today, it sure will. Brilliant vs. Boring, right?

So for those of you out there who are like, “Yeah, I’m risk averse. Don’t like risk. Don’t wanna be involved” — neither does Warren Buffet. And he won in the end.

So the most boring — not necessarily risky — investing... The hedge fund is the one that’s doing all the risky trading, right? They’re swinging for the fences. They’re using their algorithms to tell them like, “Oh, this is guaranteed.” In the end, none of that risky shit worked.

Warren Buffet’s slow and steady, boring-ass investment beat the hedge funds in the long run. So if you’re not feeling super excited about investing ’cause you don’t love risk — investing is for you.