Tuesday, 23 April 2013
3 Reasons to Invest in Stocks
With the recent volatility in the stock market, and with the financial crisis of 2008 still looming large in many memories, it isn’t too surprising that many people are wary of investing in stocks.
It’s true that stock investing comes with some risk. However, it doesn’t have to mean that you avoid stocks altogether. Here are 3 reasons to find the money to invest in stocks:
1. Build Wealth Over Time
One of the realities of life is that putting money in a high-yield savings account or high-yield CD just isn’t going to cut it if you want to more effectively build wealth over time. This is especially true in a low-yield environment like what we’ve got right now. Your low-yield products are unlikely even to earn a return that beats inflation. You can’t build adequate wealth over time with your earning power subject to real losses.
Investing in stocks gives you the chance to earn higher returns that beat inflation, and that put the magic of compound interest to work on your behalf. When you know how money works, and you can put that knowledge to work, you can build wealth more effectively over time. Stocks are among the best ways to do that.
2. The Stock Market Has Yet to Lose in the Long Run
Even though volatility is a problem in the short-term, and there are big crashes on occasion, the stock market hasn’t lost in the long run. If you plan out your long-term goals, you’ll find that investing gives you the best chance of reaching them.
Over long periods of time — 25 to 30 years — the stock market has always seen net gains. Over time, the trend line smooths out, and doesn’t look so scary. One of the biggest investing mistakes is to panic at short-term volatility, selling with the herd, even though it’s a great time to buy at bargain prices. Take a step back and really consider the big picture and the long-term. You might be surprised at what you find.
3. Stock Investing Doesn't Have to be Complex
The real hang up for many people is stock picking. They worry about whether or not they are choosing the right stocks, and get concerned about seemingly-complex concepts like P/E ratios and reading balance sheets. While these are things that can be learned, stock investing doesn’t have to be complex, especially to start.
Simple investments, like index funds, can help you avoid the pitfalls of stock picking. With index funds, you can start investing fairly easily, with little expertise, and with a small amount of money. An index fund, which follows a group of investments (you can even pick an all-market fund and track the entire market’s performance), allows you to avoid the need for stock picking. These types of investments have made the whole process less complex for large groups of people.
You can start with a small amount of money, and be consistent. Indeed, when it comes to investing success, consistency is key. Create a plan, and look for funds that you understand. You might get around to stock picking later, but to start, it doesn’t need to be complex — and over time it can result in true wealth.