Buying stocks is at the center of many investors’ long-term financial strategies, and the stock market is at the center of everyday life. It’s hard to escape the latest news about the Dow, the S&P 500, and what’s happening on Wall Street.
I try not to worry about the daily ups and downs of the stock market, or get distracted by every last bit of noisy stock market news — but I find the stock market fascinating, and believe that stocks are ultimately one of the best asset categories to invest in. If you want to save for retirement and build wealth for the future, buying stocks is one of the best moves you can make.
Let’s look at a few big reasons why I believe in buying stocks — and why you should join me.
1. Stocks tend to deliver strong long-term return on investment (ROI)
When you invest in stocks, you’re (ideally) doing it because you want your money to grow as much as possible in the long run. Here’s what that looks like in real life: the S&P 500 Index has delivered 10.7% average annual returns for the past 30 years. For example, if you had invested $10,000 in the S&P 500 in 1992, and reinvested the dividends, and held onto those investments for 30 years without panicking or selling shares…you’d have $170,000.
This doesn’t mean that you’re going to get that same 10.7% every year! Far from it; some years, the stock market (and the S&P 500 index, and other broad market indices) go down by 10% or more. Other years, stock prices go up by 20% or more. You never know what the stock market is going to do until it’s too late; no one can predict the future, not even the richest investors on Earth.
But as a general rule, based on the lessons of history and the structure of the global economy, if you believe that corporate America and hard-working people all over the world are going to keep finding ways to innovate, create, produce, and make more money? You should buy stocks. Buying stocks in the S&P 500 or other diversified stock ETFs can help you buy into the collective efforts and ingenuity of millions of talented people all over the planet. To me, that feels like a risk worth taking.
2. Stocks tend to outperform bonds and bills
Sometimes people worry about the volatility (ups and downs) of buying stocks, so they decide to invest in bonds instead. Bonds should be part of the overall portfolio mix for many investors, based on your age and time horizon. Investing in bonds and short-term government debt (like T-bills or other short-term cash equivalents) often feels “safer” than buying stocks, and it can be. Sometimes bond prices go up when stocks go down, and sometimes bonds earn a higher ROI than the stock market.
But in the long run, stocks tend to outperform bonds and bills. According to analysis from author and investor Nick Maggiulli, from 1900-2018, stocks in 24 different countries consistently outperformed bonds and bills by an average of 3%-6% per year. This extra boost of performance is known as the “equity risk premium” — because stocks are riskier than other assets, they can often earn higher returns.
There’s no guarantee that stocks will always do better than bonds and cash; past performance is no guarantee of future results. But in general, if you can stomach the short-term ups and downs of the stock market, you’re likely to earn bigger returns with stocks than you’d get from bonds, bills, or even the best savings accounts.
3. Stocks tend to pay dividends
Another good reason to buy stocks is that stocks tend to pay dividends (a way of sharing their profits with shareholders). Not all stocks pay dividends, and dividend yields are not always a substantial percentage. But every month, I get a little chunk of money in my IRA account from the profits of the stocks that I own in my stock ETFs.
Earning stock dividends feels good. Free money! And I have my dividends set up to automatically reinvest, so that little percentage of cash flow from my stocks is immediately used to…buy more stocks.
Bottom line
Buying stocks lets you own little pieces of big successful companies and share in the future profits of the corporate world, even if (like me) you don’t have a corporate job. Stocks can be risky in the short run and there is a significant risk of loss for any individual stock. But over time, the stock market tends to go up as businesses get more successful and profitable, as more investors enter the market, as the global economy grows, and as money makes money.
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