Is it good to invest in stocks?

Is it good to invest in stocks?

Stocks are one of the best ways to build wealth and reach retirement while hedging against inflation. However, it is important to keep a well-diversified portfolio or consider exchange traded funds to manage risk.

Imagine, investing enough money that your investments make more than your job. The stock market is one of the best wealth builders.

Most people are afraid of the stock market until they understand it.

Luckily for you, I’ll show you if it’s good to invest in stocks. I’ll show you the pros and cons of investing and what the best way to invest is. You’ll be on your way to understanding investments in no time!

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Is it good to invest in stocks?

Investing in stocks, or better yet, a well-diversified stock portfolio is considered a good idea. The stock market provides an opportunity for you to build wealth, earn income, and protect yourself against inflation.

In general, investing in a diversified asset mix will allow you to grow your overall wealth. Companies earn more money, which increases their share price and your equity. Some of these companies will even pay a dividend payment.

One of the best reasons to invest in stocks is to protect yourself against inflation. You could save $5,000 every year for 30 years in a bank account and have $150k. However, in 30 years, $150k would be worth about $71,511 in today’s dollars at 2.5% inflation.

In other words, your money becomes less valuable due to inflation because the cost of living and goods increases.

However, let’s assume you invest that same $5k over 30 years at 8% return on investment. At the end of 30 years, you would have $620k. In 30 years, $620k is worth about $300k in today’s dollars.

What are the pros and cons of investing in stocks?

There are many pros and cons of investing, but typically the pros outweigh the cons. Investing allows you to build wealth, receive capital gains and dividends, hedge against inflation, have liquidity, and potentially faster gains. Cons include not understanding your investments, low-diversification, bankruptcy, liquidity, and volatility.

Pros of investing in stocks

Investing in a well-diversified stock or exchange traded fund portfolio has the following benefits:

  • Your money makes money. Compounding interest allows your money to earn you money. Eventually, your invested assets could make you more money than your 9 to 5 job.
  • Dividend income. Some companies pay a dividend which you can use for income or reinvestment.
  • Capital gains. The increase in value of your share prices is known as capital gains.
  • Hedge against inflation. Investing in the stock market should allow you to earn more money and keep up with inflation. Your money loses value sitting in a bank account, but investing allows your money to grow with inflation.
  • Liquidity. Selling stocks at any time is usually easier than selling real estate or a gold bar.
  • Faster gains. Some companies grow quickly which can lead to higher returns if you choose the right stock. The downside is that picking individual companies provides low-diversification. For example, Shopify stock has increased over 2,000% in the last five years compared to the S&P 500 at 102%.

Cons of investing in stocks

Investing does have a few potential drawbacks and risks which include:

  • Investing in companies or assets you don’t understand. Most new investors start investing in companies without doing adequate research. You want to make sure you fully understand the company or asset you are investing in.
  • Little to no diversification. Some investors choose not to diversify their portfolio, which can be problematic if a company underperforms or goes bankrupt.
  • Companies going bankrupt. You do have the potential to lose your money if a company goes bankrupt.
  • Low liquidity. Trading stocks with low-volume may mean you can’t liquidate your position when you want.
  • Volatility. Individual stocks can have large price fluctuations.

What is the best way to invest in stocks?

The best way to invest in stocks is to invest in a low-cost index fund consistently over the long-term. Index funds are well diversified, have a good growth history, and may be inexpensive compared to investing fund managers.

An index fund is a collection of stocks designed to track an index, like the S&P 500. Typically, the index funds can be purchased for a fraction of the cost of the underlying index. Each index fund has an expense ratio, which is the fee the fund manager charges for you to hold the fund.

For example, VOO is the Vanguard S&P 500 fund which tracks the performance of the S&P 500 or the top 500 publicly traded companies in the United States. At current prices, you can purchase VOO for $422 per share while the S&P 500 can be purchased for $4,600 per share. VOO has an expense ratio of 0.03%

The thing I like about Vanguard funds is that they are low cost. Similar S&P 500 index funds have an expense ratio of 0.82%. A portfolio with $100k invested into the S&P 500 would be charged $30 while other funds average $820.

Most index funds have a history of strong performance. A history of strong performance isn’t an indication of future performance, but it is good to look at. Since inception, the S&P 500 has an average annualized return of 10%.

As you can imagine, the stock market has up years and down years. However, investors who buy and hold well-diversified funds tend to see positive returns.

Summary: Is it good to invest in stocks?

As you can see, it is typically a good idea to invest in stocks. Stocks will allow you to build wealth and protect yourself against inflation. Mistakes are made when people treat investing as trading or don’t pick quality companies.

There are many pros and cons of investing, but typically the pros outweigh the cons. Investing allows you to build wealth, receive capital gains and dividends, hedge against inflation, have liquidity, and potentially faster gains. Cons include not understanding your investments, low-diversification, bankruptcy, liquidity, and volatility.

The best way to invest in stocks is to invest in a low-cost index fund consistently over the long-term. Index funds are well diversified, have a good growth history, and may be inexpensive compared to investing fund managers.

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