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Whether you’re trying to fortify your retirement nest egg, increase your income, or just live your wealthiest life, you need to be investing your money. But what is the best method of investing for your unique situation? Here, we will explain some of the benefits of investing in stocks compared to other traditional investment vehicles and help you decide whether or not you should invest in stocks.
Should I Invest in Stocks?
Many investors come to us and wonder whether investing in stocks makes sense for them, and the short answer is that it depends. Your personal investments depend on your risk tolerance, short and long-term goals, current financial situation, and more. Therefore, it’s important to do your own research before choosing your investments. That being said, our goal here at Money Morning is to demystify the stock market and explain how, with proper education and attention, you can invest in stocks if that’s what you choose. Compared with other investment choices, stocks generally come with higher risk and higher rewards. This could be the right solution for investors who are willing to do their research and stomach the investment risks for potential gains.
As a short answer, stocks may be a good option for investors focused on long-term (10+ years) gains, but if you need the money sooner, stocks might not be the best option for you because of their short-term potential for volatility. Next, let’s look at stocks compared to other investment options and then outline some things to know before investing in stocks.
Stocks vs. Savings Accounts vs. Bonds
Many investors have retirement savings on the horizon as their long-term goal, but the median savings for Americans between 56-61 is just $17,000. And unfortunately, Social Security isn’t the answer either. In 2017, the average monthly payment that retirees received was $1,386. That’s only $16,632 for a full year.
Rather than risk outliving your money, you have to think about supplementing your nest egg now. And dumping money into a savings account, government debt, or banking on your company’s retirement plan just isn’t enough.
The FDIC reports the average interest rate on savings accounts in 2019 was just 0.09%. If you parked a whopping $100,000 into savings, you’d add a mere $450.81 in five years. Hardly enough to move the needle on your retirement account.
Treasury bonds used to be a popular choice for investing, but they hardly fare better. Since 2007, 20-year treasury bonds have returned about 15%. That would’ve turned your hypothetical $100,000 investment into $115,000.
That’s a little better but still doesn’t cut it. Your money needs to be working for you.
You can put your money to work by investing in the stock market.
If you had $10,000 to invest in the S&P 500 in 2009, it would have bought you 148 shares of the SPDR S&P 500 ETF (SPY) at $67.95. As of October 2020, the S&P 500 stands at 3,477.13, and SPY trades at $346.85. This means that your $10,000 would now be worth $51,333. If you had $100,000 like the above comparisons, you would have $513,338. And that’s just from a passive investment in the entire S&P 500 index.
If you invested your money in the best stocks to buy – like the ones we help you find – you’d have made even more money. So to answer the question of “should I invest in stocks?”, you have to consider other, more conservative options and weigh whether or not this growth is worth it to you and makes sense for your goals. Assuming you’re on board with investing, let’s now look at some considerations and things you should know before investing.
Tips for Getting Started in the Stock Market
If you want to invest in stocks, you’re probably wondering where to start. Not only are we here to help you decide if you should invest in stocks, but we also want to share some helpful tips for people buying their first stocks.
DIY Brokerage Accounts vs. Robo-Advising
The first thing to understand is the difference between choosing your own stocks using a brokerage account and putting your money in a robo-account based on your goals. Brokerage accounts often come with their own fees and investment options, but they offer a higher level of customization. Robinhood, one of the most popular day-trading apps, is an example of a brokerage account. There are also robo-advisor services that are more hands-off and manage your investments based on your goals. Fidelity Go and Betterment are examples of robo-advising apps.
Individual Stocks vs. Mutual Funds and ETFs
The next thing to know when deciding if you should invest in stocks is looking at purchasing individual stocks versus groups of stocks, like mutual funds or exchange-traded funds (ETFs). Mutual funds consist of small pieces of many different stocks in a single transaction. Buying individual stocks is when you invest in a specific company, such as Amazon or Netflix.
While investing in a single company and hitting it big can seem appealing, most financial advisors recommend diversifying your portfolio to minimize risk. This might look like having some single stocks, but also have some investments in ETFs, real estate, precious metals, bonds, and more. This diversification helps protect you in case one company’s stock plummets.
Know Your Time Horizon
As we mentioned, investing in stocks makes more sense for long-term investing and even then, nothing is guaranteed. If you have a shorter-term goal, like buying a home, a car or a vacation, lower-risk, lower-volatility investment strategies might be a better bet.
Learn More About Investing
At Money Morning, we help you understand the stock market and how to navigate it. Once you have a firm understanding of your investment goals, we help you pick winners through practiced strategies and lots of research, helping you lay the foundation of a wealth-building portfolio.
Continue to the next course of the Profit Academy to learn how to balance investing risks and goals.