You should be investing a good chunk of your long-term savings in the stock market. The stock market simply has a record of better returns than almost any other investment available to the average investor. There are, however, people who say that investing in the stock market at all is for fools.
But Is The Stock Market Grounded in Reality?
One of the main arguments against investing in the stock market is that it is not grounded in reality. Skeptics say that investing in the stock market is just as bad as gambling. To a certain extent I agree. In the short-term, stock values are like a roller coaster. Up 2% one day, down 3 the next day. As I write this, McDonalds’ stock just made a full 1% plunge over the past hour, but is now on its way back up. The true underlying value of a company obviously doesn’t change that drastically that fast. Even over the course of months and a few years, stocks values are incredibly fickle. However this is all short-term. So if you only intend to be invested for a few years, the stock market is indeed dangerous territory.
Over the long-term, however, stock values do reflect reality, and the stock market becomes a much wiser investment. Warren Buffet advises only investing in the stock market if you intend to stay invested for longer than 10 years.
Back to McDonald’s stock– if you expand the chart to show the last 30 years, there is a pretty consistent growth pattern. This growth in value doesn’t come from people pouring money into it like a pyramid scheme. Rather it comes from McDonalds expanding business, consistently returning a profit, and consistently being able to pay dividends. When you buy a stock for the long haul, you’re not making a bet on what speculators are going to make the stock price do in the short-term. Rather, you’re buying a piece of the business that is going to provide you a passive income stream for as long as you hold that investment. You’re buying an income generating asset.
But Not Individual Stocks!
After looking at McDonald’s 30 year graph, you might be ready to plunge into one or two hot sounding stocks. Unfortunately, companies don’t always do well. You’ve probably heard about Enron. For a little while Enron was a hot investment. Then the bottom fell out and is now worthless. Kodak and A&P Grocery Stores were both solid companies for decades, but now are worthless. No company is immune from such fates. For all we know, McDonalds could be put out of business in 10 years by the shift to healthier, fancier dining options. As a whole, however, businesses make money. Which is where index funds come in.
Index funds are baskets of stocks that represent broad sections of the economy. Since they are passively managed, index funds don’t rack up high expenses that get passed on to the investor. When you invest in these index funds, you gain exposure to a large number of businesses and protects you from being hit hard when a few of those businesses fail or do poorly.
So yes, playing the stock market in the short-term is for fools. But long-term investing? Barring a complete collapse of our civilization and return to the stone age, long-term investing is one of the wisest things you can do with your money. There are tons of ways to get in the game, but Betterment is one that goes out of its way to make diversified, low-cost investing easy and straightforward. Better yet, they don’t have account minimums. You could literally start investing with a dollar and they’d diversify it! You’ll thank yourself in 20 years.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.