For decades people have been told that investing in the stock market provides better returns than cash over the long term. Whilst this has been true in the past, with everything that has been going on in the financial markets lately, is this still likely to be the case? Should I still risk my money? These are questions I am going to explore.
You will have no doubt heard on the TV all the turbulence in the banking sector and in the Eurozone, it seems to have been going on forever. The truth is financial markets have always had these “panic” events.
One striking example is the great depression of 1929.GDP fell by 25% and markets crashed far more than they did in 2008. It took a long time, but the world recovered and recovered very well.
This to me is proof that capitalism works and can withstand any kind of collapse. In my view there is likely to be a lot of pain in the global economy which is weighed down by huge amounts of debt at personal, business and government levels. Though again these scenarios are nothing new and have always been recovered from in the past.
Despite all this, I believe the stock market still has many attractive qualities that it has always had including:
A better chance to beat inflation
As you are no doubt aware, the cost of many of the items we buy lately has gone up appreciably. By putting our money into CDs and other low yielding assets, we are actually losing money in real terms. Currently inflation is over 2% and many CDs pay less than 1%.
This means our money is actually going down by over 1% per year. I know it’s often a hard conception to grasp, people often say “It hasn’t gone down, I got an extra 1% from the CD.” Whilst this is true, you can’t buy as much with it..
How about retiring early?
If you invest wisely at a young age, it can give you a great chance to retire early. I won’t go into lots of heavy math here, for the sake of keeping things simple.
But did you know that if you put in $1,000 per year into stocks or other investments, and was able to generate 11% per year for 20 years , this would be worth over $65,000? If you did the same for 35 years it would be worth over $340,000.
Dividends alone are beating cash and possibly inflation
The stocks in the Dow Jones Industrial Average are averaging around 3%. This alone may be enough to match inflation or even beat it, depending on how high it goes in the future. Some companies such as AT&T are paying over 5% a year.
Many investments don’t have a huge time commitment
Whilst day trading obviously needs a big time commitment, many investments don’t. Buy and hold investing requires very little time. Once you have purchased the stocks, you literally just hold onto them for as long as the company has strong fundamentals.
Opportunities for some bargains
The stock market often presents some outstanding bargains. Personally, I like to invest after a big market crash. This takes a lot of nerve, especially if you are new to trading. However, buying at these precarious times has shown over the centuries to be the best time and the most profitable.
A final note
To wrap up, I feel I must say there are no stocks that are guaranteed to be safe and there no guarantees about future performance or dividend payments.
There’s always going to be risk involved, the value of your investments can go down as well as up as you are no doubt aware.
There are many advantages to investing in the financial markets as I have discussed above, but only you can decide if you are prepared to take such a risk with your money.
Are you prepared to invest your money at the moment?
This post is written by Karl who runs WiseStockBuyer
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Comments
Should You Consider Investing Your Money? — 12 Comments
Until the global personal and government debt challenges are resolved (or on the road to resolution), I’m avoiding equities mostly. I understand the inflation, past performance, etc. arguments (many of which have become ‘conventional wisdom’ but simply are false). For many reasons I won’t elaborate on here, the risks of equity investing I think are at an all-time high right now, and growing.
Thanks for the comment Kurt. Interesting points, I don’t agree that risk is at an all time high though. I think the day Lehman went under was scarier. Europe is very scarey though, but I think it will eventually resolve, it could take years, even if it means mass money printing and inflation.
You’re right of course Karl about the immediate post-Lehman bankruptcy period being a higher risk time than the present. Not sure I find especially reassuring the thought that equity investing is less risky now than when we were on the cusp of a worldwide financial meltdown.
The “A Better Chance to Beat Inflation” section is key to answering the title question. There is greater risk in investing. But NOT investing is an opportunity cost due to inflation, a sure fire way to lose purchasing power in the long term. Better to take on some risk, but with the potential to increase purchasing power than to take no risk, but with the guarantee to lose purchasing power.
Yes, absolutely Nathan. With QE3 looking more possible, inflation could pick up. Though when the US begins to tackle it’s deficit, that could end up being deflationary. It’s a very uncertain world.
Hey MM, good to see u here :)… I share your views, definately don’t buy high at this time. I suspect there were be many “earthquakes” in the markets to come that would make good entry points.
One other aspect that people don’t realize is how cheap the costs of investing in the stock market is. If you bought a home, you’d be looking at selling costs like 6% commissions. With gold you are looking at insurance, storage and selling costs.
Since 1900, the Dow Jones Industrial (DJI) topped three times (1929/1965/2000). The following periods of consolidation (bear market) continued for 13 to 17 years, top to bottom (1906-1921, 1929-1942, and 1965-1982). Within these lateral movements, the DJI topped/bottomed roughly every 4 to 5 years.
Past performance is not a guarantee of future results.
Absolutely you should invest on your own. I’m looking at financial independence from dividend stocks within the next 5 years. The risk associated with price fluctuation is minimal if you have a steady underlying income stream from the stock as that will generally make it attractive to hold.
For decades people have been told that investing in the stock market provides better returns than cash over the long term. Whilst this has been true in the past, with everything that has been going on in the financial markets lately, is this still likely to be the case? Should I still risk my money? These are questions I am going to explore.
Until the global personal and government debt challenges are resolved (or on the road to resolution), I’m avoiding equities mostly. I understand the inflation, past performance, etc. arguments (many of which have become ‘conventional wisdom’ but simply are false). For many reasons I won’t elaborate on here, the risks of equity investing I think are at an all-time high right now, and growing.
Thanks for the comment Kurt. Interesting points, I don’t agree that risk is at an all time high though. I think the day Lehman went under was scarier. Europe is very scarey though, but I think it will eventually resolve, it could take years, even if it means mass money printing and inflation.
You’re right of course Karl about the immediate post-Lehman bankruptcy period being a higher risk time than the present. Not sure I find especially reassuring the thought that equity investing is less risky now than when we were on the cusp of a worldwide financial meltdown.
The “A Better Chance to Beat Inflation” section is key to answering the title question. There is greater risk in investing. But NOT investing is an opportunity cost due to inflation, a sure fire way to lose purchasing power in the long term. Better to take on some risk, but with the potential to increase purchasing power than to take no risk, but with the guarantee to lose purchasing power.
Yes, absolutely Nathan. With QE3 looking more possible, inflation could pick up. Though when the US begins to tackle it’s deficit, that could end up being deflationary. It’s a very uncertain world.
Hey MM, good to see u here :)… I share your views, definately don’t buy high at this time. I suspect there were be many “earthquakes” in the markets to come that would make good entry points.
I do invest in mutual funds because I have a long time horizon. I just hope we don’t turn into Japan.
yep…lance…..that is a concern. Hopefully that won’t happen as we did the QE a lot quicker than japan.
One other aspect that people don’t realize is how cheap the costs of investing in the stock market is. If you bought a home, you’d be looking at selling costs like 6% commissions. With gold you are looking at insurance, storage and selling costs.
Hi Wayne, That’s an interesting angle to look at from. Very valid points…Buying stocks is also a lot less hassle than buying a house 😀
Just some numbers:
Since 1900, the Dow Jones Industrial (DJI) topped three times (1929/1965/2000). The following periods of consolidation (bear market) continued for 13 to 17 years, top to bottom (1906-1921, 1929-1942, and 1965-1982). Within these lateral movements, the DJI topped/bottomed roughly every 4 to 5 years.
Past performance is not a guarantee of future results.
Absolutely you should invest on your own. I’m looking at financial independence from dividend stocks within the next 5 years. The risk associated with price fluctuation is minimal if you have a steady underlying income stream from the stock as that will generally make it attractive to hold.