Why should one invest in the stock market? Actually, there are several reasons to do so. Investing in stocks can provide impressive returns, and these gains can help investors successfully overcome inflation.
There is a significant wealth of information on this particular market, which can help individual investors to make better-informed decisions. In addition, numerous investment vehicles provide exposure to this market, offering investors many ways to get involved.
Finally, there are many inexpensive ways to obtain exposure to this stock market, so investors don't have to spend a prohibitive amount of fees.
Historically, stocks have provided the highest long-term results of any asset class, as the Standard & Poor's 500 Index produced an average annual return of more than 11% between 1928 and 2016. In comparison, the three-month Treasury Bill generated an average annual return of 3.46% and the 10-year Treasury Bond returned 5.18%.
One great way to illustrate the difference in returns is using the Rule of 72, which gives investors an easy way to determine how long it will take them to double their money with a specific annual return. To make use of this rule, an investor can take the number 72 and divide it by an asset's rate of return to determine the number of years needed to double one's money.
For example if a person invests £100,000 into stocks, and those stocks generate an average annual return of 11%, it will take slightly more than 6.5 years for the value of those stocks to double in price.
If that same person invested £100,000 into Treasury Bills with an average annual return of 3.46%, it would take them more than 20 years to double their money.
Some may be tempted to either stash their money in a bank account or put it under a mattress, thinking this approach to be safe. However, this strategy is short-sighted, as nobody is safe from inflation risk, which is the risk that a person's principal will falls in value as its purchasing power declines over time.
For example, if a person puts £100,000 into a savings account with a 0.2% savings rate and inflation is 2.2% per year, they will have roughly £80,000 10 years later when adjusted for inflation. If they find a savings account that pays 1% a year and put the same figure into that account, they will have less than £89,000 in inflation-adjusted dollars 10 years later.
Because so many investors trade the stock market, there is no shortage of information available for this particular asset class. Analysts, researchers and academics all scrutinise stocks and provide their insights on this asset class's history and performance.
These market observers provide not only explanations for how the stock market performed during the last week, month and year, but they also offer forecasts for how this particular asset class will do going forward.
Investors interested in stocks have the ability to peruse whitepapers, research reports and expert analysis before purchasing shares of individual companies.
A Wealth Of Investment Vehicles
By using ETFs, for example, investors can obtain quick and inexpensive exposure to a basket of stocks. One popular ETF is the SPDR S&P 500 ETF, which allows investors to gain exposure to the benchmark Standard & Poor's 500 Index (S&P 500) by purchasing a single share of this particular fund. While this ETF will provide access to the S&P 500, an index containing the stocks of many blue-chip companies, there are several other funds that will help investors gain exposure to other indices, for example the Russell 2000, which contains the shares of many smaller companies.
Low-Cost Investing Options
Investors looking to put their money into the stock market can take advantage of discount brokers that will help them purchase these securities for low fees. For slightly higher fees, they can frequently get some guidance from the staff at their broker-dealers.
Those interested in the stock market should keep in mind that ETFs, index funds and mutual funds all have fees. However, these fees are low in many cases, especially for passively managed investment vehicles.
While many of these vehicles come with low fees, some are more costly, and expenses can have a significant impact on investor returns. Further, the old adage "you get what you pay for" doesn't always apply, as higher fees do not always equate to stronger performance.
There are many different reasons why a person should invest in the stock market. Historically, stocks have provided higher returns—on average—than other asset classes. Armed with these returns, investors can potentially accumulate wealth for important events like paying for their children's college education or retirement.
Investing in stocks can help overcome the wealth-eroding effects of inflation, a factor that can slowly reduce the purchasing power of one's principal.
There is significant information available on stocks, including historical data, reporting and analysis. For investors interested in this particular asset class, there is a wealth of investment vehicles that provide access to the stock market—including ETFs, index funds and mutual funds—as well as low-cost investing options such as discount brokers.
However, investors should keep in mind that the stock market comes with significant downside risk. By putting their money into this asset class, investors can lose some—or all—of their principal.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…