Choosing the right investments can be a daunting task. With so many types of mutual funds, stocks, bonds, money market funds, and more, how are you supposed to know which is best for your personal financial goals? Understanding the pros and cons of each investment type is paramount to your success. If you’re curious about what the stock market has to offer, the answer is potentially a lot.
The most fundamental reason to invest in stocks is simple: stocks are a great tool to grow your wealth. Saving money is great, but assuming inflation averages around 3% per year, you need your money to grow even faster. Most high-yield savings accounts only offer about 1% interest, meaning any money sitting in a savings account could actually be losing its value over time. It’s important to find a way to make your money work for you!
The main benefit of investing in stocks as opposed to other types of investments is potential return. Though stocks are riskier than other investment types, their return on investment outpaces nearly every other investment type. This isn’t to say stocks come with a guarantee to always rise, or that they’ll never decrease in value. Stocks are more volatile than other investment types such as bonds or treasury bills. If you want some recent examples of this, take a look at 2008 or 2020. However, over the long-haul stocks have historically outpaced their counterparts. Not to mention, many stocks pay dividends which provides income without having to sell your shares.
If you’re worried about the complexities of picking the right stock, there’s good news. You don’t have to correctly predict the next Apple or Amazon to be a successful stock investor. Many people have great success investing in established, stable companies. The S&P 500 – a stock index tracking the 500 largest companies listed on U.S. stock exchanges – has around a 10% average annual rate of return since 1926. You don’t even have to pick individual stocks at all in order to invest in the stock market. Mutual funds are a collection of investments inside a single security, and many mutual funds are comprised of stocks. A stock index fund is a great way to invest in the stock market without having to identify individual companies yourself. For new stock investors, this might be the best place to start.
Tax-free investment vehicles such as 401(k)’s and IRAs can make stock investing even sweeter. In addition to your contributions potentially being tax-deductible, any capital gains taxes are deferred until you start taking distributions. Your returns can compound tax-free until retirement!
A well-rounded portfolio will consist of stocks or stock funds as well as other investment types like bonds or money market funds. It is important to diversify your stock holdings so that you don’t have too much of your portfolio in any individual stock or within the same sector of the economy. Stocks are a high risk, high reward investment option. Working with a professional investment advisor can help ensure your portfolio best matches your personal financial goals.
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.
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