There’s plenty of reasons to get into the stock market. For the past few years many potential investors have been jittery, worried about volatility or trying find the appropriate time to make an entrance.
Rather than trying to time the markets, which most financial experts say is a bad method, first-time investors should consider what they can gain (or lose) in the stock market before investing.
“The stock market and real estate are the two biggest wealth creators in history,” says Sam Seiden, chief education officer at Online Trading Academy, headquartered in Irvine, California. “Investing in the stock market is much cheaper and easier than real estate for most people.”
Think of it like owning a home versus renting, says Tim Shanahan, president and chief investment strategist at Compass Capital Corp. in Braintree, Massachusetts. As a stock market investor, you own a piece of a company with stocks or equity funds that may pay dividends and increase in market value, he says, while an investor who purchases debt bonds is renting the money to a company to earn interest.
[See: 10 Skills the Best Investors Have.]
Over time, many billionaires, including Berkshire Hathaway (ticker: BRK.A, BRK.B) CEO Warren Buffett, have made money this way. Think of investing in the stock market as a long-term strategy that takes diligence and consistency.
There’s more than one way to invest. Investing can be done on a micro-level with individual stocks or on a macroeconomic level by purchasing a basket of indexes that map back to the Standard and Poor’s 500 index or other global benchmarks.
“You can invest in mutual funds but those come with higher fees,” Seiden says. “You can invest in individual stocks, which will tend to have the biggest market moves, or ETFs. You can also invest in options on the stock market, which offers lower capital investing and more customized strategies.”
Start by mapping out your goals and doing a risk assessment, says Magdalena Johndrow, associate financial advisor for Farmington River Financial Group in Farmington, Connecticut.
“A lot of investors have a certain perception of what they should be doing,” she says. “A lot of new investors think they should invest 90 or 100 percent in equities because they have a long time to retire.”
But if an investor’s risk appetite is different than their risk tolerance, this could create a problem and cause someone to worry or considering pulling their funds from the market before retirement age at an inopportune time. Make sure your personal goals align with your risk tolerance before investing in something that will keep you up at night, Johndrow says, to make sure you have the right mix of stocks, bonds and other asset classes.
The stock market is designed to go up over time. Due to 401(k) programs and other retirement plans, there are huge direct investments into the stock market each month that usually force prices higher, Seiden says.
“When a company in the S&P 500, Nasdaq, or Dow Jones industrial average doesn’t perform well, the exchange simply removes it and replaces it with a better one, helping prop up prices,” Seiden says.
He also says it is in Wall Street’s best interest to have stock market prices move higher because many of the firms own much of the stock themselves.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Beat inflation. While there isn’t a 100 percent guarantee, the stock market may help investors earn more money since equities have historically been known to keep up with or exceed inflation rates. According to J.P. Morgan Asset Management, the 50-year average for the consumer price index, which is used to gauge inflation rates, is 4.1 percent.
“You want to make sure your money is outpacing inflation,” Johndrow says, which helps with retaining purchasing power in the long term.
For example, more than 50 years ago, the price of a Coke (ticker: KO) was 5 cents . “If you asked people to pay $1.50 back then, they would say you were crazy, but that’s what we are paying today,” Johndrow says.
That happens as the purchasing power of money decreases over time. Even with the Federal Reserve starting to increase interest rates, getting a guaranteed rate through a purchasing a corporate bond, savings account or certificate of deposit, likely won’t yield high enough returns to combat inflation rates.
That’s why many investors have found investing long-term in the stock market has its returns. According to a report by Legg Mason Global Asset Management, there’s a 10.3 percent average return for the S&P 500 between 1937 and 2016.
Compound your interest. Getting in early and saving often is always better.
For example, if an investor begins investing $3,600 per year at age 25 for 15 years at an 8 percent interest rate and then stops, she will have earned $1,050,000 by age 70, Johndrow says.
If another investor begins investing $3,600 per year at age 40 and does it for 30 years at an 8 percent interest rate, she will only have earned $450,000.
Mitigate your risk with diversification. Although you can’t completely remove risk, it’s been historically shown that when you diversify with more asset classes you may be able to get a better return, Johndrow says. If one holding or particular sector of the market underperforms, other investments will hopefully help balance out the rest of the portfolio.
To mitigate the risk, John Burke, president at Burke Financial Strategies in Iselin, New Jersey, says investors need to stay in the stock market a minimum of three years.
“If you go back to 2008 when people invested at the worst time, you had to wait three years to get your money back,” Burke says. “We don’t know if today is the day the market is going to go through one of those spells, but at least you’ll get your money back over the long run.”
Just don’t treat investing in the stock market like a trip to the casino, says John Knolle, principal at Saranap Wealth Advisors in Walnut Creek, California .
[See: 9 Under-the-Radar Ways to Buy Financial Stocks.]
“Many new investors are looking to make it big and fast when investing in the stock market for the first time,” Knolle says. “They often chase returns and search for the next hot thing. It’s not a single night in a casino where you either go big or go home.”
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5 Reasons to Invest in the Stock Market originally appeared on usnews.com
