Why Should I Invest?
Investing is a way of using your money to potentially make more money in the future. Instead of just spending your money on things you want right now, investing involves buying things like stocks, bonds, real estate, etc. with the hope that they will grow in value over time. The goal of investing is to build wealth and achieve financial goals such as saving for retirement, buying a house, or funding education. By investing wisely and being patient, people can make their money work for them and grow over the long term.
Why invest in stocks?
Do you want the good news or the bad news first? The good news, of course.
Owning stocks has been a reliable way to increase your savings in the long run. As jittery as one might feel about the latest news headlines, there is just no comparison between keeping money in the bank and buying and holding a basket of American companies’ shares.
If you had invested $100 in the stock market at the beginning of 1928, less than two years before it crashed and the Great Depression began, it still would have turned into more than $500,000 by the end of last year. Putting the same amount in super-safe U.S. Treasury bonds would have left you with roughly $500.
The bad news? You have to put up with some scary moments to capture stocks’ amazing returns. Over that period there have been more than 21 bear markets, defined as at least a 20% drop in the S&P 500 stock index from peak-to-trough. And there have been at least 33 corrections—drops of between 10% and 20%.
When you put your money in the stock market, you take the bad with the good. It’s hard for people to set the right expectations and think about returns in the long term (over several years).
Investing in stocks is easy, and you can do so with less than $100. Stocks can be bought and sold extremely quickly. The average annual return of the stock market, as measured by the S&P 500, has been around 7% to 10% after adjusting for inflation over the long term. (In contrast, interest rates on savings accounts are typically relatively low, often around 0.01% to 0.10% annually.)
Investing vs Trading
For most Americans, investing is a better choice than trading. Trading is what you’re doing when you play the stock market, and play the Stock Market Game. Some even go so far as to think of trading as gambling. Trading is not investing!
Let’s break down the differences between Trading vs. Investing.
Trading
Trading involves buying and selling financial assets, like stocks or cryptocurrencies, in a shorter time frame, often days, hours, or even minutes. Traders aim to profit from short-term price fluctuations. Trading can resemble gambling because it involves making quick decisions based on uncertain outcomes. Students playing the stock market game are trading.
Investing
Investing is a longer-term strategy where individuals buy assets with the expectation of holding onto them for a significant period, typically years or decades. Investors focus on the fundamental value of assets and aim to grow their wealth over time through capital appreciation, dividends, or interest payments.
Investing allows individuals to build wealth steadily over time, benefiting from the power of compound interest and long-term market growth.
Invest for Retirement Planning
According to financial experts, Americans need to save a substantial amount for retirement to maintain their standard of living. For example, some financial advisors suggest having at least 10x your final salary saved by retirement age. However, many Americans fall short of these savings targets, with studies showing that a significant portion of the population has insufficient retirement savings by various ages. Remember, investing is a marathon, not a sprint. It’s about making informed decisions, staying patient, and focusing on the long-term growth of your wealth rather than chasing short-term gains.
Invest for Financial Goals
Investing can help individuals achieve various financial goals, such as buying a home, funding education expenses, starting a business, or taking a dream vacation.