It is normal to have initial reservations about stuff we are not familiar with. It’s very easy to stay in your comfort zone, especially if it works just fine and you’re satisfied with your current way of living and you don’t explore your options that much. Yes, braving into the unfamiliar can be quite daunting, but sometimes staying on the safe side makes us miss out on many potential wonderful opportunities!
Take for instance the stock market. Oops! Hold on there, stay with us here for a little bit. Many people are likely to be first intimidated by the idea of the stock market, let alone invest in it! Sure, the idea of complex ups and downs, and potentially losing money can get people to back out.
Learning about the stock market is like going on a first date with someone. You’re unsure of it, and you get a little nervous, but things could work out in the end and you’d be thankful you tried it out!
Why Should You Care About the Stock Market?
There are a few reasons why you should care about the stock market. The reasons have to do with inflation, growth, and diversification. Let’s explore them in detail below.
1. Investing in the Stock Market Helps You Keep Up With Inflation
Certified Financial Planners strongly advise people to start investing in the stock market as early as possible. They agree that investing may seem risky, but not investing could be riskier when you consider long-term inflation.
Inflation is the overall increase in prices and the decrease in people’s purchasing power. For instance, 10 years ago, apples (and we’re not talking about your iPhones!) could have cost you $1 per pound. Now, the same apples will probably cost you $1.70 to $2 per pound. So, what happened? Inflation happened. Let’s just say your five cents now can’t buy as much as your five cents 10 years ago, and this will continue to happen within the foreseeable future.
How exactly does investing help? Let’s say you have $10,000 worth of savings in your bank account. Yes, it earns interest, but only to a minimal extent. This $10,000 may not enable you to buy the same things in the same quantity 5 or 10 years from now. Investing in the stock market helps you keep up with inflation because stock investments offer higher potential returns which increase the value of your investments. So, for instance, if you invest your $10,000 today, its value 10 years from now may double, triple, or… who knows?
2. Stocks Have Proven to Offer the Most Growth Potential
It’s hard to time the market and predicting a stock market bottom is impossible. However, studies have shown that stocks have earned more than bonds in the longer term. Based on the tracking by securities rating agencies and market experts Standard and Poor’s, historically, stocks have provided about a 10% annual return on investment in the last 90 years. In contrast, bond investments returned about 5.3% and money market investments returned roughly 3.5% annually.
Isn’t this just perfect when you’re saving for something you want in the far-off future like retirement? All you have to do is invest your money today and harvest all the fruits of your (or your fund manager’s) labor when you hit the big 6-oh!
3. Stocks Are Not Perfect and You Don’t Have to Put All Your Money in Them!
You just couldn’t have it all, can you? While stocks have shown to offer more opportunities for return, it is riskier as you have to ride with the ups and downs of the stock market. As Spiderman once said, with great power comes great responsibility. In this case, with great return comes great risk!
Not the aggressive type? Good news! You don’t have to invest everything in stocks. There’s this thing called diversification where you can choose how much you invest in stocks, bonds and other investments depending on how much risk you are willing or able to take. My personal favorite is real estate investing.
A thing to keep in mind, though. Don’t invest too conservatively (a.k.a. staying on the safe side). Market analyses have shown that more conservative investment mixes (skewed more toward bonds and short-term investments, rather than stocks) have less growth than those with a more aggressive mix (those that contain more stocks). As they say, go big or go home.