What Skipping Stocks Costs You

By Dan Caplinger | September 10, 2012

For nearly 20 years, The Motley Fool has sought to help ordinary people become better investors. Much of the advice that we've offered shares a common theme: The stock market gives you the best opportunities to increase your wealth over the long haul and achieve the financial goals that are important to you.

We're taking this month to get back to basics in hopes of getting everyone up to speed on the fundamentals of investing. Given how many people haven't received any financial education at all, taking action and explaining the complicated world of finance in simple terms is time well-spent in my book.

Should you own stocks?

One issue that has received a lot of attention in recent years is the trade-off between risk and return in investing in the stock market. 2009's financial crisis culminated a decade of weak performance for the stock market. Even worse, it included two massive bear markets that saw investors lose huge chunks of their investment portfolios.

In response to what many have dubbed the "lost decade," investors left the stock market in droves. Yet that simple move out of stocks has cost investors plenty. Take a look at the math over several different timeframes:

• Many see September as the scariest month for investors. Yet if you got out of stocks on Aug. 31, you've missed out on a move that has sent the Dow Jones Industrials (INDEX - ^DJI) up 2% and the S&P 500 (INDEX - ^GSPC) up more than 2% -- in just a week's time. Admittedly, market-moving events like Europe's and China's separate efforts to shore up their economies don't happen all the time, but they do serve as an example of how trying to time the market can lead investors to miss the best days of positive performance.
• Coming into 2012, many believed the flat returns of 2011 pointed to the end of the bull market. Yet so far this year, the Dow has enjoyed a 9% return, beating the pants off bank accounts yielding 1% or less.
• In early 2009, many investors thought stocks would go to zero and were willing to get out of the market at all costs. Yet the Dow and S&P 500 have more than doubled from their worst levels.

Now I know what you're thinking: Looking at performance when stocks are at four-year highs isn't entirely fair. But even if you go back 13 full years to when the stock market was trading at all-time highs, you'll find plenty of stocks that have put up strong performance numbers. PepsiCo (NYSE - PEP) has ridden the stable snack and beverage business to annual returns of more than 8% since 1999, due in large part to the spread of its popular products across the globe. Similarly, even though Apple (Nasdaq - AAPL) unquestionably benefited from the tech boom of the late 1990s, its biggest gains didn't come until the development of the iPod in the early 2000s, followed by its equally lucrative iPhone and iPad descendants. Apple's stock has jumped more than 35 times since the frothiest days of the tech boom in 1999.

The best reason to look at stocks now

To me, though, looking backward doesn't prove that stocks are a smart buy now. Rather, the most convincing argument comes from looking forward.

Despite the big bull run in stocks over the past several years, you can still find plenty of values in the market. Apple, for instance, has a share price that's only 16 times its rapidly growing earnings -- and, as our top analysts explain in their recent in-depth report on Apple, that doesn't even include the likely impact of the coming iPhone 5. Rock-solid stocks like oil behemoth ExxonMobil (NYSE - XOM) offer earnings yields of more than 10% -- head and shoulders above what you'll get from bonds and bank CDs. On the whole, the market's valuation is quite reasonable on a trailing basis. Although some would argue that you should incorporate 2008's market meltdown into the equation, it's important to remember that stock values are based on future results, not past ones.

So even if stocks make you nervous, they still represent the easiest path to personal wealth. With bond yields near record lows and most other investments offering equally poor future prospects, owning the right stocks can make a huge difference in your way of life for years to come.