Many investors have seen their portfolios rise phoenix-like from the ashes. But the biggest damage from the market meltdown may still be yet to come.
Clearly, the majority of investors significantly invested in the stock market during 2008 and early 2009 didn't enjoy the spectacle of their ravaged portfolios. Even with the big rebound we've seen over the past year, many investors still have yet to catch up to where they stood in 2007, before the markets began to plunge.
However, the impact of stocks' lost decade on investor confidence may prove far more powerful, potentially persuading future generations of investors never to invest in stocks at all. That could spell disaster for their financial prospects for decades to come.
Pulling the trigger
Even when you're not scared about the possibility of a market cataclysm, beginning to work toward a major financial goal like saving for retirement takes a fair amount of effort. Consider:
- Before you can even start, you need to find a way to invest your money, whether through a discount brokerage account or a mutual fund company.
- Once you have that set up, you have to decide on how to allocate your money across a range of thousands of different types of investments.
- Then you need to come up with the cash to invest every month. Even the most diligent budget-using households may still find it difficult to come up with cash for regular investments -- especially when times are tight.
Moreover, starting is just the first step. You also have to keep constant tabs on your portfolio to make sure nothing goes wrong.
Why you need to start now
Given all those obstacles, it shouldn't surprise you that many people never bother to do anything more complicated than throw their extra money in a savings account somewhere. With such an uncertain payoff, building a comprehensive investing plan may well not seem like it's worth the effort.
In particular, the financial crisis has convinced many people that investing in the stock market is a losing proposition. With major stock indexes having produced zero returns over the past 10 years, that attitude is easy to understand. People want an incentive for making investments -- one that simply hasn't been there recently.
Even with these objections, though, the simple fact is that you can't afford not to invest. You need to start now before it's too late -- and stocks need to be part of your investing plan.
Why you need stocks
The sad fact is that conservative investments can't produce high enough returns for most investors to meet their goals. Investments like bank CDs and Treasuries may be backed by the U.S. government, but their tiny returns won't move you quickly toward your goals. Add the impact of inflation and taxes, and you'll be lucky to end up with any returns at all.
In contrast, stocks in nearly all sectors of the economy have provided strong long-term returns, even considering the stagnant period over the past decade:
|
Stock
|
20-Year Average Annualized Return
|
|
Dell (Nasdaq: DELL )
|
29.9%
|
|
United Technologies (NYSE: UTX )
|
14.8%
|
|
Johnson & Johnson (NYSE: JNJ )
|
14%
|
|
American Express (NYSE: AXP )
|
11.7%
|
|
Target (NYSE: TGT )
|
13.2%
|
Source: Yahoo! Finance.
Of course, many stocks have fallen short of these returns. Struggling companies like Eastman Kodak (NYSE: EK ) , for instance, haven't been able to avoid losses. Hard-hit financials like Bank of America (NYSE: BAC ) have seen more modest returns, although their recovery since last year's market lows has been nothing short of phenomenal.
Historically, stocks have produced returns of between 8% and 10% annually. But even if you rein in your expectations to the 6%-8% range, you'll still see your money grow much more quickly with stocks than with other investments -- and unless you're able to save huge amounts of money, you'll need every bit of return you can get.
Get started right away
If you haven't already done so, contributing to an IRA is the best way to get started with your investing. IRAs give you a great deal of flexibility to pick whatever investments are right for you, along with unique tax breaks you won't find anywhere else. But with an April 15 deadline for making contributions for the 2009 tax year, you can't afford to wait to get started.
The financial crisis may drive some investors out of the stock market entirely. But you don't have to sacrifice your financial dreams. Get started with an IRA today and get yourself on the path toward a brighter future.
For more information on IRAs, check out the resources at the Motley Fool's IRA Center.
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