People who don't invest in the stock market usually have one of two excuses as to why: Either they don't have the money to invest, or they're afraid of losing the money they have. If you happen to fall into the latter category, you're certainly not alone. The stock market has always been volatile, and nobody wants to work hard, save money, and lose it all in a major downturn. But if fear is what's been keeping you from putting money into stocks, here are a few good reasons to change your thinking.
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1. The stock market has a strong history of rebounding
There's nothing like the words "stock market correction" to send earnest, would-be investors running for the hills. Corrections, which are periods when stock values fall at least 10%, are fairly common. However, they also don't tend to hurt investors who are in it for the long haul. Between 1965 and 2015, the S&P 500 underwent 27 corrections of 10% or more, yet it ultimately recovered from each and every one of those corrections. If your investment strategy is to get in and get out quickly, then yes, you might get burned by the stock market. But if you're willing to invest your money for 10 to 20 years or more, you stand a strong chance of coming out way ahead.
2. You need stocks to outpace inflation
The value of money isn't constant, and thanks to an ugly little beast known as inflation, the money you have today may not be worth as much 10, 20, or 30 years down the line. One of the biggest challenges retirees face is keeping up with inflation, and the best way to do so is to generate a high enough return on your investments to grow your savings substantially. But to accomplish that goal, you need to invest in something that will deliver those sizable returns -- namely, stocks. While there's typically more risk inherent in stocks than there is in bonds, stocks have historically outperformed bonds. Between 1928 and 2010, stocks averaged an 11.3% return, while bonds averaged just 5.28%. That gap makes a huge difference when it comes to saving for retirement.
Imagine you're able to sock away $200 a month for retirement over the course of 30 years. If your investments average an annual return of just 5.28%, you'll be left with an ending balance of $167,000. But if your investments average an annual return of 11.3%, you'll have a cool $506,000 to work with. If you want to increase your chances of outpacing inflation and enjoying a financially comfortable retirement, you need to give your money a real opportunity to grow by putting it in stocks.
3. You can always diversify
If you don't know much about stocks, choosing individual companies to invest in can be a nerve-wracking prospect. Make the wrong call, and you could lose money regardless of how the market performs on a whole. Instead of buying individual stocks, you might instead consider an index fund. Index funds are investment funds that attempt to match the performance of a given index. Unlike actively managed mutual funds, which tend to come with high fees, index funds have lower expense ratios because they're passively managed. Index funds essentially offer built-in diversification, which can help minimize risk. A good place to start is the Vanguard 500 Index Fund (VOO -0.60%), which invests in S&P 500 stocks.
If you're going to invest in stocks, be sure to do so with money that you don't foresee needing in the near term. In other words, stocks are a bad place to put your emergency cash, which should be accessible at all times. Rather, you should use the stock market to build up savings to meet your long-term goals, like retirement.
Finally, while it's always a good idea to keep tabs on your investments, if your stocks are part of a long-term strategy, don't spin your wheels checking your portfolio balance on a daily basis. You're pretty much guaranteed to have some up days and some down days, and it's the latter that can really drive you crazy. Remember, the only way to lose money in the stock market is to sell off your investments at a loss. If you panic every time your positions go down, you're more likely to make a rash decision -- like liquidating an investment that drops in value -- and lose money in the process. You're far better off investing that money wisely, sitting back, and preparing yourself for what will probably be a bumpy but ultimately rewarding ride.
