Investing wisely is essential if you hope to build wealth. Unfortunately, many Americans are making a huge mistake when it comes to investing. In fact, a recent Gallup poll found just 21% of Americans viewed stocks as the best investment.
And while it's understandable that a large majority are wary of putting their money in the market -- especially in light of the recent market volatility -- the reality is that history shows stocks really are the best option for most people. If you aren't putting money into them, you could be setting yourself up for a lot of financial challenges.
Americans are becoming less confident in the market -- and that's a bad thing
The number of Americans who are worried about putting their money into the market has always been higher than it should be, but COVID-19 has only made things worse.
In fact, Gallup's most recent poll showed the number of Americans who consider stocks or mutual funds as the best long-term investment was down 6 percentage points after the stock market suffered major declines in March. This brought the number down to the lowest it's been since 2012.
While stocks have fallen out of favor, real estate has consistently been ranked as the best long-term investment. A full 35% of Americans believe it's the best option for wealth building over the long term, and it's consistently held the top place for at least a third of Americans since 2016.
And while savings accounts or CDs and gold aren't viewed as the best long-term investment by quite as many Americans as stocks and mutual funds, they're pretty close. In fact, 17% of people think certificates of deposit are the best long-term investment, while gold is viewed as number one by 16% on the population.
Why stocks are the best investment
Although it's understandable that the public may have felt hesitant about stocks after the market suffered major losses in March, it recovered very quickly throughout April and May. This fast rebound reinforced what's always been true about the stock market -- given enough time, it always recovers what it has lost.
In fact, the stock market has consistently produced 7% average annual returns after adjusting for inflation. While real estate can provide similar returns, or even beat the S&P 500 in some cases, it has some notable downsides if you're buying physical properties, including being much less liquid, requiring more up-front cash to get started, and involving a larger investment of time (REITs eliminate some of these downsides, but they're technically stocks). And CDs tend to provide much lower returns, while gold presents a lot more risk.
Stocks, on the other hand, can be quick and simple to buy and sell, and you don't need much money or much knowledge to get started investing in them.
How to invest in stocks
Hopefully, you're now convinced that investing in stocks is the best approach to building wealth. If you are, but don't want to take the time to learn about picking individual stocks, the good news is that there's a really easy way to get your money into the market.
You can buy index funds that give you exposure to different asset classes. This will help you diversify quickly with minimal risk so you can maximize the chances of earning the same returns stock market investors have historically earned.
You'll also want to be sure that you aren't investing money you'll need in the next few years, that you watch the fees you pay, and that you don't react to downturns by pulling your money out. If you can fulfill these basic rules of investing, putting money into the market should pay off for you in the end -- far more than opting for other investments such as real estate or gold likely would.