At The Motley Fool, we're all about long-term investments in the stock market. But why invest in the stock market over gold, real estate, bonds, or any other kind of investment?
The answer lies in the long-term returns stocks can give investors who are willing to ride out the wild ride. Understanding how investors can make more money investing in stocks can be key to success as investor.
Stocks beat bonds long term
If you only remember one reason to invest in stocks, it should be this: Stocks outperform bonds long term.
Below is a table of return data for a number of time frames from Aswath Damodaran at the Stern School of Business. As you can see, over very long periods of time, stocks have averaged much higher returns than both short- and long-term treasury bonds. But even over a shorter time frame, like the past decade, stocks have outperformed, including the worst recession in most of our lifetimes.
|
Average Annual Return |
S&P 500 |
3-Month Treasury Bond |
10-Year Treasury Bond |
|---|---|---|---|
|
1928-2014 |
11.53% |
3.53% |
5.28% |
|
1965-2014 |
11.23% |
5.04% |
7.11% |
|
2005-2014 |
9.37% |
1.44% |
5.31% |
Source: Aswath Damodaran at Stern School of Business with data from FRED.
This doesn't mean that investing in stocks won't cause some heartburn -- the financial crisis showed that. The greater returns for stocks can only be realized if you buy and hold stocks through good times and bad, so if you can take the long-term view, you'll likely make more money holding even an index fund than treasuries.
A liquid investment with no effort
Lots of alternative investment strategies have become popular over the past decade. For example, gold became a hot commodity for a while and flipping houses has made and lost many fortunes. But if we look at the long-term price of gold and the movement in the Case-Shiller Home Price Index, we can see that the best return has been in stocks.
The great thing about stocks is that, unlike an investment in real estate, there's no work involved. There's no mortgage, no angry renters, no maintenance cost; you can just buy an index fund and forget about it.
What better reason to love investing in stocks than a zero effort return that beats alternative investment options?
Stocks get all the upside
The best-case scenario for owning bonds is that you get your money back with a little interest (very little at today's interest rates).
The nature of corporate structures is that bond investors are first in line if a company goes bankrupt, but they're last in line if a company performs well and earns more than what's known as its cost of capital. In short, stock investors get all of the upside from a company's growth.
Of course, the flip side is that the downside risk is 100% of your investment, but with a diverse portfolio or an index fund you can mitigate some of that risk.
Invest in stocks long term
If you have a long time horizon, you should be investing in the stock market. Stocks simply provide the greatest returns for investors, even after accounting for major downturns like we saw in 2008 and 2009. That higher return is why investors should invest in stocks over bonds or other alternative investments that have much lower long-term profit potential.
