The stock market has created an enormous amount of wealth over the years. On average, the S&P 500 -- which consists of 500 of the largest U.S. publicly traded companies -- has returned 8% to 12% per year. At that rate, only $10,000 invested in the stock market 50 years ago would have grown into more than $380,000 today.
However, be aware: The stock market doesn't go up every year. The S&P 500 typically falls three out of every 10 years. Some of those drops can feel quite brutal, and that level of volatility is not for everyone. But if you can manage your fear, stocks have the potential of earning significantly higher returns than other investment options over the long term.
What are the benefits of investing in stocks?
There are many benefits to investing in stocks. Seven big ones are:
- The potential to earn higher returns than alternatives like bank CDs, gold, and government bonds.
- The ability to protect your wealth from inflation, as the returns often significantly outpace the rate of inflation.
- The ability to earn regular passive income from dividends.
- The ability to own a tiny slice of a company whose products or services you love.
- The ease of buying and selling, which makes stocks a more liquid investment compared to other options like real estate.
- The ability to diversify a portfolio across many different industries.
- The ability to start small. Thanks to $0 commissions and the ability to buy fractional shares with many online brokers, investors can begin purchasing stocks with a little bit of money.
Is there any reason not to invest in stocks?
Stocks are not without their drawbacks -- the biggest of which is volatility. On average, the stock market declines 10% from its high roughly every 11 months, 20% about every four years, and more than 30% at least once a decade. Investing in stocks isn't for everyone. Consider these valid reasons not to buy stocks:
- You can't stomach the thought of a more-than-10% decline in your investment.
- You need the money within the next three to five years for a down payment on a house or other large planned purchase.
- You're retired or nearing retirement and need a fixed income stream more than the capital appreciation potential offered by stocks.
Beyond volatility-related concerns, there are other reasons to avoid stocks:
- You have a lot of high-interest-rate debt like credit card debt. Paying off this debt can often yield higher returns than buying stocks.
- You don't have an adequate emergency fund. Having enough cash on hand to cover an emergency expense can prevent you from needing to borrow money on a credit card.
- You don't have the time or desire to research stocks to buy.
Why should you start investing ASAP?
While there are some valid reasons not to buy stocks, the upside potential outweighs the risk for most people. Therefore, it's almost always a good idea to invest in stocks, even when the market is at an all-time high. Studies have shown that what's more important than timing the market is an investor's time in the market. Holding out for the right time to buy stocks can be costly, because a large portion of gains come from a small number of days.
Meanwhile, stocks tend to recover from corrections -- declines of more than 10% -- in a matter of months. Thus, the longer an investor is in the market, the lower the probability of losing money.
Equally important to time in the market is picking the right stocks to buy. As Motley Fool co-founder David Gardner puts it, "It doesn't matter when you invest if you are investing in great companies." A minority of stocks account for the majority of the market's overall return. That's why it's better to buy stock in a great company as soon as you can than to wait around for a better price that might never come.
For most people, the time to buy stocks is right now
Those who have money they won't need for a few years should consider investing in stocks to produce the highest returns. Waiting to invest that money is more likely to have a negative impact on an investor's returns than a positive one, which is why the best time to buy shares of a great company is almost always right now.