Quick -- why are you investing? Here are some possible answers:
- To make enough money to endow a wing of a hospital.
- To make enough money to buy a big-screen TV.
- To earn a bigger return than Shirley next door and show her who's smarter.
- For the intellectual thrill of it.
- Because you're bored.
Are any of those your reasons? I didn't think so. Our friends at Scottrade recently released the results of their 2007 American Investor Study, which included the top reasons why many people are entering the stock market. Here they are (and note that respondents could choose more than one answer):
- 56%: to save for retirement.
- 51%: to build a nest egg for themselves or their family's futures.
- 32%: because it's an obligation, "just something I need to do."
- 27%: to save for a "rainy day" fund.
- 27%: because it will be fun and interesting.
- 23%: to reduce debt.
- 18%: to save to buy a new home.
- 17%: to save for educational expenses.
These mostly make a lot of sense to me. Retirement is something we all need to plan and save for. (Test-drive our Rule Your Retirement newsletter for free.) Emergency ("rainy day") funds are critical, because bad things happen sometimes. Here are two cautions I'd like to offer, though.
First off, if you're investing to pay off your debts, be careful. The stock market has averaged 10% annually over long periods, but that doesn't mean you'll make that much year in and year out. If you're paying more than those rates on your debt (such as 25% on some credit cards, which isn't all that unusual, shockingly), you'd be much better off using any available cash to pay off your debt before entering the market.
Next, if you plan to buy that home or pay for that schooling within a few years, the stock market isn't the best place for your money. In the short term, it could crash or slump, taking your savings with it. In the long run, it's likely to go up. Learn how to invest short-term money by visiting our Savings Center.
But if you've got long-term goals you're trying to meet, stocks are the way to go. If you're just starting in the market, consider a simple broad-market index fund, such as the Vanguard Total Stock Market Index