There's a host of reasons so many Americans aren't invested in the stock market. For some, it boils down to a lack of money. For others, it's a matter of fear. Either way, these folks are missing out on a key wealth-building opportunity, which they'll no doubt come to regret.
Now there is some good news here. Though countless Americans aren't invested in stocks, a good 52% say that they plan to add stocks to their portfolios -- just not right away. That was the sentiment expressed in an Ally Invest study, which also found that 60% of adults feel they'll somehow be more financially secure in the future -- they're just not sure when or how.
IMAGE SOURCE: GETTY IMAGES.
Of course, the irony here is that while most Americans are acknowledging that they'll need to get their financial act together, they're failing to take one major step that could help get them on track immediately: investing in stocks. And the sooner they stop putting off those stock investments, the better shape they're likely to land in.
Don't miss out on a key opportunity
The reason we're all encouraged to invest in the stock market is that it's one of the most effective ways to generate a decent return without exposing ourselves to needless risk. Of course, this isn't to say that the market is devoid of risk, either. Stocks are certainly a more volatile beast than bonds, and compared to savings accounts, they're exponentially dodgier.
So why take the chance on stocks? It's simple: If you don't, you'll stunt your long-term savings' growth and wind up with less money at a time in your life when your options for earning more are limited at best. I'm talking about retirement, and what many folks don't realize is that the key to living comfortably on a fixed income is having an adequate nest egg to draw from. But without stocks in your portfolio, your chances of getting there grow increasingly slim.
Just how much of a hit might your portfolio take if you shy away from stocks? Imagine you're able to set aside $500 a month for retirement over a 30-year period during your career. Here's what your ending balance might look like, depending on where you put your money:
|
Portfolio Mix |
Average Annual Investment Return |
Total Accumulated Over 30 Years (Assumes a $500 Monthly Investment) |
|---|---|---|
|
Mostly cash |
2% |
$243,000 |
|
Mostly bonds |
4% |
$336,000 |
|
Stocks and bonds |
6% |
$474,000 |
|
Mostly stocks |
8% |
$680,000 |
Data source: author.
The crazy thing about the numbers above is that they're coming as the result of the same out-of-pocket contribution ($180,000 in total) and savings window. The only variable we're working with is return on investment. But check out the difference between a stock-heavy portfolio and one whose assets are mostly sitting in cash. With the former, we're looking at a $500,000 gain. With the latter, we're talking $63,000. All told, you'd wind up with $437,000 less in retirement in our example by choosing cash over stocks.
Now let's circle back to the fact that most Americans are, in fact, planning to buy stocks at some point. Better yet, let's be optimistic and say that the typical worker who saves money over a 30-year period ends up buying stocks 10 years in, but keeps his portfolio mostly in cash up to that point. If we assume a $500 monthly investment, then by the end of that first decade, that individual will have roughly $66,000. If that worker then shifts to a stock-focused strategy for the remaining 20 years, he'll have $582,000 in time for retirement -- not a bad comeback.
On the other hand, that's basically $100,000 less than what a stock-focused strategy from the start would've resulted in. And that's a lot of money to give up.
If you're planning to invest in the stock market eventually, and haven't done so because you're skittish or feel you lack the knowledge to move forward, it's time to change that outlook immediately. Contrary to what you may have been led to believe, you don't need to be an investing genius to make money from stocks. If you truly know nothing about the market, and have no idea how to choose companies to invest in, don't. Rather, load up on ETFs, or exchange-traded funds, which allow you to track different market indexes and benefit when conditions are favorable. Unlike individual stocks, ETFs offer instant diversification, so they're typically less risky across the board.
No matter your age or goals, if you're hoping to attain financial security down the line, you'll need to accept that stock investments are a big part of the answer. And the sooner you do, the more you stand to benefit.
