During the last year or two you’ve managed to save some money, which is of course great! The question becomes do you let it sit in a bank savings account earning almost nothing in interest income, or do you take the chance to earn more on your money and invest in the stock market now? The stock market is the single greatest wealth creator in the world but there can be risk associated with investing. In order to help you decide to invest in the stock market now, let’s consider the pros and cons of investing in stocks.
Anytime you start to invest in the stock market you need to consider the question: Is now a good time to invest in stocks? Weighing the pros and cons of investing in stocks is a great place to start but it is great to consider alternative investments as well.
First the Cons of Investing in the Stock Market:
- You can lose money in the stock market as your returns are not guaranteed. When you give a bank your money to invest in a certificate of deposit, the bank it will give you your principal back at a later date plus interest. When you invest in the stock market now by buying a stock you are doing so with the belief that it will appreciate in value. Although savvy stock investors have a good chance of picking stocks that appreciate in value, even the best stock investors sometimes lose money. If you can’t handle picking a stock that loses value, then you shouldn’t invest in the stock market now.
- Stock values can fluctuate significantly on a day to day basis, which can be troubling to watch at times. Although the returns on investments in stocks is attractive over the long run, on any given day your stocks can lose 2% to 5% of their value. If you are the type of person who cannot handle short term volatility, you should not invest in the stock market now.
- Building real wealth in the stock market occurs slowly over time. It is not a get rich quickly scheme. You may read many advertisements about getting rich by investing in the stock market, but if it is too good to be true, it probably isn’t true. Real wealth from the stock market is made by buying high quality companies whose products you likely use frequently and holding them for long periods of time. If you are looking for a get rich quickly scheme, look somewhere other than the stock market.
Now the Pros of Investing in the Stock Market
- The stock market is a great place to build wealth for the patient investor over the long run (defined as five to ten years, or more). Major stock market averages have returns approaching 10% a year for the past 100 years. Very few investments have the history of that level of return. A return of 10% a year transforms $10,000 into $26,000 over a ten-year period. That is a fantastic return. And remember that is just the average return and many savvy investors can do even better.
- The stock market is very liquid, meaning you can buy and sell most stocks instantly at their current value. Unlike a bank certificate of deposit that you need to hold to maturity or risk penalty, you can buy or sell stocks just about any weekday at minimal to no cost.
- Anyone can invest in the stock market. You don’t need any special training or education. Although you want to understand the company of the stock you are buying or selling the actual act of trading stocks can be done very easily.
- You can get started with very little money. Someone who wants to invest in the stock market now can buy just one or two shares of a company if they are just starting out. As you save more money over time that you want to invest in the stock market, you can add shares over time.
- Investing in the stock market can be a great hedge against inflation. If stocks are returning approximately 10% per year on average and inflation is running approximately 2% per year, that means that your net worth is increasing in real terms and not being eaten away by higher prices for goods and services.
Is Now a Good Time to Invest in Stocks?
Based on the pros and cons of investing in stocks listed above, Is now a good time to invest in the stock market for you? Do you identify more with the pros or will you worry too much about the cons? There is no right or wrong answer. Each individual must decide for themselves based on what feels right for them. If you are still undecided, why not take a small amount of your savings, say 5% to 10% and invest it in the stock market to see whether it feels right to you. You can always raise or lower the amount of money invested in the stock market based on your experiences over time.
