There are plenty of reasons people don’t invest, but probably the biggest one is fear. Many feel they simply don't have the knowledge to make sound decisions and could lose money because of the risk associated with investing. Others may just not trust the stock market, preferring to put their money into safer solutions.
But it's important to know historically, the numbers show investing can build wealth over time. Multiple financial resources report over the last 20 years the historical average annual return of the Standard and Poor's 500 or S&P 500, is 10.16%, assuming dividends are reinvested. Adjusted for inflation, the 20-year average stock market return including dividends, is 7.41% Compare these percentages to other savings vehicles like regular or high-yield savings accounts and you can see why investing makes financial sense.
More About the S&P 500 Index
The S&P 500 is a stock market index that tracks the performance of 500 of the largest U.S. public companies.
Because it's an index, the S&P 500 can't be traded directly. Instead, investors can invest in mutual funds or exchange-traded funds that track the index.
Understanding Investing Choices
There are many ways to invest, each with its own level of risk and potential return. Some common investment options include stocks, bonds, real estate and mutual funds. Stocks represent ownership in a company, and their value can fluctuate based on the company's performance. Bonds are loans that you make to a government or corporation, and they provide a fixed rate of return over a specific period. Real estate involves buying and selling properties, which can appreciate in value over time. You can do this through buying real estate mutual funds. Mutual funds are pools of investments managed by a professional money manager. There are many types of mutual funds, but the most common are stock, money market, bond and target-date funds.
What's Investment Risk?
Investment risk is an inherent part of investing. The higher the potential return on an investment, the higher the associated risk tends to be.
Different investments carry varying degrees of risk. For example, stocks are generally considered riskier than bonds, as their prices can fluctuate more significantly. Real estate investments can also be risky, as they are subject to market conditions and location-specific factors. Mutual funds, which pool money from many investors to invest in a diversified portfolio, offer some risk reduction compared to individual stocks but still carry some level of risk. Having a mix of these investments can reduce risk.
Why do people invest?
Investing isn't just about making money; it's about securing your financial future and achieving your goals.
Retirement planning is one of the reasons people invest. Retirement may seem eons away, especially if you're younger, but starting early and investing regularly is key. Investing for retirement allows you to accumulate wealth gradually and benefit from compounding interest over time.
Investing can help you reach specific financial goals, like buying a home, contributing to your child’s schooling or taking a vacation. By clearly defining your goals and aligning your investments with them, you can create a financial roadmap to reach those goals.
Investing also offers a hedge against inflation, which erodes the purchasing power of money over time. By investing in assets that outpace inflation, you can grow your wealth.
Making Money Over Time
Investing can generate passive income, providing a steady stream of earnings to supplement your primary income. Through investments like dividend-paying stocks, or bonds, you can create multiple income sources.
Finally, building an emergency fund should also be a part of your investing strategy. Life is unpredictable, and having a high-yield savings or money market account can help you deal with unexpected costs without changing your long-term financial plans.
Stay the Course
While it's easy to react to the day-to-day ups and downs of the stock market, it's important to remember investing is a long-term game.
Trying to predict when prices will go up or down is hard to do consistently and successfully. Instead of trying to time the market, it's better to focus on building a well-diversified portfolio of investments aligning with your risk tolerance and long-term financial goals. This approach can help you weather market downturns and stay on track to achieving your investment objectives.
Rebalancing Act
Rebalancing your investment portfolio is a useful strategy for maintaining your desired asset allocation and managing risk. As your investments perform over time, their values will fluctuate, leading to changes in your asset allocation. Rebalancing involves periodically selling a portion of your high-performing assets and using the proceeds to buy more of your underperforming assets. An investing professional can help with this.
Remember, investing is a journey, not a destination. By knowing why you want to invest and matching your plans with your goals, you can start a path to financial success and achieve the future you want. Stick with the fundamentals and you'll learn more over time.