A lot of people could be missing out on strong returns.
Buying stocks is something it pays to do from a young age, despite the risks involved. That's because stocks have historically been able to generate much higher returns than more conservative assets, like bonds. And you might snag a much higher return on stock investments than on the money you have in a savings account or CD.
But in a recent Motley Fool research study, an estimated 42% of Americans do not own stocks. And if you're part of that statistic, you might struggle to meet your financial goals down the line.
Why stocks are so important
An estimated 150 million Americans have money invested in stocks. But if you're not one of them, you could be losing out. It’s important to invest in stocks because you have the potential to generate strong returns. And you'll need those returns to outpace inflation in the context of saving for long-term goals, like retirement.
Now, you may be scared to load up on stocks in your brokerage account or IRA for fear of losing money, since the stock market tends to be quite volatile. But there are steps you can take to mitigate that risk.
First, adopt a buy-and-hold strategy. Don't plan to cash out your stocks shortly after acquiring them. Rather, plan to hold them for many years or decades. Stock values can fluctuate a lot -- and drop -- from one year to the next. But in the long run, the stock market tends to reward investors who stick with it.
Also, focus on quality stocks over those that are buzzy and get a lot of press, like meme stocks. Look at companies that have been around for a long time and have continuously found ways to offer value to customers.
And always,always do your research before adding a stock to your portfolio. You'll want to look at factors like how well a company manages its cash and debt, among others, to see if it's a good buy.
You'll also want to look at growth potential. Does the company have a lot of new products in its pipeline? Is it constantly trying to innovate? These are other key factors that indicate whether a stock is worth investing in or passing over.
You can buy stocks in buckets instead of individually
The idea of hand-picking stocks on an individual basis may seem daunting to you. If that's the case, ETFs, or exchange-traded funds, may be a better bet.
When you buy ETFs, you're buying a whole basket of stocks, so to speak, with a single investment. That means you get the benefit of instant diversification in your portfolio without having to research dozens of companies at a time.
There are different types of ETFs you can look at, from those that effectively encompass the entire stock market to those that track a specific sector of it. Think about what's best for your portfolio when making your choice.
It's easy to see why stocks might seem overly risky to some investors. But if you don't buy stocks, you'll take on another risk: not generating a high enough return to meet your personal financial goals. Keep that in mind if you've shied away from stocks thus far and aren't particularly inclined to change your ways. And look at ETFs if that makes you more comfortable diving into stocks.
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While about 150 million Americans own stocks, an estimated 42% of U.S. adults do not. If you don't put at least some of your money into stocks, you might miss out on strong returns and fall short of meeting your financial goals. If you're worried about hand-picking stocks
picking stocks
Active stock-picking is the investing approach where an individual investor or a fund manager meticulously selects specific stocks to invest in, one by one.
All told, institutional investors—that is, primarily pension funds—control close to 40% of the common stock of the country's large (and many midsize) businesses. The largest and fastest growing funds, those of public employees, are no longer content to be passive investors.
About 90% of investors lose money trading stocks. That's 9 out of every 10 people — both newbies and seasoned professionals — losing their hard earned dollars by trying to outsmart an unpredictable and extremely volatile machine.
Purchases and sales of U.S.-domiciled securities may result in foreign exchange costs every time there is a transaction. In addition, there may also be foreign exchange charges whenever a dividend is paid from the U.S. security. Over time, this can become a significant cost to your returns.
Again, you technically don't lose any money in the stock market unless you sell your investments. If you simply hold your stocks until the market rebounds, your stocks should regain their value. The key is to ensure you're investing in strong stocks that have the ability to weather market turbulence.
The richest Americans own the vast majority of the US stock market, according to Fed data. The top 10% of Americans held 93% of all stocks, the highest level ever recorded. Meanwhile, the bottom 50% of Americans held just 1% of all stocks in the third quarter of 2023.
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market manipulation.
Values fluctuate, but you are holding stocks, not money. It only becomes money again when you sell it. If you sell your stocks for less than you paid for them, only then have you lost money. That lost money went to the owner of the stock that you bought at the time you bought it.
So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock.
Another reason why day traders tend to lose money is that it's very different from long-term investing. While traders take advantage of price swings (which means they have to make specific predictions), investors tend to buy a diversified basket of assets for the long haul.
You should not invest money in the stock market when you have immediate financial needs, high-interest debt, or lack an emergency fund. Investing should be for long-term financial goals, and it's important to have a stable financial foundation before risking capital in the market.
But there are no guarantees of profits when you buy stock, which makes stock one of the most risky investments. If a company doesn't do well or falls out of favor with investors, its stock can fall in price, and investors could lose money. You can make money in two ways from owning stock.
Stock market investments have proven to be one of the best ways to grow long-term wealth. Over several decades, the average stock market return is about 10% per year. However, remember that's just an average across the entire market — some years will be up, some down and individual stocks will vary in their returns.
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
Look into options like bonds, treasury bills, or other fixed-income securities, as they tend to be more stable during market downturns. Additionally, consider investing in alternative assets like real estate, commodities, or even cryptocurrencies, which can have different market dynamics compared to traditional stocks.
“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”
Your pension money is invested to help it grow, so you get more income when you retire. It's likely a sizeable part of it will be invested in the stock market.
The 100-minus-your-age long-term savings rule is designed to guard against investment risk in retirement. If you're 60, you should only have 40% of your retirement portfolio in stocks, with the rest in bonds, money market accounts and cash.
The traditional investing strategy for a pension fund is to split its assets among bonds, stocks, and real estate. An emerging trend is to put some money into alternative investments, in search of higher returns and greater diversity.
Introduction: My name is Rev. Leonie Wyman, I am a colorful, tasty, splendid, fair, witty, gorgeous, splendid person who loves writing and wants to share my knowledge and understanding with you.
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