3 reasons I continue to buy stocks (despite short-term risks)

Buying stocks is central to many investors’ long-term financial strategies, and the stock market is at the center of their daily lives. It’s hard to avoid the latest news about the Dow, the S&P 500, and what’s happening on Wall Street.

I try not to worry about the daily ups and downs of the stock market and not get distracted by loud stock market news. But I think the stock market is fascinating, and I believe stocks are ultimately one of the best asset categories. If you want to save for retirement and build wealth for the future, buying stocks is one of the best ways to do so.

Let’s take a look at some of the big reasons I believe in buying stocks and why you should join me.

1. Stocks tend to provide a high return on investment (ROI) over the long term.

When you invest in stocks, you do so because you (ideally) want your money to grow as much as possible over the long term. In real life it looks like this: The S&P 500 Index has delivered an average annual return of 10.7% over the past 30 years. For example, if you invested $10,000 in the S&P 500 in 1992 and held on to that investment for 30 years, reinvesting the dividends and not panicking or selling your stocks…You will have $170,000.

This doesn’t mean you’ll get the same 10.7% return every year! Far from it. Some years the stock market (and the S&P 500 and other broad market indices) decline by more than 10%. Other years, stock prices rise by more than 20%. You never know what the stock market will do until it’s too late. No one, not even the wealthiest investor on the planet, can predict the future.

But what if, based on the lessons of history and the structure of the global economy in general, we believe that American businesses and hard-working people around the world will continue to innovate, create, produce, and find ways to make more money? You need to buy stocks. Purchasing shares of the S&P 500 or various other stock ETFs can help you purchase the collective effort and ingenuity of millions of talented people around the world. To me, it feels like a risk worth taking.

2. Stocks tend to outperform bonds and bonds.

Sometimes people are worried about the volatility (up and down) of buying stocks and decide to invest in bonds instead. Bonds should be part of the overall portfolio composition of many investors based on their age and time period. Investing in bonds and short-term government debt (such as Treasury bills or other short-term cash equivalents) often feels “safer” than buying stocks, and it may actually be. Sometimes bond prices rise when stocks fall, and sometimes bonds earn a higher ROI than the stock market.

However, over the long term, stocks tend to perform better than bonds or bonds. From 1900 to 2018, stocks in 24 countries consistently outperformed bonds and bonds by an average of 3% to 6% per year, according to an analysis by author and investor Nick Maggiulli. This additional performance boost is known as the “equity risk premium.” Because stocks are riskier than other assets, they can often yield higher returns.

There is no guarantee that stocks will always perform better than bonds or cash. Past performance does not guarantee future results. But in general, if you can tolerate the short-term ups and downs of the stock market, you’re likely to get a bigger return from stocks than you would from bonds, bills, or even the best savings account.

3. Stocks tend to pay dividends

Another good reason to buy stocks is that they tend to pay dividends (a way of sharing profits with shareholders). Not all stocks pay dividends, and dividend yields are not always significant percentages. But every month, I get some money in my IRA account from the profits from the stocks I hold in a stock ETF.

Earning stock dividends feels good. Empty money! And you can set dividends to be automatically reinvested, so a small percentage of a stock’s cash flow is immediately used to buy more shares.

conclusion

Buying stocks allows you to own a small piece of a hugely successful company and share in the future profits of the corporate world, even if you don’t work for the company (like me). Stocks can be risky in the short term and there is significant risk of loss for individual stocks. However, over time, stock markets tend to rise as companies become more successful and profitable, more investors enter the market, the global economy grows, and money makes money.

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