For many new investors, stocks are like the Tango – highly seductive, exciting to watch, but intimidating to actually try and do without a trusted partner to teach you the basic steps.
Studies indicate that Millennials are doing less investing in the stock market than previous generations. The reality is that, despite the risks, stocks remain one of the time-tested building blocks of personal wealth, stable retirements, and the generational transfer of assets.
As part of our Financial Literacy discussion, we’d like to offer some thoughts from the point of view of Personal Finance Managers for those of you who want to understand the value of investing in stocks.
Time is your most important asset.
For our clients in their 80s, 90s, and 100s, a key differentiator between those living comfortably and those struggling financially is whether or not they started investing at a relatively young age. Putting money to work in the stock market early in life, adding steadily over their lifetimes, and investing prudently, has enabled our invested clients to grow their assets through the compounding of accumulated earnings.
Keep ahead of inflation.
Stocks are the only asset class that has consistently outpaced inflation over time. Though the common belief is that assets that change in price are risky, it’s actually riskier to be underexposed to stocks than to be overexposed. Money that does not grow faster than inflation loses its purchasing power over time.
Historically, the S&P 500 index (the benchmark of U.S. stock market performance) has returned around 10% annually since its inception in 1926 through 2019. Inflation has averaged slightly less than 3% during the same period. Traditional savings have yielded negative returns in real-term (i.e., earned less than inflation) since the 2008-2009 financial crisis when short-term interest rates were cut to near zero.
Our senior clients who were not comfortable with stock investing have seen their income from savings and CDs diminish.
The cost of investing has come way down.
Past barriers to beginning investing in the stock market are no longer obstacles (fixed brokerage costs, high management fees, the minimum quantity of shares). Stocks are relatively easy to invest in; much easier than, say real estate, a small business, or art. Money in stocks is a liquid asset. This means that the investment can be converted into cash quickly with few, if any, transaction costs.
Stay the course.
Staying invested through market swoons, and possibly even using market dips to add to their positions, enabled our clients to more than offset the loss they would have realized had they sold during a market downturn. History has shown that the stock market always bounces back. So, it pays to take the long view and maintain good investment habits with money that you don’t need in the near term.
Some investment returns can be achieved tax-free.
Retirement accounts (IRA, Roth IRA, 401K, etc.) offer decades of tax-free investment growth. These accounts take the best advantage of the time maxim mentioned above, so it makes good sense to prioritize retirement funds at every stage of life.
Identify and overcome your fears.
- If big market swings make you nervous, don’t look at your portfolio value often.
- If you’re concerned you will buy high and sell low, then implement a discipline independent of market conditions. For example, pick a day each month and set an amount you’ll invest on that day.
- If you enjoy following market performance, then consider a sustained period of relatively low prices as an opportunity to buy stocks “on sale.”
The lessons we take from our anecdotal observations of seniors is that a commitment to invest in a disciplined fashion, combined with a big measure of patience, does indeed grow wealth.
If you want to discuss how investing fits within your personal finance management goals, the team at Eddy & Schein Group can help.