Is Investing in Stocks Worth It?

Is Investing in Stocks Worth It?

These days, it seems like you can"t go a day without hearing about "stocks." Every day there"s a news story about how good or bad stocks are doing, or how new investors became millionaires off...

These days, it seems like you can't go a day without hearing about "stocks." Every day there's a news story about how good or bad stocks are doing, or how new investors became millionaires off a single stock. Investing companies continually bombard you to invest your money with them, advertising that the only way to retire is to invest in the stock market. (With them, of course.) You may even have friends and family that talk about their successful stocks. 

It seems like everyone is investing in stocks and are making money, which can leave you feeling left out if you aren't. This might have you thinking, "Should I start investing in stocks? Is investing in stocks worth it?" 

Investing in stocks can be a great way to build wealth over the long term, but they usually aren't the "get-rich-quick" scheme the media or brokerage firms make them seem. Let's dive more into this so you can decide if investing in stocks is good for you and your goals or not. 

Your Investment Journey

Everyone is at a different place in their financial journey. Some people may have the savings they need for a comfortable retirement while others are living paycheck to paycheck.

The stories you hear are usually about people whose financial situations are completely different from yours. Just because the people in these stories, or even your friends and family members, are investing in stocks, it doesn't mean you should. 

So where should you be financially before you can consider investing? 

Where Should I be Financially to Invest In Stocks? 

If you live paycheck to paycheck, you should not be investing in stocks. Stocks have high volatility and have a risk of losing value, and you should not be risking the money you need to pay for your necessary expenses. 

If you do not have the money to cover a $400 expense like many Americans don't, you should not be investing in stocks. It's recommended that you instead look towards saving what you can, paying down debt, and working towards a future where you do have discretionary income to spend on things like investing.

But what if you don't live paycheck to paycheck? What if you are financially stable and want to put some of your savings to work for you? 

Should you invest in stocks then? You should only begin thinking about investing in stocks if you have a usable amount of emergency savings.

Emergency Savings

Many financial advisors recommend that one of the smartest things you can do is to have an emergency fund or a "rainy day" fund. This emergency fund serves as a way to help you survive financially if something unexpected happens. 

This emergency fund would help you get by if you lost your job, got injured and couldn't work, or something very unpredictable blindsides you, like COVID-19 and the resulting pandemic did to many people.

Financial advisors recommend having enough in an emergency savings account to keep you going for at least 6 months of expenses. 

For example, if you spend an average of $3,000 every month for things like rent, groceries, insurance, and utilities, you should have an emergency fund of at least $18,000 ($3,000 x 6 months). 

Before you begin stock investing, you should have this emergency fund. Stocks cannot necessarily be turned to cash easily, so it is important to have enough cash to pay for emergency expenses. 

It may be hard to imagine an emergency happening, but preparing for one can be the difference between surviving a disaster and preventing financial ruin. 

Once you have this, you can then begin considering building your investment portfolio.

Savings vs Investing

Investments and savings both contribute to your "nest egg" of wealth, but they are not the same. Understanding the two and how both of them should be used can help you decide which one you should be focusing on. 

Savings

Savings is the cash that you readily have on hand that you can access for various expenses and other purchases. Your savings can be kept in a savings account or some other account that keeps your money safe and may earn a small interest rate. 

Savings can also be put aside to pay for things like education, retirement, a vacation, or any other purchase you are working towards.

Short Term

Savings are helpful for providing a crash pad for you in case of emergency as we mentioned above. They are also helpful for working towards your various financial goals. You can budget your money and put away some savings each month to get closer and closer to your savings goal. Short term, your savings won't fluctuate like investments do, which provides stability.

Long Term

In the long term, savings barely change in value, which is both good and bad. If you put $10,000 in a savings account, 10 years later you will still have $10,000 plus some interest. This is good because it minimizes fluctuations and keeps the value of your money steady. 

However, it's also bad because inflation will eat away at the spending power of your money. Just like $10,000 was worth more in 1980 than in 2021, so too will $10,000 be worth more in 2021 than in 2060. This is one reason why people turn to stocks and retirement accounts over the long term.

Investing

In the context of this article, "investing" refers to buying shares of a company's stock in the stock market. Each public company (Amazon, Apple, and Walmart, for example) has stock prices for their shares that investors pay for in order to buy a "share" or a piece of that company. 

Investors buying stocks are hoping that the share prices increase over time, giving them a "return" or a profit on their initial investment when they sell their share. For example, if you own a stock that has a price of $100 and after 1 year the price is $110, you will have a return of $10 when you sell the stock ($100 from your initial investment + $10 of price growth).

Institutions like hedge funds and mutual funds use investing to make money as a normal business would. Individual investors typically use stocks as long-term investments to help pay for things in the future like retirement or a child's education. Someone investing for retirement may but down $10,000 in hopes that it will grow over many years, which is something savings cannot do very much. 

Short-Term

Investors investing in the short term are typically holding a stock for a year or less. Short-term investors try to take advantage of short increases in stock prices to make a profit. However, many of the people that successfully do this are seasoned professionals, and even then very few people are successful at it.

In the short term, stocks are very volatile and can have huge price swings that seemingly move at random. Stock prices tend to be hugely influenced by news or earnings reports from the company, and these are things you can't really take advantage of since they are unpredictable. 

Because of this, you must have a very high-risk tolerance as you could lose a lot of money trying to make money with stocks in the short term. As such, stock trading in the short term is not for beginners.

Further, the profits you make from stocks in the short term (a year or less) are taxed very heavily. These are called short-term capital gains taxes and are much more than long-term ones.

Long Term

A long-term investment strategy is one that uses stocks and other investments to help grow a portfolio over a long period of time. Long-term investing can be very fruitful thanks to the wonders of dividends and compound interest. 

Over the last 80-100 years, the "stock market" or, more accurately, the stock market index, has gone up. Throughout this time though, there have been "bear markets" or times where the stock market drops a large amount, like during the Great Depression, the 2001 stock market bubble, and the 2008 financial crisis. 

However, after all these crashes the stock market has always come back strong and has surpassed its old levels. 

Based on history, if you leave your money in a diversified portfolio (more on this later) for 20-40 years, you are likely to have made a significant return. But as with all things to do with investing, you're still gambling that history will prove out.

Should I Invest My Money in Stocks?

We've gone over some of the basics of investing, but should you invest your money in stocks? 

While the financial decision is ultimately up to you, here are some things to consider before you make that decision.

Why You Should Invest Your Money in Stocks

  • You have a long-term financial goal: If you have a long-term goal you are working toward, like retirement, education for a child, or some other purpose, investing is better than saving. If you want to reach $10,000 for your goal, you would need to find $10,000 to save. With investing, you could theoretically invest something less than $10,000 and have it grow over time without you needing to do anything but wait. 
  • You have extra income beyond your emergency fund: Before you start investing, your financial priority should be to build up your emergency fund. However, after you've done this you may have some extra income that you want to put to work. If you're willing to set that money aside and risk losing it or not accessing it for a long time, you may consider investing to earn some extra long-term income.

Why You Should NOT Invest Your Money in Stocks

  • You have other expenses to take care of: Investing seems easy, and it's very tempting to want to invest your money in the hopes that you can quickly make more money anmd "get rich". However, it is not nearly as simple as it sounds and you may end up losing money in the process. If you have other important expenses that you need money to take care of, you should not invest your money. If you do, your investment might be lost and you may not have the necessary cash flow to pay for your expenses. 
  • You do not have your emergency fund built up yet: As we mentioned earlier, one of your priorities should be to build up an emergency fund that could last you 6 months. If you do not have this built up yet, you should not invest your money, as an emergency can happen at any moment and you want to be prepared for it should it happen. 
  • Stocks are risky: The stock market is risky. For every buyer, there must also be a seller. For every story of someone making money, there is another story of someone losing money, even though it never makes the headlines. If you are living paycheck to paycheck or cannot afford to lose your entire investment, you should not play around with the stock market.

How to Safely Invest In Stocks

Do you think you are ready to invest in stocks but are you worried about safely doing it? Here are some things you can do to minimize your risk and make smarter investing decisions.  

  • Diversify: Owning one or two individual stocks is risky. If you only have a few investments and one drops by a huge amount, you can lose a lot. To combat this, you should "diversify" your investment portfolio, which means owning many different stocks in different industries in order to minimize risk. Different stocks act very differently. Technology stocks act differently than bank stocks, and growth stocks act differently than value stocks. By having a diverse allocation of stocks, you can greatly combat risk.           
  • Index funds: Index funds are typically exchange-traded funds, or ETFs, which are essentially just a basket of stocks. Index funds try to mimic certain indexes, like the S&P 500 (many people consider this to be the "stock market"). In other words, you can buy shares of index funds to follow its price. If the S&P 500 goes up 10% in a year, an S&P 500 index fund will go up 10% too. Index funds have very cheap fees and offer built-in diversification.
  • Invest in an IRA: IRAs, or individual retirement accounts, are investment vehicles that are made to help people with their retirement savings. With an IRA, you deposit up to $6,000 a year into it and choose your investments. You then continue contributing to the IRA and leave this money in the IRA account until you turn about 60. Once this age is reached and your investments have grown greatly, you can withdraw your investments at a very low tax rate. If you're looking to plan for retirement, an IRA is one of the best ways to do it. 
  • Invest in Treasury Bonds: While not considered a "stock", bonds are a kind of loan you can give to companies, a city, or even the federal government. These loans are actually very similar to a loan you can get from a bank. They are given a set amount of time for repayment and have a set interest rate. The biggest difference is that you have to wait the full amount of time before you can get your money back. (Or sell the bond to someone else if you need the money faster.) Considered the least risky, treasury bonds are money given to the US Treasury Department. If you want to invest your money, with less risk but better interest than a savings account, adding bonds to your portfolio can be a great way to guarantee return just in case the market doesn't follow history.
  • Hire a financial advisor: If you have a good amount of extra money, you can hire a financial advisor to help you pick safe investments. Many financial advisors must receive certifications in order to advise people, and many have a great experience with investing and the stock market. An advisor could help you manage risk and help pick investments that are right for you. However, be wary of listening to their specific stock picks, their "best investments" or their "blue chip" stocks. Advisors are notorious for encouraging their clients to invest in a promising stock that totally flops. 
  • Do your research: When in doubt, do your own research. There is a lot of chatter and noise on the news and on social media about investing, and listening to this might lead you to make bad decisions. Some people may promise you safe investments with high returns, or that they can triple your money. Tune out the noise and do your own research to pick the best investment strategy for you. Just like how you research when you're buying a car or real estate, so too should you do research for your investments. Only you can know what's best for your financial well-being. 

So, Is Investing in Stocks Worth It?

Overall, investing can be a great way to meet some of your very long-term financial goals like retirement or education for your children. Allowing the effects of compound interest to create a snowball of wealth for you over a few decades can really change your life. 

However, the stock market can be very volatile and you can lose a lot of money if you try to quickly get rich through investing in the short term. 

Prioritize creating an emergency fund before you consider investing. Once this is taken care of, then consider some investment options to create wealth for you in the long run. Before you make an investment choice, consider some of these questions so you can make an informed decision:

  • Are you able to lose your entire investment? There's a company behind every stock, and that company can go bankrupt. Even if it's unlikely to happen, you still must prepare. Never invest an amount on one stock that would financially ruin you if you lost it all. 
  • Are you investing just because the price went up? It can be tempting to want to invest in a company whose stock has doubled or even tripled in a short period of time. However, past returns do not guarantee future returns. (And increases can sometimes mean trouble ahead.) Ask yourself this when you want to invest in a high-flying stock.
  • Are you investing based on emotion? FOMO, or fear of missing out, is a very real psychological challenge investors face, and it can cause investors to make very bad decisions. Investing based on emotion causes investors to take unnecessary risks instead of focusing on things like the fundamentals of the company or its ability to grow its revenue. Before you invest, take a step back and ask yourself if your choices are based on emotion or fact. Consider taking a walk, or even waiting a day before you make your decision. 
  • Is someone else telling you to buy it? You may hear people on the news or social media telling you to buy a stock. While it might be tempting to, never buy based on a "hot tip" like one of these. Ask yourself, "Why did the person tell me this?" The answer is usually that they want you and others to buy the stock so it goes up at which point they can sell at a profit. If they had such a good stock idea, they would keep it to themselves and buy as much as they could! 
  • Do you understand what you're investing in? Every stock represents an underlying company that has real people, makes real products, faces real challenges, and has many competitors. If you don't understand the company whose stock you own, you should consider not investing in it. As the famous investor Peter Lynch said, "If you can't explain the company to a 10-year-old in 2 minutes or less, don't own it."

On Investing

In the end, the choice to invest or not invest is your choice. If you work hard to understand what you're investing in, and how those investments can mature into the goal you set, you should feel secure about where you've put your money.

If, however, you're thinking about investing because an advertisement from an online broker is causing you to worry you're missing out on a wondrous money-making opportunity, it's time to step back and really think about what you're about to do and why. 

In the end, it's about asking questions, understanding what you're getting into, and knowing the risks. You can also look into other types of investments, such as bonds, in case investing in stocks seems too risky for you and your goals. If you still have questions, many brokerage firms have financial advisors that can help you understand more.

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