2-09 Why Stocks Are a Good Choice For Investing
In this course, we generally advocate that stock market investing is an excellent choice to receive consistently high Return on Investment (ROI). This does not mean we think everyone should be “stock picking” – but that stocks, mutual funds, and ETFs generally provide the best return in the long run.
Earlier in Chapter 1, we showed the ROI of a $10,000 investment in various types of assets:
Investing in stocks, over the long run, provides the best balance of risk, reward, and liquidity. Compared with some of the other asset types we have looked at so far, we can compare against stocks:
- Commercial Real Estate showed higher returns than stocks during some of the time we looked at, but the price tended to have big peaks and big falls. As an investment, this means it has much more risk, and not much more reward.
- Gold and precious metals is always a popular investment, but looking at the actual price trends over time, it becomes much less attractive than stocks. Other than savings accounts, gold had the lowest long-term return of any of the assets we looked at.
- Residential real estate provided a steady return over time, but far less than the stock market. Residential real estate also does not have liquidity – it takes a long time to sell an apartment or house to convert it into cash if you want to invest elsewhere. Selling a stock takes a second, with the cash available usually immediately to be invested elsewhere.
- Cryptocurrencies are also a current Hot Topic in investing. However, cryptocurrencies have huge amount of risk (with giant spikes and equally giant crashes). A stock is also based on an underlying company – you can look at their financial statements and see if it is a valuable investment. A cryptocurrency’s value is based more directly on speculation, and can be hard to predict how its price will move.
Due to heavy financial regulations, stocks are also a very transparent investment – you can see the financial details of every company you are investing in and have many tools at your disposal to make a well-informed decision. Much of this course focuses on accessing this information to make your trading decisions.
Uninformed people think you can get rich or poor fast with stocks as compared to other more stable investments. You certainly could achieve these dubious results. However, if you follow the simple rules you learn in this course, you will prevent yourself from falling into that trap. It is a fact: over the last 100 years, stocks have proven to be the BEST investment despite their daily – sometimes hourly – ups and downs. If you need some help deciding which stocks you want to invest in, we recommend signing up for a stock picker like the Motley Fool Stock Advisor or an investment research platform like Zacks.
- Stock Advisor is a stock picking list that has beaten the market by almost 500% since its inception.
- Zacks is a platform you can use to conduct stock research on your own, but they also offer a list called #1 Strong Buy that has beaten the market in 26 of the 31 years it has been used.
You must understand our emphasis on the long-term value of investing in the stock market. Investing in the stock market will not allow you to “get rich quick” but, as the last 100 years prove out, investing in stocks WILL allow you to “get rich slowly.”
However, timing and your investment horizon (the amount of time you have to leave your money invested) will determine your success. Take a look at this table below. If you had only 1 year to invest in the stock market, over the last 100 years you could have earned anywhere between 61% and -39% in that 1 year. But if you had 10 years to invest in the stock market, you would have AVERAGED somewhere between 19% and 0.50% per year, with a likely return of 11.10%.
| Years | Highest | Lowest | Average |
|---|---|---|---|
| 1 | 61.00% | -39.00% | 13.20% |
| 3 | 33.00% | -11.00% | 11.60% |
| 5 | 30.00% | -4.00% | 11.90% |
| 10 | 19.00% | 0.50% | 11.10% |
| 20 | 15.00% | 6.40% | 9.50% |