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A lot of people are hesitant to invest in the stock market. And I can understand, considering the S&P 500 is currently hovering at historical highs right now. Nevertheless, there are still good reasons to invest in the stock market. Here are 5 good reasons.
The 5 Reasons For Investing In The Stock Market
#1 You need a fighting chance against inflation
Everybody says there are 2 certain things in life: death and taxes. Well, inflation is trying its hardest to be included in that list. Inflation is the rise in prices. It rarely lets up each year. Sometimes when the economy is in a recession inflation may slow down as people quit spending as much money.
But it always picks back up.
A good rule of thumb for estimating inflation when doing your retirement planning is to assume 3%. Some years it may be higher, and some years it may be lower. But 3% is a good estimate for inflation.
Now consider if your retirement lasts 30 years. Is that unreasonable? Not really if you think about it. Many retirees quit work when they turn 65 and can get health insurance through Medicare. And it’s not unreasonable to hear of people living to age 95.
Well, that’s 30 years. And if you don’t live that long you probably still want to do your retirement planning with a 30 year time horizon in mind… just in case.
Over a 30 year period inflation can do some big damage to your portfolio. Using some simple math and assuming an inflation estimate of 3%, your $100,000 you have today would have to grow to $242,726 in 30 years. That’s just for you to keep up with price increases.
In other words, inflation has put you on a treadmill. You have to keep running just to stay in the same place.
If you are not investing your money in such a way to give you a fighting chance against inflation, then you are losing ground.
#2 Market risk is not the only risk
As long as you live in this world you will face risk. It’s a matter of which risk you are most comfortable facing. Market risk is not the only risk out there. It is just one of many risks.
Here are some risks that you, as a retiree (or soon to be retiree in the next 5 to 10 years) face RIGHT NOW:
Longevity risk – This is the risk that you will outlive your money. In other words, your money will die before you do. If you’re portfolio does not have growth in it because it is too conservatively invested, there is a greater likelihood of you running out of money.
Market risk – To be fair, I must include this risk. Investing in the markets does involve risk. The value of your portfolio can go down. And there are no guarantees that it will grow.
Purchasing power risk – This gets back to the first point. Inflation will cause your purchasing power to decrease. If all your money is only in safe investments, i.e. conservative financial instruments that typically have lower returns, you have a greater likelihood of it not keeping pace with inflation.
These are just 3 risks you face. And I think you get the idea that market risk is not the only one out there. And ironically, when you try to avoid market risk (which gives you the most potential to grow your portfolio), you are actually increasing your longevity risk and purchasing power risk.
#3 You can custom tailor your portfolio to your risk tolerance
Not all equities have the same amount of risk. Which do you think is riskier to invest in: stock in a small tech firm with no successful track record, OR stock in Wal-Mart? Obviously, Wal-Mart should be less risky.
Not all stocks will have the same type of volatility. Some are safer than others.
And then you have to consider that you probably don’t want to expose yourself to the riskiness of holding individual company stocks. If you invest in ETF’s of broad stock market indexes, you have reduced your risk exposure to any one particular company through diversification.
Then you can take it a step further and hold ETF’s (or hold mutual funds) that track not only a stock index (like the S&P 500) but also hold funds that track an aggregate bond index, a commodity index, an international stock index, and even a REIT index.
So you can get broad diversification, which will reduce the risk of your portfolio. And if you want a more conservative portfolio then you can decrease your exposure to the more volatile asset classes, like equities, and increase your exposure to the less volatile asset class of bonds.
So this is another good reason to invest in the markets. You don’t have to be all in on equities. You have other options that can help you grow your portfolio.
#4 The proper investing rules can help you invest better
If you are investing in the stock market without a set of rules in place to govern your portfolio, then you may be letting emotion guide you too much. But if you put some simple investing rules in place and follow them, this may help you make better investing decisions.
There have been plenty of studies done that show the average investor underperforms the market. The Dalbar studies are very good at tracking this phenomenon. They look back over a 20 year period to see how the average investor did compared to just how the broad market performed. And they update it every year on a rolling 20 year basis. So, it’s quite shocking when you realize how the average investor underperforms.
A lot of it has to do with emotion. A lot of do-it-yourself investors let their emotions guide their decision making process, instead of a set of established rules.
For example, when the market has been going strong for a while, it is tempting for the average investor to want to jump in there. He is seeing everyone else make all this money for the past couple of years. And his emotions are telling him that it’s his time to get in on the action.
But he may be investing at the market peak, just when it is ready for a correction.
And when the market is declining, it is tempting for some investors to want to get out while they still have something left.
This kind of behavior can hurt your portfolio. It is essentially buying high and selling low. Buying when the euphoria is high, and then selling when you are scared and just trying to salvage what’s left of your investment.
That’s what emotional investing can do.
#5 Stock investing can provide the potential for growth in your portfolio
It is true the markets can go down. And it is true you can lose money in the stock market.
But they also can provide good potential for growth. From 1970 till the end of 2013 the cumulative average growth rate of the S&P 500 was 10.40%.
Now, that would have been a bumpy ride, and sometimes just buying and holding does not make sense. But it does show the potential for growth that equities can provide.
And you can do better than just holding an index of the S&P 500. As I was saying before, you can get much broader diversification by giving your portfolio exposure to other asset classes, like bonds, commodities, international stocks, and REITs.
You don’t have to use equities exclusively in your portfolio. And probably, for most people, that would be a bad idea anyway. And as you reach retirement age, most people will be better suited to a more conservative portfolio. This means putting a higher allocation of assets in less volatile asset classes like bonds.
But, nevertheless, this shows the potential for growth, if you invest wisely and don’t let your emotions control you. I mean, it really does come down to being wise with how you manage your portfolio. Which is why I have put together a free video series that may help you out with that.
Speaking of which…
So, we’ve gone over the 5 reasons to invest in the stock market. And really we’ve talked about the importance of not just limiting yourself to equities in your portfolio. But you can improve diversification by including other asset classes as well.
Well, managing your portfolio the right way is very important. Especially for retirees and those nearing retirement in the next 5 to 10 years.
Retirees are more dependent on their portfolios than, say, a worker that has 30 more years of employment ahead of them. That’s because they will usually have lower income in retirement than they did when they were working.
Also, they are more likely to be withdrawing funds from their portfolio to cover living expenses, compared to someone that is working and drawing a salary.
This is why it’s so important that you do the best you can managing your portfolio. It can help you have a less stressful retirement.
That’s why I have put together a free 3-part video series called “6 Ways The Wealthy Manage Their Investments That Ordinary Investors Do Not.” In this video series I’m going to reveal some simple steps you can use in your portfolio to help you reduce the large ups and downs in your portfolio’s value, help you feel more confident in the investing decisions you make.
To get instant access to this very helpful video series, just CLICK HERE and register. Input your first name only and your email address and I will get these videos sent out to you.
In your service,