Why stocks are the best option to grow your investment and the quickest route to financial freedom↓
So you want to invest your hard-earned money? You want your money to work for you. Great! So which investment vehicle do you want to start with?
Since you're here, I'll assume it's the stock market. But what are stocks? How do you not lose money? These are excellent questions and ones I want to answer today. We'll discuss stocks and other investments, and how they compare historically. I will show you why stocks are the best option to grow your investment and the quickest route to financial independence.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher
Let's start with the basics. Many people, including investors, believe stocks (shares, equity) are pieces of paper that can be bought and sold on a whim. If you read the post on value investing, then you know that to be false. A stock is a share in the ownership of a company. Holding stock in a business means you are one of many owners, or shareholders, that make up the entire company. This means you have a part ownership interest in the company and the stock represents your claim (no matter how small) to the company's assets and earnings.
“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.” — Warren Buffett
Shares are created when a business or company reaches a certain size and wants to go "public". When they do this they decide to sell a chunk of itself to you, me, or whoever else would like to invest in them. So when you purchase stock, you become a business owner. And the better the business does, the better your investment does. Another way to earn money through stocks is with dividends. These are a portion of profits distributed to a company's shareholders. These can be in the form of cash, shares, or other assets and can be reinvested or allocated elsewhere at your discretion.
Before you decide to invest in stocks, you should be aware of the other options out there. these include bonds, mutual funds (index funds), savings accounts (CDs), and other vehicles such as gold, real estate, and cash.
But how do stocks compare, historically, to the other aforementioned options? That's a good question because stocks oftentimes get a bad reputation for offering nothing but risk. As history shows however, as long as you stay in the stock market for a decent amount of time you are bound to have a better return rate.
As you can see from the graphic below, stocks have not only performed admirably since 1926, they have destroyed every other investment vehicle along the way. If you would have chosen stocks to invest your $1,000 in, you would be the proud owner of $364,782.42 averaging 6.8%, inflation-adjusted, annual compounded returns. Compare that to 0.5% for T-Bills, 1.8% for Gold, and 2.9% for corporate bonds and you see an astronomical gap. Corporate bonds and gold actually displayed more volatility than stocks as well. That tiny, little purple dot next to the original $1,000 is what your investment would've become if you had just left it as cash. Inflation averaged 2.8% since 1926, eating away at your $1,000 over time to a measly $75.07.
So why not just keep all your money in mutual funds or stock indexes and let the professionals worry about the market? A couple of reasons. First, not all fund managers are the experts they claim to be. In fact, very few are. Fortune magazine reported since 1985 only 4% of all fund managers beat the S&P 500. The few who did, only managed to best the index by small margins.
Secondly, stocks as a whole do not consistently earn 6-7% year in, year out. If you were to invest in every stock in the Dow Jones (a key index) from 1906-1942 then you would have earned $0. Not a penny. For 36 years. You would've lost money due to inflation. In 1965, the Dow hit 1,000 and never went over for the next 18 years. My point is the stock market has years, decades even, where it stays flat or decreases. If you would've put all your money in a mutual fund or a stock index during these time-frames, you would be right back where you started, decades later.
This is why I recommend you invest in stocks, but not on a whim and not with a service. Follow a value investing philosophy, invest for the long-term, and, as history shows, you will be much more successful than if you didn't.