Top 10 Reasons to Invest in Stocks - AlwaysWealthy

Top 10 Reasons to Invest in Stocks

Over 50% of Americans are invested in stocks today. In 1929, this figure was only 2.5%. The internet and investing apps made investing in the stock market easier and more accessible than ever before. But with half of the population invested in stocks, there is still a huge number of people that have never bought or sold any stocks. If you’re wondering whether you should invest in stocks or you’re a new investor looking for inspiration, this article will give you the top 10 reasons to invest in stocks.

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Top 10 Reasons To Invest in Stocks

Top 10 reasons to invest in stocks
Here are the top 10 reasons to invest in stocks

Want to know the benefits of investing in stocks? There are plenty. In order to make this fun and entertaining, we made a list with the top 10 reasons to invest in stocks. However, if you’re a complete beginner and would like to learn how to invest in stocks, we’ve got your back.

Throughout this article, we’ve embedded several links to detailed guides and resources that will help you invest in stocks as a beginner. Make sure you check these out or save them for later, since they will help on your journey to becoming an investor.

With that being said, here are the top 10 reasons to invest in stocks.

Government Bonds Have a Negative Real Yield

Government bonds provided a risk-free return until recently. Now, some people call them a return-free risk.

The reason why government bonds are considered risk-free is because a government that has its own central bank and issues its own currency cannot default on its debt. In case of a looming government bankruptcy, the central bank steps in and prints money to buy government debt.

This makes it impossible for a modern government to default on its debt. However, governments can still lessen their debt burden by inflating away their national debt. This is sometimes also called “soft default” or financial repression.

When the inflation rate is above bond yields, the 2-3% risk-free returns people could make by buying governments bonds don’t exist anymore. If inflation is at 7.9% and bond yields are at 1.9%, investors are losing 6% per year in real terms. This means, bonds are a losing investment.

While you won’t lose money nominally because you’ll get back your principal plus interest, government bonds have a negative real yield. Your purchasing power erodes gradually while you help the government lessen its debt burden.

Inflation Eats Away Your Savings

After the Great Depression, the United States left the gold standard.

Under the gold standard, there was a limit to how much money the government could create. Until 1933, all circulating US dollars had to be backed to 40% with physical gold. This prevented governments from arbitrarily expanding the money supply and causing inflation.

In 1933, president Roosevelt issued Executive Order 6102 and ended the gold standard. Since then, and especially after the Nixon Shock in 1971, the United States has experienced continuous mild to moderate inflation.

Inflation is when the money supply expands in relation to existing goods and services. When there are more units of money chasing the same number of goods, prices of goods and services increase. In the United States, inflation is at a 40-year high and recently peaked at 7.9%.

When there is inflation, you lose purchasing power by saving or holding cash. Unless you invest in something that makes enough gains to outpace inflation, your money gets less valuable each year.

Savings Accounts Have Low Or Even Negative Interest Rates

Unfortunately, savings accounts aren’t what they used to be.

Savings accounts these days have yields of 0.03%-0.10%, which aren’t able to keep pace with inflation. In Europe, there are even negative interest rates. This means, you have to pay the bank money although it lends out your money and earns interest.

Read More: Where to Invest Money to Get Good Returns

The bank wins, you lose. Even high-yield savings accounts with 1% yields result in loss of purchasing power due to inflation.

Certificates of Deposit (CDs) are no exception here. If you keep money at the bank, or under your pillow, its purchasing power will drop over time. This means, every year it’ll buy you less goods and services. With savings accounts and Certificates of Deposits providing a negative real yield, investing in stocks presents an alternative that has higher chances of keeping pace with inflation.

Investors Have to Take on More Risk

In a high-inflation environment, investors are continuously pushed further out on the risk curve to preserve their purchasing power. With bonds and traditional savings accounts having negative real yields, “gambling” on the stock market becomes one of the few ways to beat moderate or high inflation.

This is unfortunate. But whenever inflation spikes, speculation on stock markets spike as well. For example, during the German hyperinflation, speculation on the stock market was an extremely common way for people to try to protect their purchasing power.

It didn’t always work out that well. Despite investors making millions and even billions on the stock market, in many cases the currency lost purchasing power faster than stocks could rise.

Despite this, some Germans got rich and did well on the stock market.

With mild to moderate inflation, preserving purchasing power by investing in stocks is easier than in a country that is dealing with hyperinflation. Nevertheless, investing in stocks is not a guarantee that you’ll outpace inflation. You could even lose it all if you make a terrible investment.

Read More: Dollar Cost Averaging Vs Lump Sum Investing

But if you keep your money in cash, bonds or savings accounts, you are guaranteed to lose money. It’ll just be slower, gradual and less noticeable.

Bitcoin and Cryptocurrencies Might Be Too Exotic

One alternative is bitcoin and cryptocurrency. But cryptocurrency is probably in a bubble. Bitcoin, which should be distinguished from other cryptocurrencies, has historically been a great way to outpace inflation.

It was the best-performing asset of the past decade. Nevertheless, some investors might prefer the stock market over bitcoin because its less exotic, has a longer track record and benefits from more regulatory clarity. Also, if you don’t understand bitcoin, you should probably not invest in it.

As with anything, always thoroughly research and understand what you invest in. If you understand businesses, companies and the stock market better than bitcoin or cryptocurrencies, you might be better off investing in the stock market.

Index Funds Keep Pace with Official Inflation Numbers

The S&P 500 has an average annual return rate of around 8%. This means, if we go by the official Consumer Price Index figures, investing in an index fund that tracks the top 500 companies in the United States should allow investors to keep pace with inflation and preserve their purchasing power.

There are many different index funds that track the S&P 500.

The most popular and liquid index fund is SPY.

Keep in mind though that index funds that track the broader market aren’t risk-free. But as we’ve seen, not even government bonds are risk-free anymore. Every investment comes with risks, including keeping cash under your pillow.

Growth Stocks to the Rescue

Some alternative measures suggest that real inflation in the United States could already be at around 15%. In this case, only stocks with a return greater than the broader market would outpace inflation. Investing in the S&P 500, which is like investing in the US market as a whole, wouldn’t cut it. Growth stocks that have a higher return than the S&P 500 might do the job.

There are also index funds that track growth stocks, such as the Ark Innovation ETF and Nasdaq QQQ. Growth stocks are stocks of companies that are expected to grow significantly in the future.

Read More: Investing in Stocks for Beginners

When a company experiences fast growth, it is possible and likely that its stock price increases in value as well. However, growth stocks are riskier than stocks of established and large companies. Higher returns almost always means more risk.

Despite the volatility of the stock market and bitcoin, not being invested in either of them is guaranteed to result in loss of purchasing power. Unless of course, you prefer investments like real estate, art or other exotic investments that could outpace inflation.

The Federal Reserve Props Up the Stock Market

The Federal Reserve heavily influences the stock market. While until now, the Fed doesn’t buy stocks outright, the Fed’s monetary policy has a huge impact on the stock market.

When the Federal Reserve is dovish and loosens monetary policy, stocks tend to rally. When the Federal Reserve is hawkish and tightens monetary policy, sentiment in the stock market often changes and leads to investors selling off their stocks.

The good news is that the Federal Reserve can’t let markets tank too much. Whenever this happens, and a “Too Big To Fail” institution is about to go bankrupt, they have historically stepped in and loosened monetary policy again.

Since the Global Financial Crisis of 2008, the Federal Reserve hasn’t been able to significantly taper its Quantitative Easing program or meaningfully raise interest rates.

Read More: The Everything Bubble: Is The Worst Financial Crash In History Coming?

The Federal Reserve is aiming to do this in 2022 in response to inflation being at historic highs, but it remains to be seen how much the Fed can let markets crash before they have to reverse policy.

While it’s not the Federal Reserve’s job to “save” the stock market or protect investors from financial losses, they must keep inflation and employment in check.

When markets crash and “Too Big To Fail” institutions face bankruptcy, this can cause contagion in credit markets and even deflation. The Federal Reserve will do anything it can to prevent a deflationary economic crisis like the Great Depression from occurring again.

This means, the stock market is somewhat indirectly protected by the Federal Reserve. The credit market and stock market are closely connected. Whenever one crashes, the other might get into trouble as well.

As a result, the Federal Reserve has a history of propping up asset prices through asset purchases. While they don’t buy stocks outright, flooding the market with liquidity leads to asset price inflation which effects the stock market.

As long as asset prices inflate faster than consumer goods, investors that invest in the stock market are preserving their purchasing power.

Multiply Your Money

Another reason to invest in stocks is to get rich. Although very few people are able to outperform the market, some investors are able to invest in growth stocks early on and make life-changing gains.

Roaring Kitty, who invested heavily in Game Stop stocks and options, made a fortune in a very short period of time. Similar stories exist of people who invested early in certain speculative cryptocurrencies like Dogecoin.

However, many of these investors truly believe their investments have fundamental properties that make them good long-term investments. As a result, they never cash out and stay invested.

There are plenty of Game Stop and Dogecoin investors that became temporary millionaires. But it remains to be seen how much these investments are worth in a few years or decades from now. Not selling at the right time could be a huge mistake.

Read More: Stock Market Advantages and Disadvantages

Nevertheless, a more aggressive investing strategy further out on the risk curve can be rewarding. But it can also be devastating and lead to the total loss of funds.

The narrative of getting rich quick never dies. It is just as alive today as it was in 1929, if not significantly more due to the internet and easier accessibility.

Improve Your Financial Literacy

The final reason to invest in stocks is to improve your financial literacy and acquire a valuable skill. If you never invest a single dollar in the stock market, you won’t have any real-life investing experience. Learning about investing, money management and personal finance is important.

Investing in stocks, even if it’s just small amounts of money for educational purposes, can help you make smarter decisions with your money in the long-term.

It can open new doors, provide you with important insights and present you with opportunities you would otherwise miss out on. As always, it’s important to thoroughly research and understand what you’re investing in.

Learning about risk management, exploring different investing strategies and researching companies can be fun and educational at the same time.

Summary: Top 10 Reasons to Invest in Stocks

These are the top 10 reasons to invest in stocks. Inflation and negative real returns provided by many traditional savings mechanisms is the main reason to explore investing in the stock market. During periods of moderate to high inflation, investing becomes the new saving.

Stocks aren’t the only place to invest your money though. There are plenty of other investments, from real estate to bitcoin to exotic investments like rare wines and whiskeys.

At the end of the day, you have to find out what type of investor you are and which asset classes you feel comfortable with.

April 11, 2022