Why you should invest in Stocks

This quick little blog is going to explain why, if you want to invest, investing in stocks is one of the best choices you can make.

The fact is that, over the past 100 years or so, any long-term savings that you invested would have done much better in the stock market than anywhere else you could have invested, including real estate, gold, bonds and definitely collectibles.

Now, before you begin, and before you enter any ticker symbols, track the Dow or look deeply into a specific company’s cash flow, you should definitely set some expectations for yourself.

One of the very best rules of thumb when it comes to investing in stocks is to invest money that you’re not going to need for at least 5 years and, if possible, much longer. Any money you won’t need for the next 5 years should definitely be invested into the stock market for your best chance of a great return.

Any money that you’re going to need in the next one, two, three, four or less than five years, money for your son’s college tuition, a down payment on your first home or to open your first business, should be put into something like a money market account, a CD or simply a savings account. In other words, a short-term savings vehicle where you can access your cash quickly and with few, if any, fees.

And by the way, if you have high interest credit card debt of any kind, you should definitely pay this debt completely down before you start investing in stocks, no question.

Now, here’s the best, strongest, no questions asked reason why you need to put your long-term money into stocks; history.

Historically speaking, there was no better place where you could have put your money in the last hundred years, and gotten a better rate of return, then in the stock market. Since 1926 the historical average annual S&P return has exceeded 10%. Even though the S&P 500 only had a 6% annual return from 1997 through 2007, due to the bear market of 2000 through 2002, you simply can’t argue with historically excellent returns like these.

If you look at history, and you look at everything that’s happened in the last hundred years including depressions, bull markets, elections, recessions and so forth, the stock market has undoubtedly been the best place to put your money for excellent long term returns

And that, simply put, is why you should invest in stocks.

Risk Free Lesson on Investing

If you’ve just started investing the truth is that you’re probably scared to death about putting your hard-earned money at risk. After all, investing is risky and, as a newbie, you have anxiety that you won’t do it “right” and lose some of your hard-earned money.

The truth is, a little bit of fear is absolutely normal. That being said, today we’re going to give you some great advice about how to learn some investing strategies, and give them a practice run, before you actually begin to invest your hard earned money “for real”. Enjoy.

Create a mock portfolio online

Okay, let’s say that you gotten comfortable with the basic mechanics of investing, like researching the company whose stock you want to purchase and deciding how and when to place your orders for buying and selling. If that’s where you are, you can create a mock portfolio online and see how any decisions you make play out, even if it’s just over a short period of time. One caveat however is that you can’t draw a lot of “big conclusions” based on how your stock choices did, and how the market behaved, over a few weeks or months.

Setting up an online portfolio to use as your mock portfolio can be done on sites like AOL or Yahoo finance for free. You can enter mock details as to when you purchased shares, and at what price you purchased them. Then you can track the performance of the shares and see how your holdings behave over a few weeks or months. This is a great technique to learn more about yourself and your own investing habits and skills.

For investors who are a little bit more experienced

Even if you are what most would consider a seasoned investor, a mock portfolio can assist you in a number of ways. For example, if you’ve just read about an investment strategy that you think looks good, and you’ve seen a few reports on back testing showing that it worked well for others, you can do a trial run using your mock portfolio to see how it works when you do it.

You can use this strategy to see what happens with any stocks that you invest in and, if the strategy seems to be working, start investing with real money. If it’s not, at least not for you, then you save yourself some time, headaches and money that you didn’t risk.

Frankly, the thought of all of this work creating mock portfolios might be enough to give you a headache and, if it has, you can actually skip this altogether and simply invest in a few low-cost stock mutual funds instead. It’s relatively easy, low risk and over time you can add to it too. For a beginner investor there’s certainly no shame in doing it this way, and it’s low risk to boot.

 

Not surprisingly, first-time investors usually have a little bit of anxiety about when the best time is to make their first stock purchase. It’s not an unfounded fear, frankly, because if a person were to start at the wrong point in the market, which has a tendency to go up and down quite a bit, they can be left staring at big losses right from the start.

The good news is simply this; time is definitely on your side. If you are investing for the long haul, which is recommended, well-chosen investments will have compounding returns that add up quite well no matter what the market was doing when you decided to purchase your first shares.

Truth be told, rather than worrying about when you should make your first purchase of any stock, you should be thinking about the length of time that you’re planning to leave your money in the market. You probably already know that there are different degrees of risk and return based on the different types of investments and each of those investments is going to be best suited for  different  lengths of time.

For example, if you’re looking for dependable returns in a shorter period of time, bonds are probably the best way to go. For example, from 1926 through 2003, short-term U.S. Treasury bills yielded approximately 3.7% per year. While this might not sound like a great yield, keep in mind that during this time inflation was practically nonexistent, which means that nearly 4% average was not all that bad until around the late 1960s.

You’ll get slightly higher returns if you invest in longer-term government bonds, on average 5.4% annually during the same time period we just talked about, from 1926 to 2003. That being said, during the 1980s long-term bonds were returning almost 14% but lost 4% per year during the 1950s, proving that they are a bit more volatile.

Large-cap stocks have shown to be quite good for investors , returning an average of 10.4% per year during the same time period as above, which is a sight better than bonds. Although they suffered a slight decline in the 1930s, bonds did particularly well during the 1950s when they were getting an average annual return of 18%, during the 1980s when it was 16.6% and then again during the 1990s when it was 17.3%

Okay, so we’ve looked at the types of investments you can make and we’ve talked about their average annual return. Now it’s time to talk about the most important factor for amassing more cash with your investments; time.

As you probably already know, or at least should, the longer you can leave your investments alone the greater return on that investment you will have and the greater amount of risk you can take as well since, if things do go bad for a while, you can wait it out until the market returns.

Again, it’s not really the timing of when you make your first investment but the amount of time that you will leave your investments in the market. The market goes up and down more often than the tide but, that being said, the longer you leave your investments alone the better chance that they will do well and bring you an excellent return when you’re finally ready to cash out.

Common Investing Pitfalls the New Investor Should Avoid

As a new investor there are definitely a number of common pitfalls that you need to avoid. The reason is simple; avoiding them will save you money. Read below to find out what they are and what you can do to avoid them. Enjoy.

First and foremost, doing nothing will net you nothing. What that means is that, while there is no guarantee that the market is going to go up any time after you make your first investments, doing nothing at all will net you nothing as well. It’s better to get started and weather any storms that come along then do nothing.

Similar to doing nothing is starting late, as you should already know that the earlier you start the better off you will be. Now, if you’ve already made it through your 20s and  still haven’t started, this should be changed from “starting late” to “not starting right away, now, like today”.

One common pitfall is investing in the short term only. Simply put, the only time you should invest money for short-term time period is if you’re going to need money  shortly. Any money that you invest in the stock market should be money that you won’t need for five years or longer.

If you don’t take advantage of a 401(k) retirement plan with your employer, and even worse you don’t take advantage of their matching plan,  you are making the common mistake of turning down free money. Simply put, any employer matched savings program that you can take advantage of, but also has tax advantages, should be maxed out whenever possible.

Another common pitfall that a lot of people make is to invest before they pay down any credit card debt that they might have. The fact is, most credit cards have incredibly high annual interest rates that will negate any sort of return that he might get on your investment. You’d be much better off paying off that debt and, once it’s gone, using whatever money you have left over to start investing.

We talked about people who are scared to start investing or put it off, but one mistake that many make is to simply go “all in” and put their money into something that is incredibly risky. Unless you have a magical source of more money and losing everything won’t hurt, this is not recommended.

One very big pitfall that many fall into is looking at their collectibles as a good investment. Look at it this way; if antique G.I. Joe action figures or Beanie Babies were being used to fund people’s retirements, there probably wouldn’t even be a need for a stock market. Unless you have literally millions of dollars in collectibles, and even then, looking at them as a way to fund your retirement is not in your best interest.

Finally there’s the mistake people make of trading in and out of the market too frequently. We’ve already said on many blogs that the best approach to investing is to do it for the long term. If you constantly trade in and out of the market you’ll miss out on any long-term gains that you might’ve gotten and also pay an awful lot more in fees that eat away  any returns that you might get.

Okay, so now you know some of the biggest pitfalls, mistakes, blunders and boo-boos that new investors make. Now it’s time to get out there and start investing, safe in the knowledge that you’ll be able to avoid these common mistakes yourself.

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