Why Invest in Stocks

Over the past century stocks have handedly outperformed all other investments. Because of these returns today more than 150 million U.S investors directly or indirectly own some form of stock. This does not include the countless number of investors from outside the United States. Every investor’s portfolio should include at least some percentage of equities even if you are retired.

Over the long haul a stock portfolio will outperform other investment opportunities. From 1972 – 2007 the S&P 500’s average return was 12.28% and international developed market (EAFE) average return was 13.32%. These returns handedly beat Treasury Notes, Corporate Bonds, Money Markets, CDs and the most ruthless predator of all, inflation.

One caveat to holding stocks is that you must be in the market for the long term. As the amount of time you plan to hold stocks increases your risk decreases exponentially. In the 200 years of U.S stock market history there has never been a 15 year holding period where you would have lost money. In recent history you would have had to hold U.S total stock market index for less than 6 years in order to have lost money. The following chart displays the 10 year rolling compound annual growth rate of the U.S TSM index and the EAFE index. As is demonstrated by these charts there is not a 10 year period in recent history where an investor would not have performed handsomely.

Why Invest in Stocks? You should invest in stocks because they are the return generators of your portfolio. If you are investing for the long term, as you should, then the risk of owning stocks diminishes completely. Please remember when investing in stocks to only purchase index funds and stay clear of individual stocks and actively managed funds. To end this article I will present you with a quote from John C. Bogle, founder of the Vanguard Group:

“If you go back to 1970, there were only 355 equity funds. Only 169 of them survive today, so right away you are dramatically skewing the numbers by not counting the losers. Of those 169 survivors, only nine beat the S&P 500 through 1999. Three by 1 percent to 2 percent per year, four by 2 percent to 3 percent, and only two by more than that. I would say that 2 percent isn't really statistically significant, but lets leave that aside. Then there's taxes. After tax, maybe only those top two truly beat the market. That means its just a game of chance and a bad one at that.”