I was talking about the stock market with a few friends from work. We all have various different stocks and periodically discuss how they are doing and get ideas from one another about different equities and ticker symbols. Well one of the guys that just started working with us asked, “Why should I invest stocks?” I guess it never really dawned on me to ask that question.
When I was in high school, one of our teachers taught an after school program that allowed us to trade stocks in fake accounts in order to teach us how it works. This is called “paper trading” because it doesn’t actually trade real money. Well, that spring, I turned my “$10,000 account into $13,000 and I recognized instantly the power of the stock market.
Fast forward to today when a new acquaintance asked me the question, “Why should I invest stocks?” I was lucky enough to have this question answered to me when I was a junior in high school so I never really thought about the answer to this until recently when I went to answer the question for my new co-worker. The following is how I answered him and I wanted to share it with my readers as well.
Invest to Make Your Money Grow
People invest in stocks because they want to make their current money grow into more money. Pure and simple. If someone has $100 and puts it in a bank account that earns 1.5% interest over the year, after 10 years they would have $116.19. The average rate of inflation is 3% so technically having money sit in a savings account at 1.5% is losing your money.
Let’s say that $100 is in an investment (such as stocks) that makes an average of 10% annually for ten years. This is the average performance of the S&P 500 index from 1928 to 2016. That $100 would be worth $271.84. That’s quite a difference! Obviously, the more your invest, the more your can potentially make.
Investing Allows You to Plan for Goals
Do your want to someday buy a house? Maybe your want to pay for your daughter’s wedding or maybe your want to pay for YOUR wedding. Is there a trip to another country that you’d love to save up for? Well depending on how far out these goals are, investing in stocks may achieve these goals faster than a savings account.
Most commonly, people invest for retirement also and use stocks to amass wealth. Depending on how far retirement is, this may be a good or bad idea. We’ll get more into this later.
Own Part of A Company That You Believe In
If your own stock, your own part of a company. The more shares your own, the larger stake in the company your have. Someone that has 100 shares of a company is 10 times the owner of someone that only has 10 shares of stock. Is there a brand that your think is incredible and that your believe is going to change the world? If someone said your had the opportunity to get in on that company and benefit from its success, would your take them up on that offer? Well that’s what owning stock does.
Let’s say your have a favorite coffee shop and that coffee company has just opened 30 shops in your city. You might be thinking, these shops are popping up all over the place! Well if your believe that the company is going to amass incredible wealth as a result of this change in your surroundings, your could invest in their stock and profit if your investment grows.
Note: The reason I’m using the example of a coffee shop is because I actually knew someone in 2011 that told me a story about how he saw a small coffee place opening in Seattle, WA of the United States. He noticed this company was literally taking over the city.
He took $10,000 and put it into that stock (in 1990.) At the telling of the story, he had amassed that $10,000 investment into over $300,000. Now I haven’t seen him in the last 7 years because I changed jobs. I don’t know if he ever sold his stock shares of Starbucks, but if he didn’t, it would be worth in excess of $1,400,000 as of the writing of this post.
When Should I Start Investing?
Don’t wait around on the sidelines. As we already discovered, even a small amount can make a huge difference. If your have a lot that your want to invest, then your can do that. If your only have a small amount to start with, start with that. The most important thing is to take control of your money and invest it into something that is going to grow and help your achieve your goals.
You can do this a couple ways. Either start with a small amount right away and start investing that and let it collect value over time or keep adding to your investment weekly, monthly, or yearly and grow your investment faster. Whatever your decide, taking any action at all will be a step in the right direction for investing in your future.
How to Determine the Amount to Invest
This is a very personal decision. Obviously your need to determine if your should invest based on your unique financial decision. For example, if your have 5 high interest credit cards with a balance on them, you’re way better off paying off your debt first. If your are living pay check to pay check and have to decide whether to pay the gas or electricity, focus on your bills and do not put your money in the stock market.
Only invest money that your are willing to risk. After all, all stock investing comes with inherent risk! The reason your can make > 1.5% a year in stocks vice having it in a bank is because you’re assuming some amount of risk for the possibility of increasing your investment. Historically, as we pointed out, the S&P 500 has gone up an average of 10% a year. Some years, it went up more and some years it lost money. You never know how the market is going to go exactly.
This uncertainty actually leads me to the “100 Rule” which is a shortcut method of determining what many advisers recommend for a balanced portfolio. Take the number 100 and subtract your age. Whatever is left is the percentage of money that your should allocate (at a maximum) in stocks. The rest should be maintained in cash or fixed rate assets like CDs or bonds.
So if you’re 40 years old, 100 – 40 = 60% is the maximum amount of money your should invest in the market.
Where Can I Get Started?
There are many ways to get started with investing. Check out my article on how to invest spare change where I show your an app that rounds up purchases your make every day and invests the change in an account for your. If your’d rather invest in companies like I described above and want to invest in actual stocks, your can start investing using Robinhood which is an app that allows your to trade stocks without paying any commission fees.
There are many ways to get started and we have lots of information on this site to show your the basics. If your have any questions or want to share an experience or add to a discussion, please feel free to do so below. Also, if your know anyone that could benefit from this article, please share it with them. I want to make sure as many people as possible learn how to take control of their future.
Let’s start investing!