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Why Invest In Stocks?
In terms of an asset class, stocks are hard to beat. Over time, they have higher returns than bonds or real estate. There are a few reasons stocks are such a great asset class, but stocks do have a few drawbacks as well:
Benefits of Stocks:
Returns: Over time, stocks outperform bonds, CDs (and other cash investments), and real estate. Stocks on average return about 10% a year, whereas these other investments generally return at about 5-7%.
Taxes: If you hold a stock for more than a year, your profits (when you choose to sell your stock) are taxed at long-term capital gains rate of 15% instead of your standard tax rate. Money you make from interest in a savings account or CD is taxed at your regular tax rate, which can be as high as 35%.
Diversification: Unlike real estate, it is easy to diversify your stocks. In fact, you can buy whole indexes of stocks, such as the S&P 500 or Wilshire 5000, by investing in ETFs that track those indexes. When you buy real estate, your returns are largely the result of how popular that area becomes. If you buy a house in an area that goes downhill, you will lose a lot of money on that house. For stocks, you can own a stock that literally goes to zero, but it's not a big deal provided you invested in a wide variety of stocks.
Disadvantages of Stocks:
Risk: The stock market can vary wildly. If you invest in a stock, your investment can literally go to zero if that company goes out of business. However, if you are properly diversified, the risks associated with the stock market are not that bad. Over the long run, the stock market goes up. Nevertheless, the risks with stocks will always be higher than a guaranteed return with a CD or government treasury.
