If you’re wondering how to protect your savings in a way that can beat inflation while giving you above-average returns, one option to seriously consider is to invest in the stock market.
The Dow Jones Industrial Average has delivered an annualized return of almost 8% over the last 25 years. The S&P 500 has, in fact, given a return of between 8% to 12% per annum.
So, if you had invested just $10,000 in the stock market, say 50 years ago, that $10,000 would have become more than $380,000 today! So, is investing in the stock market a good choice? Let’s look at the pros and cons of doing so.
- 1 1) Pro: A great way to beat inflation
- 2 2) Pro: You can generate substantial wealth
- 3 3) Pro: Your financial portfolio gets added flexibility
- 4 4) Con: The stock market may crash
- 5 5) Con: You’ll have to devote a lot of time if you do your investments yourself
- 6 6) Con: You should have a good appetite for risk
1) Pro: A great way to beat inflation
Investing is one of the best ways to beat inflation. Historically, the average annualized return from stocks is higher than the average annualized inflation rate. However, this will apply only if you hold stocks for an extended period since the stock market has its ups and downs.
2) Pro: You can generate substantial wealth
One of the biggest draws of the stock market is its potential to generate substantial wealth for you. You must have heard of people who bought shares of companies such as Google or Apple at very low costs and made a literal fortune with those investments.
However, you don’t need to play the lottery in an attempt to find the next multibagger, provided you’re willing to play a long game in the stock market and hold your investments in the long term.
You can generate good investment returns on the stock market by taking professional assistance from experts advisors and help you generate wealth in the long term.
3) Pro: Your financial portfolio gets added flexibility
Your financial portfolio will consist of various assets like your house and bank deposits. If you invest in stocks, your entire financial portfolio will get added flexibility.
If you like, you can allocate your funds for your retirement. The best part of such allocation is that those funds will stay tax-free until you actually use them.
4) Con: The stock market may crash
Volatility is a given for the stock market, yet a significant erosion of your invested capital is less common. But, keep in mind that if the stock market suffers a substantial drop in value, then the value of your invested stocks may plummet. For example, the stock market crash in 2008 made almost all stocks touch unanticipatedly low levels in just a few hours.
Even though the stock market recovered since then, investors took years to rebuild their portfolios.
5) Con: You’ll have to devote a lot of time if you do your investments yourself
If you buy stocks on your own, you need to do thorough research of each company to get an idea of its profitability potential before purchasing its stock. You should know how to read annual reports, financial statements and keep an eye out for any news about the company’s development
What’s more, you should monitor the stock market regularly since the price of a company’s stock is likely to fall in a bear market, a market crash, or a market correction. Follow these practical tips for investors if you are looking to get the most out of your investments.
6) Con: You should have a good appetite for risk
If you’re investing in individual stocks, you should have a good risk appetite. If a company does well, you may get returns that are multiple times your invested amount. However, if a company does not perform well, investors in it are likely to sell, which may, in turn, cause the stock price to go down drastically. If you sell your holdings in that stock, you’re likely to lose a substantial part of your initial investment.