Should you be Investing in Stocks?
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By Sean Ryan, CFA
Whether (or how much) to invest in stocks mainly depends on your investment objectives.
Compared to investing in bonds or keeping your money in the form of cash, stocks offer higher risk and higher return. In this case, “risk” means volatility – stock prices will tend to bounce up and down much more than bond prices. That means a higher risk of seeing your investment decline in any given month or year.
So why would anyone want to own stocks if they are more risky? Over time, investors get compensated for bearing that higher risk through higher returns. While stocks may be more likely to lose value in a given month or year, they tend to have a bigger increase in value over longer time frames, compared to bonds. Over a 20 year or longer time period, the chance of bonds doing better than stocks is actually quite tiny.
If you are saving money for a down payment on a house, for example, you probably expect to save up enough money over a relatively short period – maybe a couple years. In that case stocks may not be the best investment – better a safer investment with less chance of losing money.
In contrast, if you are saving money for retirement, then you generally have a long enough time horizon that you will benefit from owning stocks despite the extra risk. In fact, stocks may be less risky in the sense that the higher returns over time reduce the risk that you’ll outlive your assets as a retiree.
That raises the question, “What if I plan to retire in just a couple years?”
Well, once you retire you may stop saving money for retirement, but that’s not the end of your investment horizon. Hopefully once you retire you will continue to live a healthy life for decades to come. In fact, for an American turning 65 today, statistically speaking life expectancy is 17 more years for men and 20 more years for women. Which means that if you retire at age 65, then on the day you retire you are still better off investing in stocks.
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