There is a common belief, especially among the more risk-averse segment of the population, that investing in the stock market is more like gambling than investing. Given the volatility of the stock market over the past decade, it’s understandable that people might believe this. However, simply put, these people are wrong. Here’s why.
First, let’s tackle a basic question: Why invest at all? I’m sure your answer to this question would be slightly different than mine. However, generally speaking, we invest for the future. We invest because we want to improve our lives or others’ lives in constructive ways. We invest because we want to retire early, to send our kids to college, or to be able to donate our time or money to worthy causes.
In order to make the money to reach these goals, you will need to make good investing decisions. Most people would agree that good investing decisions maximize future returns while minimizing risk. If you want to gain a very meager rate of return with little to no risk, you would invest in money-market accounts or CD’s. However, you will be hard-pressed to even keep up with inflation by investing in these types of investment vehicles. In fact, you can argue that any investment has a rate of return that isn’t at least as high as the long-term rate of inflation isn’t even investing at all.
On the other hand, the stock market has a long-term rate of return of anywhere between 8-10 percent, and has significantly outpaced inflation over time. In addition to the rate of return, the primary difference between the stock market and lower-yielding investment vehicles is short-term variability. Even the best investors admit that it’s difficult to predict the exact movement of the stock market over a given day, week, month, or even year.
However, if you look at longer periods of time, it has been proven that the stock market outpaces most other investment vehicles. In addition, although it has hit a rough patch recently, it is highly probable that the economy will continue to grow in the long run as long as there are new technological and other improvements that lead to increases in productivity. Since the trajectory of the stock market typically mirrors the trajectory of the economy, it is fairly safe to assume that as the economy grows, the the market will also grow.
Investing in stocks can be a very profitable way to invest in the long-run. Keep in mind, however, that investing successfully in individual stocks is extremely challenging, and you need to know what you’re doing before you begin. If you don’t think you have the knowledge or don’t want to invest the time, you can still take advantage of the long-term advantages of the stock market by investing in index funds or mutual funds.
Regardless of exactly how you choose to invest in the stock market, make sure that you understand that the people who say that investing in the stock market is like gambling are missing the big picture. By seeing the big picture and having a long-term investing strategy, it’s likely that you will come out ahead of them in the long-run.