Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Many people wonder why they should bother investing in the stock market these days. As one woman told me, “We’ve decided we’re better off using our investment money to pay down the mortgage. That way, we at least know we’re getting a 4.5 percent return.”
Such frustration is understandable. We’ve suffered two major bear markets in the past 10 years. Housing prices have collapsed. The European Union is teetering on the edge of financial disaster. Greece has an interim government. Italy’s prime minister is stepping down. To make things worse, we all understand that the U.S. has the same underlying problems — massive debt and high debt-to-GDP ratios — as those struggling EU countries.
All of this makes investing a scary undertaking. But the stock market is a powerful tool for building wealth; it just takes time and perseverance. If you had invested $1 in small cap stocks in 1925, you would have $16,057 today. A buck put into large caps that same year would have netted you $2,967. Inflation? It takes $12 today to buy what a dollar bought in 1925. So historically the market has rewarded wise, consistent investors, even in the face of inflation. More than government bonds. More than gold. More than cash in the bank.
The roller coaster aspect of the market prompts too many investors to make bad decisions – selling at the bottom of a bear market, buying at the top of bull markets, and jumping on trends that proved to be bubbles. Such emotional moves can kill long-term returns. A recent study showed that while the S&P 500 returned 8.2 percent from 1990 to 2010, the average investor’s portfolio grew just 2.3 percent.
We can’t eliminate market volatility, but you set up an “emotion-proof” strategy that cuts out short-term fear- or greed-based follies.
We’ve faced far worse circumstances in America — the Great Depression, two world wars, the threat of communism, assassinations and 9/11 — and still thrived. And the pie will continue to grow bigger over time. Companies like Apple will innovate and change how we live, and businesses like Georgia Power and Proctor & Gamble will continue to make money by providing essential goods and services.
Remember these wise words from Vanguard founder John Bogle: “The stock market is a giant distraction from the business of investing.” Look beyond the latest headline. Don’t let emotion throw you off track or keep you hiding in a bunker. Understand that stocks that pay dividends are – and will continue to be — one of the best places to grow wealth over time.
If you are looking for ideas on creating that emotion-proof investment strategy, check out what I call The Bucket Approach.
– By Wes Moss, for Atlanta Bargain Hunter