For most of us, there comes a time in life where investing and building wealth take on greater precedent. This can be motivated by any number of reasons; like saving for your child’s college education, or speeding up your retirement timeline, or maybe you’ve just earned a promotion and have more income coming in. Whatever the reason, deciding to build your wealth and secure your financial future through investing can be a life changing opportunity.
Whether you’re just getting started on your investing journey or simply looking to refocus your investment philosophy, the 12 reasons below put the power of investing on display. From irrefutable numbers that show how investing in the stock market has been a decidedly winning bet over the last 100 years to showing how easy it is to invest in today’s tech-driven world, each reason serves an important purpose.
1) Invest to Build Personal Wealth and Secure the Life You Want
There is no better reason to start funding your investment portfolio than the opportunity it provides to secure the ideal life you’ve always envisioned.
Over a long-term investment horizon (typically ten years or longer), investing in the stock market has been a consistently winning bet.
In fact, if we look back over the last 100-plus years, not only did the stock market provide investors with 10% average annual returns, there were only a few 10-year periods where investing in the stock market lost money. The chart below looks back over that time period and shows there to be just two clusters of years where the S&P 500’s rolling 10-year annual returns produced a negative number.
Source: Crestmont Research
Unsurprisingly those periods happened to be on the heels of the two worst economic environments in modern history, the Great Depression years of the 1930s and just after the Financial Crisis of 2008 when the economy was also just a few years removed from the Dot Com Bubble of the early 2000s.
So what does this mean? It means that even with all this world has been through over the last century, from World Wars and assassinations to terrorist attacks and disease outbreaks, committing to a long-term investment approach in stocks no matter the surrounding environment has led to overwhelmingly positive outcomes.
2) Invest for Retirement
Investing for retirement is one of the most powerful ways to ensure that your future is secure and dictated by you. While it’s nice to know that social security and other safety nets are there, having an investment plan for retirement is the best way to make sure your family will be supported in the years and decades ahead.
Saving for retirement comes with tremendous tax advantages too. Most retirement accounts like 401Ks and IRAs are treated in a highly tax-efficient manner. With traditional 401K plans, which can be accessed through your employer’s benefits program, you are allowed to make contributions to your retirement portfolio on a pre-tax basis where they can then be invested in assets like stocks, bonds and commodities. From there, the investments inside your 401K grow completely tax-deferred until you begin to draw money from the account which typically won’t be until you’ve reached retirement age.
Having an investment account that grows completely tax free for years and decades can result in powerful compounding. What is compounding you ask? Well, Albert Einstein once referred to compound interest as, “the eighth wonder of the world. He who understands it, earns it and he who doesn’t, pays it.”
In simple terms, compound growth is what happens when you invest a sum of money into something, in this case the stock market, and patiently let it grow.
Source: BlackRock
It’s here that some old investing rules of thumb can help illustrate the power compounding in your investment portfolio. The Rule of 72 shows just how quickly the patient long-term investor can double their money. If we remember from the previous section, the stock market has averaged 10% annual returns over its 100 year-plus history. The Rule of 72 says to divide the number 72 by your average rate of return to arrive at how long it will take to double your money.
In this example, 72 divided by a 10% return means that your money would double every 7.2 years and that doesn’t even consider that you’ll be making consistent and frequent contributions to your retirement portfolio. Invest $10,000 today and assuming your return is 10% per year, your original $10,000 would grow to be $20,000 just 7.2 years later. That’s a pretty sweet deal!
3) Invest to Protect Your Money Against Inflation
You may have noticed that everything seems just a little more expensive these days. From going out to dinner to buying eggs at the grocery, prices have gone up. What you and your bank account are feeling is called inflation. In simple terms, inflation is the rise in price of the goods and services that you buy which results in a reduction in your overall purchasing power. Inflation rises and falls based on a variety of factors including supply and demand, input costs and currency fluctuations.
Your dollar simply can’t buy what it used to.
Fortunately for us, we can turn to investing in the stock market to fight off the ugly impact of inflation and protect the value of our money. Since the year 2000, inflation has been rather benign averaging roughly 2.5% in any given year. That doesn’t seem so bad except that’s how much the purchasing power of your dollar is eroding per year. That adds up fast!
This is where the strength of the stock market comes in to save the day. The chart below assumes that an investor purchased $1 worth of each investment shown on January 1, 2002 and held it for 20 years. And we see that while the $1 “invested” in the inflation rate had grown to $1.60, the $1 the investor put into the S&P 500 had grown to $6.20 and far outpaced the annoying bite of inflation.
Source: Morningstar/Edward Jones
What the chart also shows is that other asset classes like U.S. Treasury Bills and long-term Government Bonds have struggled to outpace inflation. This re-emphasizes the important role stocks play in your investment portfolio.
4) Invest for Higher Returns
Investing in the stock market is the best way to grow your assets and wealth because it offers a combination of fantastic historical returns with a low barrier to entry. Unlike investing in real estate or purchasing a business, investing in the stock market requires little effort and we’ll cover more on that in a bit.
And in terms of historical returns, it’s hard to refute the track record of investing in stocks. Consider the chart below which starts in 2008, one of the worst years ever for the stock market, and goes through the end of 2022. The chart plots the returns in each year for various asset classes including U.S. Large Cap stocks, Developed International stocks, Commodities, Real Estate (REITs), and Cash.
Source: JP Morgan – Guide to the Markets
What the study shows is that even after the horrific start in 2008 when the S&P 500 lost 37%, U.S. Large Cap stocks were able to rebound so powerfully over the following 14 years that they finished 2022 as the best performing asset class of the bunch by returning more than 13% per year (see far right column). The next best asset class was Developed International stocks which returned just 7.6% annually.
5) Invest to Diversify Your Assets
Another benefit of investing is the diversification it offers. All aspects of life come with risk and it’s our job to find ways to diversify away some of that risk. Take our health for example, because we want to lessen the risk of dying young or getting sick we do things like exercise, eat well, and visit the doctor.
The same approach should be taken in our financial lives. Let’s say you are a small business owner and 100% of your income and wealth is tied to the business. If business is booming, you’re probably over the moon that your customers love your product or service. But what happens if business slows or something occurs where you can’t operate the company and earn income for an extended time?
This is where investing in the stock market plays a key role in diversifying your assets and preventing you from being too concentrated in any one area of your financial life.
6) Invest for Tax Efficient Growth
As we mentioned in the Invest for Retirement section, stock market investors are incentivized by the government via tax-advantaged accounts to invest in the stock market.
Through accounts like 401Ks, IRAs, Roth IRAs, and others, investors can own stocks and see their returns compound without being taxed until the funds are withdrawn from the account. Often referred to as tax-deferred investment accounts, these were created in an effort to spur retirement savings and promote wealth building.
7) Invest to Optimize Your Liquidity
One of the coolest features of investing in the stock market is that within the span of minutes you can decide that you want to be a shareholder of Marriott or Hershey or Apple and with just a few clicks have that stock purchased and added to your portfolio.
Just as easily, you might decide you want to sell your Hershey shares in order to buy a new car. Within seconds of clicking sell those proceeds will be back in your account sitting in cash.
The stock market is massive and incredibly liquid. This is a positive for you because it means that you can access your funds quickly unlike if you tried to sell an illiquid asset like a home or your business to free up cash.
8) Invest to Generate Additional Income
Many investors that seek to generate additional income will invest in a portfolio of companies whose stocks have a history of paying attractive and stable dividends.
Dividends are a company’s way of paying excess profits back to its shareholders. A dividend can be paid in cash or in the form of additional shares. The investor can then choose to take and keep that cash as a supplement to their income or they could choose to reinvest it in the company or other investments. If the dividend comes in the form of additional shares, the investor can decide to keep or sell the shares.
9) Invest for an Ownership Stake in Businesses You Believe in
If you’re new to investing, one of the ways you can start to get comfortable is to own shares of companies you believe in or know well. While it may not seem like it, when you buy shares of a company you officially become a part-owner of that business. Albeit, a very small part-owner in most cases.
However, if you’re passionate about the products, services or mission of a certain brand it may make sense to put some of your investment portfolio in that company and become a shareholder. Not only will this bring you a sense of pride it will also give you a voice. Shareholders are entitled to take part in votes that help define the direction of the company and represent your chance to be heard.
10) Invest to Simplify Your Life
As you grow more familiar with investing, you’ll come to learn that many people overcomplicate the process. They’ll want to get into real estate or private investing or difficult to understand strategies that promise high returns and little downside. But the farther they go down that complicated road the more they forget how successful a simple approach to long-term investing can be.
The chart below shows that the longer you’re willing to be disciplined and patient, the more you’ll be rewarded.
Source: JP Morgan – Guide to the Markets
Since 1950, the S&P 500 has never had a negative 20-year rolling return. In fact, its worst return over a 20-year period is +6%. The average annual return of the S&P 500 since 1950 is 11.1% and if you invested $100,000, based on an 11.1% annual return assumption, you would end up with more than $818,000 after 20 years.
11) Invest Because It’s Easy
Never has investing in the stock market been more accessible and user friendly. Every day, millions of people manage their investment portfolios right from their phone through mobile apps and user friendly websites. Investors can fund their portfolios with just a few dollars and buy their first shares.
From there, cool features like automatic contributions have made it super simple to keep us on track toward our wealth building goals.
12) Invest to Feel Empowered
Getting started in investing can unlock a curiosity and interest that leaves you feeling empowered. By taking this crucial step toward building your wealth, you have committed to a journey that will both enlighten and humble you.
Becoming a long-term investor can also serve as a prompt to emphasizing other areas of financial wellness that, over time, will help to ensure that you have built sound financial strategy for you and those you care for.
Conclusion
Investing in the stock market offers many great benefits all of which lead to making you more likely to secure the life and future you want.
If you are just beginning your investing journey, be patient with yourself and remember that consistency wins out. If you prioritize the actions shared in this article like utilizing tax-advantaged accounts, investing for the long-term, keeping it simple and remembering the power of compounding, you will be on your way to a brighter financial future.
