Real estate Why stocks are good investments for almost everyone Almost everyone should own stocks.
- Joshua Kennon Updated April 24, Investing is one of the best ways to build wealth over your lifetime, and it requires less effort than you might think.
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That's because stocks have consistently proven the best way for the average person to build wealth over the long term. Stocks have outperformed most investment classes over almost every year period in the past century. Why have U. Because as a stockholder, you own a business; as that business gets bigger and more profitable, and as the global economy grows, you own a business that becomes more valuable.
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In many cases, shareholders also earn a dividend. We can use the past dozen years as an example. What varies from one person to the next is how much stock makes sense. For example, someone in their 30s saving for retirement can ride out many decades of market volatility and should own almost entirely stocks.
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Someone in their 70s should own some stocks for growth; the average something American will live into their 80s, but they should protect assets they'll need in the next five years by investing bonds and holding cash. There are two main risks with stocks: Volatility: Stock prices can swing broadly over very short periods. This how to make money by investing money risk if you need to sell your stocks in a short period of time.
Permanent losses: Stockholders are business owners, and sometimes businesses fail. If a company goes bankrupt, bond owners, contractors, vendors, and suppliers stand to get repaid first.
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Stockholders get whatever -- if investments in projects on the Internet -- is left. You can limit your risk to the two things above by understanding what your financial goals are.
The answer to that is a resounding, "Yes. Before you dive in, there are some mindset principles that you need to adhere to. Moving beyond the scarcity mentality is crucial. That's just a belief system. Think and you shall become.
Managing volatility If you have a kid heading off to college in a year or two, or if you're retiring in a few years, your goal should no longer be maximizing growth -- instead, it should be protecting your capital. It's time to shift the money you'll need in the next several years out of stocks, and into bonds and cash. If your goals are still years and years in the future, you can hedge against volatility by doing nothing.
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The first chart above is an excellent example of this strategy at work. Even through two of the worst market crashes in history, stocks delivered incredible returns for investors who bought and held.
Avoiding permanent losses The best way to avoid permanent losses is to own a diversified portfolio, without too much of your wealth concentrated in any one company, industry, or end market. This diversification will help limit your losses to a few bad stock picks, while your best winners will more than make up for their losses. Diversification can protect you from permanent losses and give you exposure to more wealth-building stocks.
What to Invest In
Quiz What's your risk tolerance? Why you should invest in bonds Over the long term, growing wealth is the most important step. But once you've built that wealth and get closer to your financial goal, bonds, which are loans to a company or governmentcan help you keep it. There are three main kinds of bonds: Corporate bondsissued by companies. Municipal bondsissued by state and local governments.
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Treasury notes, bonds, and billsissued by the U. As you get closer to your financial goals, owning bonds that match up with your timeline will protect assets you'll be counting on in the short term.