Investing is a great way to grow wealth, but you shouldn’t plan to strike it rich overnight. Rather, you’ll need to invest steadily and consistently through the years to eventually accumulate a hefty sum of money.
But some people are afraid to invest — specifically, they’re scared of the stock market — and so they intentionally stick to safer investments, like bonds, that are known to be far less volatile. The problem with this approach, however, is that if you don’t take much risk in your portfolio, you’ll lose out on the reward of stronger returns. In fact, staying away from stocks could actually cost you hundreds of thousands of dollars over time.
Why you can’t afford to fear stocks
Though stock values do have the potential to fluctuate a lot, one thing to keep in mind about the stock market is that in the long run, it tends to reward investors who stick with it. Bond values, by contrast, don’t tend to move around as much, though bonds do provide the stability of semiannual interest payments.
But here’s one reason why bonds shouldn’t be your primary focus if you have a long investment window ahead of you — their returns lag behind in a serious way. If you load up on bonds in your portfolio, over time, your investments might generate an average annual 4% return. With stocks, you might easily score double that return, and that’s actually being somewhat conservative.
So let’s see how that difference might impact you financially. Imagine you’re able to invest $300 a month over a 40-year period. That’s a reasonable amount of money to part with on a monthly basis, even if you’re more of an average earner. If you load up on stocks in your portfolio and snag an average yearly 8% return, you’ll wind up with $932,000. On the other hand, if you play it safe and stick to bonds, which deliver a 4% average annual return over those 40 years, you’ll wind up with just $342,000. All told, that’s a difference of nearly $600,000.
And that’s why stocks are a better bet, despite the inherent risk. Of course, you should only invest money in stocks that you don’t plan to use within seven years. Stocks do have the potential to lose value during market corrections or full-blown crashes. But if you’re investing for the long haul, stocks make a lot of sense. In fact, they could spell the difference between hitting your target savings goals or falling short.
If you’re worried about choosing the wrong stocks to invest in, you could always opt for S&P 500 index funds instead. In doing so, you’ll effectively own a piece of the 500 largest publicly traded companies out there. In fact, the key to investing successfully in stocks is assembling a diverse portfolio that helps protect you during periods of volatility. S&P 500 index funds can help you achieve that goal so that you ultimately wind up growing a respectable amount of wealth in your lifetime.
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