In terms of an asset class, stocks are hard to beat. Over time, they have higher returns than bonds or real estate. There are a few reasons stocks are such a great asset class, but stocks do have a few drawbacks as well:
1. Stocks have offered the most potential for growth.
U.S. stocks have consistently earned more than bonds over the long term, despite regular ups and downs in the market. Take a look at what $100 would be worth over the history of the stock market (S&P began tracking performance in 1926). During this time, stocks returned an average of almost 10% annually, bonds 5.3%, and short-term investments 3.5%, before inflation.2 Of course, it wasn’t a straight line up for all, but what this shows is that stocks typically offer more potential for growth over the long term. That’s why investing in stocks or stock mutual funds is so important when saving for retirement or other far-off goals.
2.Returns of Stocks
Over time, stocks outperform bonds, CDs (and other cash investments), and real estate. Stocks on average return about 10% a year, whereas these other investments generally return at about 5-7%.
Unlike real estate, it is easy to diversify your stocks. In fact, you can buy whole indexes of stocks, such as the S&P 500 or Wilshire 5000, by investing in ETFs that track those indexes. When you buy real estate, your returns are largely the result of how popular that area becomes. If you buy a house in an area that goes downhill, you will lose a lot of money on that house. For stocks, you can own a stock that literally goes to zero, but it’s not a big deal provided you invested in a wide variety of stocks.
4. You can ride out the ups and downs of stocks.
So you may know that it makes sense to own more stocks, but market downturns might still make you nervous. The headlines can be scary. Remember this: It may be painful for a while, but if the stock market behaves as it has over long periods, you should eventually be better off. Thinking of it this way may help too: Losses are just on paper unless you sell your investments. If you are tempted to sell investments when they are down, remind yourself that you are investing for a time far in the future. Try not to let short-term volatility cause you to move away from stocks. Also, if you save regularly and continue to invest during down markets (and the market demonstrates the kind of long-term growth that it has historically), you will be adding to your savings during those market dips, or “buying low.” When the market recovers, you may be even better positioned for growth.