Why invest in stocks?

September 12, 2011

I get the feeling that for many investors who have been on the sidelines though the latest market volatility there has been an “I told you so” moment; when it comes to the advice planners give to invest.

It’s true – they missed out on the nervousness, the rollercoaster ride, and the bad taste in their mouth.

As I’m prone to do, I wanted to write about how investing and the market over the long run isn’t like the casino, as I tend to think many investors equate it to. But, I started to wonder if there are different ways investors relate to the markets. I wondered… are stocks the financial equivalent to peas?

Like listening to our parents to eat our vegetables, many know their advisors are going to recommend investing outside of comfort investments like money markets and CDs, and having part of your money in stocks.

Why do we recommend them? The facts are that stocks participation has led to the growth of wealth above inflation more so than any other investment. They are one of the few investments that ‘does a portfolio good’ in that way; since 1968, small company stocks have provided returns of 6.5% over inflation according to data provided by Fama/French. With the stocks of larger companies, the Fama/French data takes us back to the 1920s and we see a similar result (6.7%).

It won’t always be positive to be sure. The downsides of stocks can last for years (though the downsides are often overstated). The benefits of ownership come over time, like eating healthy food, or anything worthwhile.

Advisors recommend stocks because they are in your interest to have an appropriate allocation. Stocks should be used in moderation, and to the extent necessary.

As advisors, we know the activity of stock investing is one where risks are rewarded; the alternatives, though investors always seek substitutes for market volatility, we can’t say the same about.

When you look at investor reactions to volatile markets, it is to leave stocks, the one asset where volatility may be their friend after a downturn. Even doom and gloom economists like Nouriel Roubini believe stocks are an asset worth owning in the face of possible economic trouble.

Like your parents you know are right, advisors will be here patiently advising to maintain a balanced diet of investments. Many who met with advisors and adjusted their allocations after the 2008 market have already considered the appropriate mix, but if you haven’t yet reviewed your plan with an advisor, do so. Like healthy diet habits, the benefits from a balanced investment plan come years down the road in the way of a stronger retirement portfolio.

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site

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