Can you & I make money in Stocks?
If you like me have goals like “Retiring Early”, “Child’s Education”, “Dream Vacation”, “Big House”, “Awesome Car”, you would have by now realized the importance of investing.
Today we will talk about investing in stocks and if you are like me, probably the first question I would ask is – Hey can I make money in stocks and if so how much? That would be pretty important to me. I’m sure it is to you too.
And the good news is – Yes you can make money in stocks – in fact stocks outperform things like bonds, cash, gold and other asset categories by a large margin over long term, so they’re a great way to grow your money.
Certainly over the long term stocks make money, in the short term they can be really risky commodity – go up and down quickly. But over the long term they do make money.
Don’t take my word for it – let’s go through some charts together.
We are looking at DOW – which is a smaller basket of stocks – only 30 of the largest US companies that are representative of a variety of industries because it is one of the oldest indices in the World – came out in 1896. Our own Nifty 50 first came out in 1996 a good 100 years after DJIA – so its historical record is just above 30 years old. And as you can see over this chart if you start over in the 1900’s, you know stocks go up and over the long term we see that stocks have gone up by following the upward motion of that chart the whole time.
The Good News
The very first thought that comes to mind seeing such mind boggling returns is the famous regulatory disclaimer – “Past returns are not indicative of future performance”. We can’t predict the future, but we have over 100 year years of data, that’s hard to deny too.
So yes, I believe stocks will make money in the future too.
As you can see from above, Stocks tend to go down from time to time, but they go up once again over the long term.
Individual stocks might go down and never recover certainly but if you have a diversified portfolio of stocks and stay true to the course, you’re going to be in a much better place than somebody not having stocks at all in their portfolios.
That’s the good news.
Now challenging news – you can see there are some drop offs in there as it’s not just a straight line going up.
There are up and downs peaks and valleys and when it’s going down that means your investments i.e. your stock has gone down. If you are an optimist, you would say, stocks are on SALE and it’s a good time to buy actually
You’re buying low with the idea of eventually something high.
Buy low, sell high. Right. Stock Investing 101.
Look at the highlighted area – at the end of 1929.
So what happened in 1930’s? What happened when all of a sudden stocks went plummeting? Well, that was the Great Depression.
And you can see during the Great Depression, how the Stocks went down pretty quickly but they rebound and they overcame the Great Depression, they overcame World War II in the 40’s and they overcame all these obstacles to stocks in the world and have continued their rise over a long period of time outperforming assets like bonds and cash and their peers as long term investment.
Great Long Term Returns But Bumpy Ride
As you can see, in the best year (1933), DOW gave phenomenal returns of 63.7%. WOW!
On the flip side, in the worst year (1931), investors lost more than 50% of their money. That’s no fun at all. Right?
You’ve got the Great Depression and stocks went way down and then they went way back up and they went down and in all that you can see that was a very volatile time.
Of the 100 years of investing in stocks (we are still referring to DOW), for some 25 years you’re going to have a loss. It might be only 1-2% or it might be as high as 53% but 25 of the 100 times you’re going to have a loss.
The good news is that, the other 75 times you gain or at least break even and that more than makes up for the volatility and the risk of those 25 years. Mind you, these 25 years are never in succession. It’s a bumpy ride, never a one way downhill or uphill journey.
If you take the long term horizon, you would be surprised, how over a single decade, stock markets become less and less risky and more and more attractive.
Take 1930’s for example, by all counts the most horrendous decade for stock markets in the history, still the loss is a mere -0.63%, I was certainly expecting it to be much worse.
In conclusion, by investing in a riskier asset class like stocks, you can get some pretty good returns over time and that’s what helps fund your future goals and your future dreams.
If you are investing for a long-term goal like retirement or children’s education – stocks turbo charge your portfolio & give you the growth you will need to achieve it. Over the long term, no other type of common investment performs better than stocks.
The major disadvantage to investing in stocks is that prices can be volatile and spike up or plummet quickly as trading volume fluctuates. News, earnings forecasts, war, economy and quarterly financial statements are just a few triggers that cause investors to buy or sell shares and that activity influences a stock’s price.
Price volatility is why stocks are one of the riskiest investments to own in the short term. Investing at the wrong time could hurt your portfolio or cause you to lose money if you need to sell on a day when the price is below what you originally paid for the shares.
But as I mentioned, you can minimize this risk, by owning a number of different categories of stocks (diversification) —such as domestic, international and small/large companies to offset the risk.
We will discuss various investment strategies in a later post.
For now Happy Investing!