Pros and cons of investing in stocks

Stocks have been one of the best wealth-builders for decades. Just $100 invested in the S&P 500 in 1928 would be worth over $750,000 at the end of 2022, but it's not always easy to achieve consistent growth in stock investing.

Even $100 invested in the same index 50 years ago would have grown to over $15,000 — 150x your investment, but stocks don’t go up every year. Over the last 25 years, the S&P 500 has had six down years, some of which took years to recover from. When investors consider the risks of the market and the disadvantages of investing in stocks, they’re better prepared to invest and enjoy the long-term benefits of investing. This can ensure you don’t let market swings keep you from one of the best investment options available. Despite relatively good returns, stocks can be volatile in the short term. Weighing out the pros and cons of investing in stocks should be a prerequisite for any investor — or anyone hoping to retire at some point in their life. Read on for a summary of the biggest pros and cons of stocks.

• Likely to grow over time

• Dividends can offer steady income

• Keep you ahead of inflation

• Getting started is easy

• Only takes a little bit of money

• Better liquidity versus other assets

• Numerous strategies to choose from

• Can be risky

• Must have a longer-term investing horizon

• Research can be time-consuming

• Gains are taxed

• May be emotionally taxing

• Number of options can be overwhelming

Potential return is one of the biggest incentives that draws investors to stocks, but there’s certainly more than that. One of the greatest benefits of investing in stocks is how accessible they are — but more on that later. For now, let’s dig into the numbers.

One of the key advantages of investing in stocks is that over the long-term, they tend to grow nicely. Investing in stocks means you have ownership in those companies — and thus, a stake in their earnings. As the economy and corporate profits grow, so do the stock prices of these companies.

Is investing in stocks worth it? The numbers suggest so. The long-term return of the S&P 500 — a stock market index that tracks 500 of the largest U.S. listed companies — has returned an average 10% annually since its beginning in 1928. Meanwhile, over the same timeframe, 10-year treasury bonds and real estate have returned less than 5%.

While an investor can profit from stock appreciation — the increase in stock prices over time — they can also generate income via dividends. Dividends are payments made to shareholders from a company’s profits. Not all companies pay dividends, while some pay higher dividends than others. Solid dividend-paying companies can provide a steady stream of income to stockholders.

Investing in stocks can be a great way to stay ahead of inflation. The long-term returns of the stock market tend to outperform inflation, while still providing a solid return. For example, according to McKinsey & Company, the average annual return on the entire U.S. stock market over the past 200 years after inflation was 6.5% to 7%. Stocks can help you hedge potential losses in purchase power and are one of the best investments during inflation.

Compare this to bond returns, which have had a more difficult time keeping pace with current inflation, and currently stand at 6.5%. The average annual return on long-term government bonds is generally 5% to 6%.

Technology has made investing in stocks easier than ever, while also decreasing commissions and fees on trades. Brokerages and fintechs allow investors to buy stocks in mere minutes — and often with no fees or commissions.

You don’t need thousands of dollars to begin investing in stocks. Many retail brokerages like Fidelity and Charles Schwab don’t have minimum account balances and will let you buy fractional shares. This means you can buy a partial share of stock, which can be very beneficial if you’re looking to build a diversified portfolio.

Compared to other investments, the stock market provides some of the best liquidity. You can buy or sell most stocks in a matter of minutes, which is great if you need your money quickly, but it’s important to be aware of taxes on both long-term and short-term capital gains. Other types of investments can take weeks or months to liquidate, such as real estate.

Whatever your investment style or risk tolerance, you can tailor your stock portfolio to meet your goals. With just stocks alone, there are numerous options that can provide exposure to small and large companies in just about any industry or geographic location. These strategies may include investing in high-growth technology stocks or sticking to more mature dividend-paying companies.

Despite the upside potential and liquidity that stocks provide, there are some disadvantages of investing in stocks — with greater return potential comes greater risk.

“Up and to the right” is the long-term trend for stocks, but they don't always finish higher each year. There are years when stocks end the year lower than where they started. If you have a short-term time horizon, stock prices may mean a loss when you need to sell.

What’s more, investing in stocks means you’re investing in businesses. Sometimes, these businesses fail. If that happens, shareholders are low on the list for repayment. Note that a well-diversified portfolio should all but eliminate the risk of a single stock going to $0.

It’s important to remember that you'll pay taxes on stock gains — eventually. You incur capital gains taxes when you sell a stock that's appreciated in value from the time of your initial purchase. If you hold the stock for longer than a year, the long-term capital gains rate applies. This tax rate is lower than the short-term capital gains tax rate. However, if you sell a stock for a loss, you can get a tax break on future capital gains from other investments.

Technology makes it nearly impossible to tune out a lot of the noise. Most “breaking news” stories or major recession predictions — albeit anxiety-inducing — shouldn't affect your long-term strategy.

Fear, worry, and unease are all potential feelings that investors may experience when the stock market goes into an extended decline. Conversely, when the stock market is on the upswing, investors may feel exuberance, confidence, and excitement. One way to ease the emotional volatility is to avoid looking at daily or weekly price fluctuations.

There are over 58,000 public company stocks listed on exchanges worldwide. Additionally, there are a myriad of other investing options, such as alternatives, mutual funds, and exchange-traded funds (ETFs). As a result, it can be challenging to find the right stocks to invest in. A financial advisor can help you navigate the vast amount of investment opportunities and design a balanced portfolio that best serves your personal situation.

Utilizing a long-term ‌investment strategy can mitigate much of the short-term risk of stocks, including price swings and volatility. There’s a reason long-term returns are usually the focus when discussing stocks because, over the short-term — less than one-year — performance may incur volatile fluctuations.

Investing in stocks can also be time-consuming, especially for someone doing it all themselves. Research, analysis, and portfolio rebalancing require a lot of constant attention. One of the key advantages of a financial advisor is expertise. They can save you time, but also provide guidance and support through volatile market cycles. Reach out to FinanceHQ today to see how we can help.

Given their volatility, stocks can be riskier when compared with less volatile asset classes like different types of bonds and real estate. However, there are some tips and strategies that can help manage the risk, such as managing your own expectations and being sure to diversify.

Although the long-term trend for stock returns is greater than other asset classes, it’s important to manage your expectations. There will be periods of stock market volatility, including downturns.

The S&P 500 has experienced over 10% mid-year declines in 10 of the last 20 years. Trying to time those downturns is nearly impossible. Investing with consistency is the key to taking advantage, surviving, and maybe even thriving in a downturn. This strategy is called dollar cost averaging (DCA), where you make a set, consistent investment over the long term.

Diversification is one of the best ways to weather bear markets, as well as negate some of the risky and volatile disadvantages of stocks. Diversification means investing across various companies, sectors, and geographies. Never invest large concentrations in a single stock, a certain industry, or a particular geographic region.

ETFs, which are baskets of assets that trade like stocks, are a low-cost way to achieve diversification. Investors can get exposure to hundreds of stocks with a single ETF, with the same liquidity as individual stocks. ETFs can also help address the issue of trying to pick from an overwhelming number of stocks. You can also find ETFs that give you access to other assets, such as bonds. Each ETF has an associated expense ratio, so do pay attention to what that is and how it may take away from your returns.

A long-term, diversified strategy will help you reach your goals despite market shifts and sudden moves. Remember that patience is one of the greatest virtues of a disciplined stock investor.

In addition, it's important to make scheduled investment contributions, check in regularly, and allow enough time for the stock market to generate long-term returns for your portfolio. Leaving your money in the market means it can compound, where you’ll see growth on the investments you make, as well as the growth on those investments.

When it comes to investing in stocks, you should revisit your goals regularly. This means reassessing your risk profile and adjusting investments or contributions based on current life events. Changes in income, savings goals, retirement plans, taxes, and insurance needs affect your investment strategy. Because of this, it’s best to check in at least once a year, but probably even quarterly, to make sure your goals and investments align.

That’s where working with a professional is a big benefit. A financial advisor’s job is to constantly monitor the markets and your investments so that you don’t have to.

One way to ensure you remain patient and diversified is to work with a professional. A financial advisor can help with all of the above, providing guidance and acting as a voice of reason during turbulent times.

Investing in an ETF can help get the ball rolling, but figuring out what you need for retirement savings can be a bit more complicated. Working with a professional can help you determine whether the benefits of investing in stocks outweigh the disadvantages of investing in stocks.

Stocks are a great wealth-building tool, so here’s a recap for those that are looking to balance the pros and cons of investing in stocks:

• Stocks have proven to be superior at generating returns for investors over the long term.

• Investing in the stock market comes with more volatility and thousands of investment choices, which can be emotionally taxing and overwhelming.

• Still, getting started with investing in stocks is easier than ever, and these relatively liquid investments usually provide the opportunity to fend off rising inflation and generate income from dividends.

There's no crystal ball that predicts where stock prices will be in a year — or even 10 years. But a financial advisor can help you set an investing strategy that matches your unique needs, risk tolerance, and savings goals. Looking to see if you’re on track for retirement? Are you diversified enough? Need help building a portfolio? Reach out today to see how FinanceHQ can help!