Well, that’s the first question I am always asked when I suggest my friends a happy economic future “Why should they invest in stocks”. When I start to explain, Then their wife or girlfriend gives a look as if I am suggesting their beloved husband or boyfriend to gamble. So on this fine evening, I thought why not try a less harmful way to make people understand an important subject of financial freedom “why you should invest in stocks “.
1. Stocks as an investment have offered the most potential for growth:
Stocks have consistently earned more than any other type of investment over the long term, despite regular ups and downs in the market. Take a look at what 10,000 Rs would be worth over the 20-years history of the stock market. During 20 years time, stocks returned an average of almost 11.2%, gold 10.4%, and ppf 9%, before inflation.
Even though it wasn’t a constant straight line up for that whole time, but the figure below shows that stocks have historically offered more growth over the long term. That’s why investing in stocks, equity mutual funds, or ETFs, is important when saving for retirement or other far-off goals.
Now, As you can see in the figure below inflation is an important aspect to consider.Inflation means the general level of prices increase or with time more money is required to pay for goods and services. Inflation has climbed at the rate of around 7% annually.
So your money’s value will depreciate with time. As a result, your so-called fight for investment is not only to beat the inflation but also to maximize the margin of your investment with respect to inflation. So if you are not investing in stocks in some way, you are losing an opportunity to avail ample returns.
Now consider that if you are not investing at all or just saving, then good luck my friends your money is gifted to economic termite called inflation. Inflation will eat up the value of your savings. My deep condolences for your money.
2. You can beat the stock market drops:
It makes sense to own more stocks, but if market drops(bearish market) still make you nervous, remember this: It may be painful for a time, but if the stock market behaves as it has over long time periods, you would be able to ride it out. This is why stocks should be owned for the long-term perspective. It has taken many years, even multiple decades, to recover from the worst historical declines in the stock market. But, overall, stocks still offer the most growth potential, by far—as long as you can stay on the course over the long term.
There is one more perspective to look at this situation: If you are tempted to sell your stocks when they go down, think why to take losses as eventually those stocks rebound back in long-term and as your investment is for a time far in the future.
Also, if you save regularly and put your savings in the stock market during down market, you would enjoy an unparallel advantage. As that investment would get you bargain in downtime and it would be better positioned for growth when the market recovers. SO START TO LOVE THE MARKET DIPS.
As you can see in the figure, we pointed out the market return after every dip:
- The market reached 1,048 level in the year 1990 to 3,927 level in 1994, returning a healthy return of 275% in the time period of four years. So if you have invested 100,000, the amount would be worth Rs 375,000.
- Similarly, The market reached 3,377 level in the year 2002 to 20,287 level in 2007, returning a fabulous return of around 500% in the time period of 5 years. So if you have invested our last return from the year 1994,i.e. Rs 375,000 the amount would be worth Rs 2,250,000.
- Then, The market made a new low in 2008. Thereafter, The market reached from 9,647 level in the year 2008 to 21,171 level in 2013 and continued to 33,174 in 2018, returning a healthy return of 275% in the time period from 2008 to 2013 and a return of 243% from 2013 to 2018. So if you have invested your last return amount Rs 2,250,000, the amount would be worth Rs 8,437,500 in 2013 and the 2013 amount invested would be worth Rs 28,940,625.
Well, this scenario might look too fancy to you, but this scenario is based on facts and figures. And yes, you can achieve it too. Just stay with us. I promise we will do it together.
Few of you might be thinking well then how will I time the market. That is the trickiest part to assess. There is a good News; We will discuss it later in another blog.
3. You don’t have to invest everything in stocks:
We at wealthblog believe that an appropriate mix of investments should be based on various factors such as person’s time horizon, financial situation, and risk appetite. But, as a general rule, those with longer investment horizons should diversify their exposure to stocks. Take a look at four hypothetical investment portfolios, to see how each would have performed over a long period of time. As you can see, the conservative portfolio has historically provided much less growth than an aggressive portfolio with more stocks exposure.
So, you have to assess your goals and other factors before investment, but make sure you have a healthy proportion of stocks exposure in your portfolio.
4.Why Stock is the king:
Well, Let’s see if you would have invested Rs 100,000 in four common and one opportunity stocks, each 20,000, 10 years back. What that sum, as well as stocks, would be worth. As you can see in the figure we have to choose:
Returns in Common Stocks Excluding Bonus and Dividends :
- Infosys (IT): In 2007 if invested 20,000 would be worth 50,120 approx. in 2017.
- HDFC (Banking): In 2007 if invested 20,000 would be worth 1,06,114 approx. in 2017.
- MRF (Tyre): In 2007 if invested 20,000 would be worth 2,07,709 approx. in 2017.
- Titan (Misc): In 2007 if invested 20,000 would be worth 2,32000 approx. in 2017.
Returns in Opportunity Stocks Excluding Bonus and Dividends:
- Eicher Motors (Automobiles): In 2007 if invested 20,000 would be worth 14,61,024 approx. in 2017 excluding bonus and dividends.
5. Power of Bonus and Dividends:
As you can see in the figure below there are other value-added benefits than just stock price increase: Bonus and dividends
A bonus is an offer of additional shares to you if you are a shareholder of that company’s stock. Bonus issue also makes a stock more attractive to other investors as it gives liquidity to the stock.
Whereas, the dividend can be issued as a cash payment for a portion of company’s earnings if you are a shareholder.In essence, a dividend is a reward to shareholders for owning stock in the corporation. So, dividends are a key way for companies to attract investors to buy their stock and stay with those stocks.
Now as you can see in the blog that there are multiple benefits if you invest in stocks or equity. So, whenever anyone says that “you should not invest in stocks or equity” rather than debating make them read this blog. And if they still don’t understand stay away from them, as they can be harmful to your economic well being.
Now some word of caution: Even you can be harmful to your economic health if you can’t control your emotions or get impulsive with your investment. There would be a lot of ups and downs in the market as we have explained in the blog. Investment in stocks would be a tough test of you and your emotion and believe me, this is the trickiest skill to gain.
In the next article, We will help you gain that mindset. We would be discussing and breaking “few of the biggest myths about investing in stocks”. So stay tuned with us.
Graphics by: Mayank kulshrestha
All blog posts of wealthblog.in are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.
Experience of 8 years in stock investment. I learned everything by making a lot of mistakes and losing a good amount of money, I am here to make sure you don’t lose on either: Hope or Money.