There is a widespread belief, especially among the risk-averse segment of the population, that investing in the stock market is more like gambling than investing. Given the volatility of the stock market over the past decade, it is understandable that people might believe this. However, simply put, these people are wrong. Here’s why.
First, let’s address the basic question: Why invest at all? I’m sure your answer to this question would be a little different from mine. However, generally speaking, we are investing for the future. We invest because we want to improve our lives or the lives of others in a constructive way. We invest because we want to retire early, send our children to college, or so we can donate our time or money for worthy purposes.
To earn money to achieve these goals, you will need to make good investment decisions. Most people would agree that good investment decisions maximize future returns while minimizing risk. If you want to achieve a very meager rate of return with little or no risk, you would invest in money market accounts or CDs. However, it will be difficult for you to even keep up with inflation by investing in these types of investment funds. In fact, you can argue that every investment has a rate of return that is not at least as high as a long-term inflation rate is not an investment at all.
On the other hand, the stock market has a long-term rate of return between 8-10 percent and has significantly exceeded inflation over time. In addition to the rate of return, the primary difference between the stock market and lower-yield investment assets is short-term variability. Even the best investors admit that it is difficult to predict the exact movement of the stock market during a certain day, week, month or even year.
However, if you look at longer periods of time, it has been proven that the stock market outperforms most other investment assets. In addition, although it has recently experienced a difficult period, it is very likely that the economy will continue to grow in the long run as long as there are new technological and other improvements that lead to increased productivity. Since the trajectory of the stock market usually reflects the trajectory of the economy, it is fairly safe to assume that both the economy will grow and the market will grow.
Investing in stocks can be a very profitable way to invest in the long run. Keep in mind, however, that successfully investing in individual stocks is extremely challenging and that you need to know what you are doing before you start. If you think you have no knowledge or do not want to invest time, you can still take advantage of the long-term benefits of the stock market by investing in index funds or mutual funds.
No matter how you decide to invest in the stock market, make sure you understand that people who say that investing in the stock market is like gambling miss the bigger picture. Looking at the bigger picture and the long-term investment strategy, it is very likely that you will lead them in the long run.