Yahoo Finanzen Why You Should Invest in Stocks for Retirement
Investing your retirement savings in the stock market has risks, but also the potential for significant growth, especially over the long term. Allocating at least a portion of your savings to a diversified stock fund can be an ideal way to grow your nest egg for retirement.
So what exactly is a stock? I tell people to imagine walking out of a bank and a stranger approaches you with a money-making deal. He claims to need capital to grow his business, and your money will grow by $8 more a year if you let him temporary use your funds. The value of your holdings change every day, so he's being up front that it may be a wild ride, but you do have complete control of when you want your money back, no questions asked. What will you do? I'm pretty confident you are going to run away as fast as possible. Yet, people are building wealth slowly by taking advantage of a similar deal being offered in the stock market all the time.
One of the ways big corporations raise capital is by issuing stock. In other words, a stock is basically rights to a share of the future profits. These stocks are priced continuously and the values can fluctuate violently at times. But the aggregate long-term returns of investing in stocks of big corporations have roughly been in the 9 to 10 percent range.
Notice I said in aggregate. Obviously, different investors have experienced vastly different returns because some corporations have done really well, causing their stock value to grow tremendously, while others fell on hard times and declared bankruptcy, wiping out equity investors completely. That's why investing in individual stocks is very risky. In light of this, money managers invented a product called a mutual fund, where multiple investors pool their money into the fund for that money manager to actively buy and sell stocks of multiple companies of his choosing in order to spread out the risks of losing all your money in one stock. The selection and record keeping doesn't come free though, which is why these mutual funds usually charge a fee via the expense ratio to cover the costs.
Eventually, a young innovator named Jack Bogle had an idea he thought was a better way to spread out the risks. He argued that investors could simply invest in an index, like the S&P 500, to get the diversification they needed. This alternative is better for investors, he argued, because investors can save the fee that goes to paying the money manager to pick the right stocks. He eventually founded Vanguard, creating the first index fund and the start of the passive investing revolution.
Today, we benefit from these innovations because investors get to choose from a wide spectrum of active and passive mutual funds from the marketplace. Both types of funds reduce the risks of investing in stocks, but index funds tend to have lower costs because you are not paying a fund manager to make trades. Still, active funds and the possibility of getting a better return than the market are always tempting for every investor. Which investment route you pick is ultimately a personal choice, but it's crucial to do your research in order to fully understand what you are investing in. Even if you speak with a financial advisor, it is important to understand all the intricacies of the investments yourself and not rely totally on someone else. You are the one who cares about your money the most.
Stock mutual funds can help you to grow your retirement savings faster than you could with bonds or savings accounts, and will continue to generate returns on your behalf after you stop working. And at a time when salaries are stagnate in many fields, stocks are the best way to join in the profit-sharing of corporate America.
David Ning is the founder of MoneyNing.com .
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