Have you ever wondered why investors behave the way they do? For example, why do people invest in bonds or stocks or not at all? Since I am an advocate of stock investing, let me make the case for stock investing.
So, why invest in stocks? No, I won’t just invest in any kind of stock. There are goals associated with investing in stocks. For starters, stock investors would want to be compensated more than if they put their money in the bank.
Stock investors would want to be compensated more than the risk-free interest rate which currently yields around 4.7%. For your information, the risk-free interest rate here is the 10 year Treasury bond backed by the United States Government that is deemed to be free from the risk of default.
When we invest in stocks, we would want a return of over 4.7%. How much more? That varies among individuals. Some want a 5% return, and others are satisfied with a 6% return. I would like at least a 7% return for my stock investment. There are reasons for this. Stock investing is relatively volatile and full of uncertainty. The interest rate goes up and down, which will hamper our return as stock investors. For example, if the interest rate rises to 8%, would aiming a 7% return for your stock investment be worth the risk? Probably not. In this case, most people prefer to put their money in the bank and enjoy a higher return.
Therefore, we need to know how much stocks have given investors historically. For the US stock market, the return for the last century has been in the neighborhood of 10%. That, my friend, is the sole reason to invest in stocks. Not because you want to own a piece of corporate America. You invest in stocks because it historically gives you a better return than other investing alternatives. No other investments boast that high of a return over the last century, not even real estate.
