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Investing in the stock market can be one of the most effective ways to build wealth over time — and it’s never too late to start. But if you’re new to the financial markets, taking the leap can be intimidating.
Consider these five reasons why opening a brokerage account and investing today could pay off for you over the long term.
1. Building Wealth Takes Time
One way to grow your confidence in the stock market is to look at historical returns. While past returns don’t guarantee future performance, these figures can give you a general sense of how stocks tend to perform over the long term.
The S&P 500 — a stock market index that includes 500 leading U.S. companies and is widely regarded as a proxy for the overall stock market — generated an average annualized return of 10.84% over the past 10 years. Looking all the way back to 1957, the index has returned an annual average return of 10.46% to date with dividends invested.
While the market certainly experiences its fair share of downs, it has trended up over the long term.
2. A Long-Term Investment Strategy Is the Key to Growth
Discipline is an important quality for an investor. When your investment horizon is long — as it is for many investors who are saving for goals like retirement — your portfolio can weather periods of volatility and recover from downturns.
The Efficient Market Hypothesis suggests that attempts to time the market are unlikely to succeed for most investors (and even many professionals on Wall Street). Plus, if you trade frequently, the associated costs can erode returns.
Slow and steady tends to win the race and over longer time horizons, your money has more opportunities to grow. But that also means that you’ll get the most benefit from investing as early as you can.
3. Compound Interest Is Powerful
Albert Einstein is said to have called compound interest one of the most powerful forces in the universe, and its power certainly pays off in investment portfolios.
When investments compound, returns are added to the principal investment and every year (providing market returns are positive), you create a larger base upon which to generate earnings. In other words, your money grows exponentially as returns on your investments begin to generate returns themselves. The effect is more pronounced over longer periods.
Let’s look at an example. Say Sara starts investing $200 every month at age 25 and Jim starts investing $200 a month at age 35. Assuming an annual return of 7%, Sara would have approximately $525,000 by age 65 while Jim would have approximately $244,000 by the same age.
Despite both contributing the same amount monthly, Sara’s portfolio ends up more than double the size of Jim’s due to the additional 10 years of compounding growth.
4. Investing Helps Preserve the Value of Your Money
Inflation — the general increase in the price of goods and services in an economy, measured by the Consumer Price Index (CPI) — erodes the purchasing power of your money over time. Inflation spiked as high as around 9% in 2022, before coming back down and standing around 3.3% in June 2024.
Money saved but not invested risks losing purchasing power over time, since the interest rates on many savings vehicles aren’t enough to keep up with rising prices. By generating annual investment returns that exceed the rate of inflation, you can preserve and increase your purchasing power.
5. There’s No Time Like the Present
The S&P 500 has returned around 17% year-to-date, snagging record high after record high. While the investing adage “buy low, sell high” may have new investors hesitant to start investing now, there are compelling reasons to take the plunge.
Maybe the most compelling is, as previously mentioned, that the sooner you start investing, the better — and that even professionals run a risk trying to time the market. But there is also still potential for more upswings in the market this year. Several investing firms, including Citi and Goldman Sachs, have raised their projections for the S&P’s year-end close.
In a research note published in May, J.P. Morgan Wealth Management noted that in the years since 1950 when the S&P 500 had gained at least 10% in the first 100 trading days (as it did this year), stocks closed the year with an average return around 25%. At the same time last year, the S&P 500 was up over 8% and ended 2023 with a gain of almost exactly 25%.
The Bottom Line
Investing in the stock market early and staying invested for the long term helps build wealth over time by leveraging the power of compounding. A long-term horizon helps your portfolio weather volatility, while average annual returns in excess of the inflation rate help to preserve the purchasing power of your money. It’s never too early or late to invest, but many professional investors maintain an optimistic outlook through year-end. Just remember to keep your personal financial goals and risk tolerance in mind when considering your investment strategy.
Sources
Standard & Poors, S& P Dow Jones Indices. Accessed June 27, 2024. https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
U.S. Bureau of Labor Statistics, Consumer Price Index. Accessed June 27, 2024. https://www.bls.gov/cpi
The University of Chicago Booth School of Business, Eugene F. Fama. Efficient Markets, and the Nobel Prize. Accessed June 27, 2024. https://www.chicagobooth.edu/review/eugene-fama-efficient-markets-and-the-nobel-prize
Barron’s, S&P 500 Record Highs. Accessed June 17, 2024. https://www.barrons.com/livecoverage/stock-market-today-061724
Standard & Poors, S&P 500 YTD. Accessed June 27, 2024. https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
JP Morgan Wealth Management, First 100 Trading Days. Accessed June 17, 2024. https://www.jpmorgan.com/insights/outlook/market-outlook/tmt-100-trading-days-in-why-2024-is-different
