4 Reasons Why Stocks Are One of the Best Investments

The potential for high returns

The first reason that stocks are a great investment are the high returns. The stock market has historically averaged an annual return of 10%. If you invest in stocks the right way, they can be one of the best ways to build wealth over the long term.

The potential for dividend income

Many companies will pay investors a dividend for owning stock in the company. A dividend is simply a portion of the companies profits that is paid out to you. Although dividends are never guaranteed, they can create a small stream of income for you as an investor.

Liquidity

In general stocks are liquid assets since they trade publicly on major stock exchanges. There are typically enough buyers and sellers available that you can cash in and cash out when needed. Now of course stocks are not as liquid as something like cash, but overall you will not be tied down when you buy stocks.

Can be bugdet friendly

Many online brokers and discount trading platforms now offer fractional shares. A fractional share allows you to buy just a piece of a stock and not an entire share. This means that you can start investing in stocks even if you have a very small budget.

Markety volatility

Now that we have covered the benefits of investing in stocks, we need to address the risks. The primary risk of investing in stocks is market volatility. The reality is that stocks go up, sideways, down, and even crash. Does this mean that you should not buy stocks? The short answer is no, you just need to be prepared.

The primary way to combat market volatility is to buy and hold strong stocks over the long term. As we mentioned before, the stock market historically averages a 10% return. However, this is over decade long periods and not just a few years. If you adopt a long term mindset, it can help you stay calm when the inevitable downturns of the market come.

You have lots of high interest debt

Beyond market volatility, it could also be risky to invest in stocks if you have lots of high interest debt. It might make more sense to pay down the debt before you invest. You can check out our post on if you should pay down debt before investing to learn where it makes the most sense to put your dollars.

You don't have a liquid emergency fund

On a final note, it could be risky to invest in stocks if you don't have an emergency fund set up yet. Most financial experts recommend setting up a liquid emergency fund for unexpected expenses so you don't have to tap into your investments. You can check out our post on if you should have an emergency fund before investing to lean more.

The short answer is no. Although stocks typically make up the back bone to most investors portfolios, it is a good idea to invest in other asset classes as well. You want to diversify between a mix of assets so that you hold stocks, bonds, and cash equivalents. Doing this will help lower your exposure to risk.

The percentage that you should allocate towards stocks will include a variety of factors including your age and risk tolerance. You can use the rule of 100 to determine the percentage of your portfolio that you allocate towards stocks. The rule of 100 states that you should subtract your age from 100 and use that number as your percentage for the amount of stocks you hold.

So if you are 25, you would subtract that from 100 and be left with 75. In this example, you should allocate 75% of your investment portfolio towards stocks. Keep in mind that the rule of 100 is there to serve as a guidline, and not as a strict law. You can allocate more or less of your portfolio towards stocks as needed.

The best time to buy stocks is right now. It is very hard, if not impossible to try to time the stock market. Even the best investors in the world cannot perfectly predict when the stock market is going to crash or go on a rally.

As we have previously stated, you should try to adopt a long term mindset and invest in good companies. When you do this, you can bet on the positive historical performance of stocks over the long haul. This will help you get off the sidelines and start investing.

The bottom line is that stocks are one of the best investments available. Altough there are risks when you buy stocks, the rewards tend to outweight them for most investors. Stocks can offer high returns, income in the form of dividends, liquidity and can be budget friendly. If you don't own any stocks yet you can check out our guide on how to invest in stocks as a beginner.