If you are just beginning to invest and might be confused, whether this is the right time to invest in stocks or not.
Because the market is falling and everyone is in a panic. I would tell you that no time is good or bad for investing in stocks, it all depends on you if you can grab the opportunity or not.
Here are 5 reasons why you should start investing in stocks in 2020.
Market At All-time Low
When the market is dipping at the bottom, you might see people selling stocks in a panic. This results in getting high-value stocks at dirt cheap. You can take this as an opportunity to invest in stocks, by buying high-quality stocks and get the benefits of low prices than the actual valuation of the company shares.
Remember Warren Buffet’s famous saying, “Be fearful when others are greedy, be greedy when others are fearful”.
If you look at Warren Buffet’s investing journey, he gained heavy profits from buying stocks, when others were selling like anything.
Beat The Inflation
The purchasing power of money decreases over time. 50 years ago, the Coke bottle price was 5-6 cents which has increased to $1.50 today.
Taking another example, if you put $1,000 in your wardrobe’s drawer, it won’t be $1,000 after 30 years. If you can buy an iPhone using these $1,000, and after 30 years when you take your $1,000 out of the drawer you may be able to buy only a cover for you iPhone.
That means money sitting idle is eroding its value.
So, you must be sure that your investments are outpacing inflation. You can’t be sure that purchasing a corporate bond, or certificate of deposit would yield high returns to beat inflation rates because the returns are very low around 6%.
That’s why you would have seen long term investors like Warren Buffet, Thomas Peterfly investing in stocks to not only combat inflation but create wealth in the long run.
Power Of Compounding
You would have heard Albert Einstien’s quote that compounding interest is the 8th wonder of the world.
Let’s see how this eighth wonder can make you wealthy.
Compounding means a rise in the value of an investment, because of the interest earned on the principal amount, as well as the interest accumulated.
You can better understand this concept with the example below.
If you’re 25 and you set aside $500 a month for the next 30 years (to retire at 55), assuming a 7% annual interest rate, net worth you will have after 30 years would be $566,764.72. And you would earn this number by investing gradually a total of $180,000 only.
See the chart below.
That’s the power of compounding.
If you well-diversify your investments, you may get better returns than the above example.
Low Interest Rates
Decades ago, you could earn enough to get a steady income by investing in treasury bonds. These investment instruments were risk-free as well. But today, you can’t expect much return in these instruments. You can get decent returns in high return investments like stocks only.
Bonds are no doubt less risky. But the average annual return on a treasury or debt bond is around 6%, whereas that on stocks is 10% on an average.
This 4% difference can make a big difference over the long period of time.
Investing in Bonds
Let’s say you are 25 and you are investing $1,000 monthly in treasury/debt bonds for 30 years assuming an annual return of 6%. Your net worth at the age of 55 would be $948,698.23.
Investing in Stocks
Again you are 25 and you are investing $1,000 monthly in stocks with the annual return of 10% (however, you may earn more). The investing period is as same as 30 years. Your net worth at 55 age would be $1,973,928.27.
Could you see the difference? It is $1,025,230. That’s insane.
In the long term investing, the difference in even 1% makes a huge difference.
Diversify Your Investments
“Don’t put your all eggs in one basket”
If you have invested in risk-free investments till now, this is the right time to take some risk and get the advantage of getting stock at low prices.
Investing in stocks diversify your returns on your investments. This will help you get better returns on some investments without losing all your money.
You may be having some money in your company’s retirement plan, you might have invested in certificates of deposits or sitting idle in your bank account. You can diversify the potential suffering in any one area by investing some money in stocks.
Experts are saying that markets are likely to hit market-bottom. You can see it as an opportunity to diversify your investments to not only get good returns but also avoiding a complete loss.
Now you have learned the importance of present time to invest in stocks. I would recommend you to learn stock investing before start your investments. You may risk your money if you don’t what you are doing.
Learn the technicalities of investing to become a DIY investor. Never look stock from its price rather look at the business. If you can understand that, you can invest without a second thought.
Finally, don’t be in a panic if your invested money is dipping down, daily ups-n-downs shouldn’t matter if you looking for long term.
Keep learning and keep investing your money if wealth creation is your long term goal.