Stocks are your friend

Despite the gloomy headlines as of late, the stock market should be embraced. Stocks are one of the best investments available, but sadly few take advantage of the return offered. While tempting to shun stocks because of the recent chaos in the markets, an investor can still make a lot of money.

Americans are shockingly ignorant to the advantages of stocks. One stunning survey by Bankrate.com found 52 percent of Americans avoid capital markets. In the same study, Bankrate.com found that 21 percent of Americans cited not knowing about stocks as the reason for not investing. This is truly tragic considering over the last five years stocks have been a boon for investors.

Whether through mutual funds or individual stocks, stocks typically outperform other investment options such as bonds, bills, gold or merely hoarding dollars. In his book, “Stocks for the Long Run,” Jeremy Siegel finds from 1802-2012, stocks have on average returned a real (inflation taken out) 6.6 percent per year, bonds returned 3.6 percent, bills returned 2.7 percent, gold returned a pitiful 0.7 percent and hoarding a dollar returned a terrible -1.4 percent.

Why do stocks outperform safer assets such as bonds? The answer is something called the equity risk premium. While there is some inherent risk, the market is relatively stable over the long run, and will reward investors with an additional premium. As more investors realize this, they abandon the safety of other investment options for the profitability of the stock market, driving up the price of stocks.

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Some risk exists. The good news is the risk can be mitigated to some extent. Investors can moderate the potential pitfalls by buying a low-cost index fund through an employee-sponsored plan such as a 401(k) or through an individual retirement account. The theory behind an index fund is that if one firm is suffering, another will pick up the slack. While there will be volatility, the cumulative return, in the long term, will likely reflect the aforementioned 6.6 percent on average per year; though that will come with some stagnant years.

Looking at the recent headlines, it can be scary to jump into the stock market. I certainly don’t recommend investing all your money in the market, but at least take a dip. If you plan for the long run and withstand the volatility, you can generate a small fortune. •

Matt Fecteau is a former White House national-security intern and Iraq war veteran.

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