With the stock market plunging in 2022, many new and prospective investors are beginning to wonder, is investing in stocks even worth it?
It’s a fair question, given what’s been happening lately. Yet, despite all the unpleasant volatility, investing in the stock market remains one of the best wealth-building strategies available. At least, when done correctly, with a disciplined and informed approach.
A quick summary of the benefits includes:
- Increasing wealth
- Planning for retirement
- Meet personal and financial goals
- Build multiple sources of passive income
- Earn long-term returns
- Fight inflation
- Contingency planning
But none of this comes risk-free, of course. So with that in mind, let’s explore the benefits and risks in more detail to determine whether it’s worth investing in stocks.
What to know before investing in stocks?
As an investor, the first thing I have to decide is how much money I should invest in stocks. A popular response is to put as much capital to work as possible. However, while true, this needs some context.
Stock investing is a long-term game. For those seeking quick returns, trading is the route to go. Although it’s worth mentioning, the success rate of traders, even professional ones, is pretty dire.
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For long-term investing to work, it requires buying and holding shares for many years. In my experience, a five-year minimum holding period is quite common. As such, a golden rule to remember is never to invest any money I’ll need within the next five years.
One of the worst situations an investor can find themselves in is being forced to sell high-quality shares at a terrible price to meet living expenses. By keeping some cash on the side in case of emergencies, this risk can be mitigated.
With a cash buffer in place, I can use the excess to start investing. And thanks to technological innovation from the fintech industry, trading fees have become increasingly affordable.
As such, even if I only have as little as £50, it’s enough to get started. Plus UK investors can even enjoy tax-efficient investment accounts like the Stocks and Shares ISA.
RELATED: What are fintech stocks?
Best way to earn money from the stock market
There is a popular saying in the investor community: “Time in the market beats timing the market”.
In other words, trying to predict exactly when a stock price will crash or surge is a loser’s game that often results in missed opportunities.
By buying and holding high-quality stocks through both the good times and the bad, a portfolio can reap the rewards as and when they happen instead of missing out.
This is also why many individuals deploy a pound-cost-averaging buying strategy when investing in stocks, especially during a bear market. Instead of investing in one bulk, I can buy shares in a company in small chunks over time.
That way, if volatility causes the stock price to fall, I can choose to buy more and bring down the average price of my overall position down, improving my long-term gains if the stock rebounds in the future.
It’s also important to diversify, in my opinion. By owning a broad range of stocks or funds, the impact of one position dropping is less severe. And apart from being a proven risk-reduction strategy, it also increases the odds of me finding the next Apple or Tesla.
Useful resources to start an investing journey
- How to start investing in stocks today
- How to build an investment portfolio
- What are the best UK investments for beginners?
Discover more educational material here.
Can I become rich from investing in stocks?
The short answer to this question is yes, but sadly it’s not guaranteed.
Investing is not something that can be mastered overnight. It needs time, dedication, patience, and emotional discipline. The latter is quite rare, and it’s why individual stock picking is often not suitable for everyone.
The stock market can be a volatile place, as many have discovered in 2022. External forces can send share prices plummeting even when the underlying business is still sound. And being able to hold onto a stock while it’s in free-fall on the belief that everyone else is overreacting is far easier said than done.
Investing in stocks also requires a great deal of knowledge of how to analyse a business. Things like profitability, capital efficiency, financial stability, corporate governance, competitive advantages, risk factors, and valuation are just a few areas of research required to make an informed decision.
And even with all this work put in, all it takes is one external factor to come in a ruin everything. Take a look at travel stocks. Before the pandemic, many of these businesses were thriving. One global pandemic later, and now they’re all on their knees.
This doesn’t exactly paint investing in stocks in the best of light. But it’s a critical piece of information to consider before starting an investing journey.
However, where there is a risk, there is often a reward. And over the long-term, a prudent, informed investor can achieve some impressive returns.
So, is investing in stocks worth it? Yes. At least, I think so. But it’s critical to remember to have a solid investment strategy and not to be led astray by emotional decisions.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has published Premium reports on Apple and Tesla. The Money Cog does not own shares in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
