- More than 100 years of research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world. Nothing, in terms of other asset classes, beats business ownership (remember – when you buy a stock, you are just buying a piece of a business).
- Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn’t require any work on your part (other than researching each company to determine if it is right for you). There are professional managers at headquarters that run the company. You get to benefit from the company’s results but don’t have to show up to work every day.
- High quality stocks not only increase their profits year after year, but they increase their cash dividends, as well. This means that every year that goes by, you will receive bigger checks in the mail as the company’s earnings grow. As Fortune magazine pointed out, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends! That’s money that would just keep rolling into your life without doing anything!
- It’s much easier to diversify when you invest in stocks than when you invest in real estate. With some mutual funds, you can invest as little as $100 per month. With companies such as sharebuilder, a division of ING, you can buy dozens of stocks for a flat monthly fee of as little as a few dollars. Real estate requires substantially more money.
- Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
- Borrowing against your stocks is much easier than real estate. If your broker has approved you for margin borrowing (usually, it just requires you fill out a form), it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks and you pay interest on it, which is typically fairly low.
Cons of Investing in Stocks
- Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors. Case in point: During the most recent collapse, the Credit Crisis of 2007-2009, well-known financial advisors were telling people to sell their stocks after the market had tanked 50%, at the very moment they should have been buying.
- The price of stocks can experience extreme fluctuations in the short-term. Your $40 stock may go to $10 or to $80. If you know why you own shares of a particular company, this shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap or sell shares if you think they are too expensive. As Benjamin Graham said, to get emotional about stock prices that you believe are wrong is to get upset by other peoples’ mistakes in judgment.
- On paper, stocks may not look like they’ve gone anywhere for ten years or more during sideways markets. This, however, is often an illusion because charts don’t factor in the single most important long-term driver of value for investors: reinvested dividends. If you use the cash a company sends you for owning its stock to buy more shares, over time, you should own far more shares, which entitles you to even more cash dividends over time. For more information, read the work of Ivy League professor Jeremy Siegel.
