A lot of people could be missing out on strong returns.
Buying stocks is something it pays to do from a young age, despite the risks involved. That's because stocks have historically been able to generate much higher returns than more conservative assets, like bonds. And you might snag a much higher return on stock investments than on the money you have in a savings account or CD.
But in a recent Motley Fool research study, an estimated 42% of Americans do not own stocks. And if you're part of that statistic, you might struggle to meet your financial goals down the line.
Why stocks are so important
An estimated 150 million Americans have money invested in stocks. But if you're not one of them, you could be losing out. It’s important to invest in stocks because you have the potential to generate strong returns. And you'll need those returns to outpace inflation in the context of saving for long-term goals, like retirement.
Now, you may be scared to load up on stocks in your brokerage account or IRA for fear of losing money, since the stock market tends to be quite volatile. But there are steps you can take to mitigate that risk.
First, adopt a buy-and-hold strategy. Don't plan to cash out your stocks shortly after acquiring them. Rather, plan to hold them for many years or decades. Stock values can fluctuate a lot -- and drop -- from one year to the next. But in the long run, the stock market tends to reward investors who stick with it.
Also, focus on quality stocks over those that are buzzy and get a lot of press, like meme stocks. Look at companies that have been around for a long time and have continuously found ways to offer value to customers.
And always, always do your research before adding a stock to your portfolio. You'll want to look at factors like how well a company manages its cash and debt, among others, to see if it's a good buy.
You'll also want to look at growth potential. Does the company have a lot of new products in its pipeline? Is it constantly trying to innovate? These are other key factors that indicate whether a stock is worth investing in or passing over.
You can buy stocks in buckets instead of individually
The idea of hand-picking stocks on an individual basis may seem daunting to you. If that's the case, ETFs, or exchange-traded funds, may be a better bet.
When you buy ETFs, you're buying a whole basket of stocks, so to speak, with a single investment. That means you get the benefit of instant diversification in your portfolio without having to research dozens of companies at a time.
There are different types of ETFs you can look at, from those that effectively encompass the entire stock market to those that track a specific sector of it. Think about what's best for your portfolio when making your choice.
It's easy to see why stocks might seem overly risky to some investors. But if you don't buy stocks, you'll take on another risk: not generating a high enough return to meet your personal financial goals. Keep that in mind if you've shied away from stocks thus far and aren't particularly inclined to change your ways. And look at ETFs if that makes you more comfortable diving into stocks.
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