The US stock market has been very volatile since late 2021 due to high inflation, rising interest rate, slowing global economy and now the fear of an imminent recession.
The tech-heavy Nasdaq is already in a bear market dropping 25% from its highs, and the S&P 500 is in a deep correction losing 14% of its value since the beginning of 2022. This is an extremely tough period for many stock investors whose stock portfolios continue to evaporate as the overall market continues to go down. Some retail investors even went to extremes, sold their entire multi-million stock investment portfolio and became stock traders.
Is it still a good idea to invest in stocks in 2022 with all the volatilities and a potential recession? There are 3 reasons you should, and 2 reasons you shouldn’t.
KEY TAKEAWAYS
- The concept of investing
- Leverage stock investments to hedge inflation and accumulate wealth
- Stock investing is easier than you think
- Get paid for doing nothing with stock investments
- How much time do you have?
- Can you stomach the emotional rollercoaster?
What is investing?
In general, when people are talking about stock investing, they are referring to the activity of buying company shares with the intention of holding them for a long period of time, like years. The great Warren Buffett once said “Our favorite holding period is forever”. He famously bought Coca Cola stock in 1988 and never sold a single share since. Over the past 34 years, his investment has grown over 2500%, 25 times of his initial capital! People invest in certain stocks because they see value in these underlying businesses, and want to own a small portion of these companies to benefit from their long-term growth.
Now with the common understanding established, let’s look at some of the upsides and downsides of investing. Yes, there are downsides for stock investing.
Inflation hedge and wealth accumulation
Stock investing is probably the best way to beat inflation and grow wealth over a long period of time, despite the numerous recessions and stock market collapse. Historically, investors who bought and held stocks issued by great companies saw their investment grow exponentially over a long period of time.
Apple stock during the dot-com bubble era dropped 83% from peak to trough, it also dropped 61% during the 2008 great recession. Both DOT-COM Bubble era and the Great Recession were no doubt devastating periods at the time, and were extremely painful for stockholders. But, if we fast forward to today, those who simply held the stock since the dot-com bubble era saw their investment grow almost 75,000% (750x). The stock is up around 5,000% (grew 50 folds) since the low of 2008. These crashes were merely a couple of blips in the history of one of the best stocks to invest in.
Low barriers to entry, low maintenance
Another benefit of stock investing is its relative low entry barrier and low maintenance. I’m certainly not saying stock investing is easy – it’s not. But once a good stock is identified, what’s left essentially is to periodically buy the stocks on a regular basis, dollar cost averaging, and never sell the stock unless something fundamentally changed, such as the company business fundamentals or the investors’ investment strategy or time horizon. There is no need to check the market every single day, as long as you are on top of the overall business trajectory.
For investors who find it difficult to pick stocks, the even more trouble-free way to invest in stocks is to buy into low-cost index funds and ETFs. Over a longer period of time, S&P 500 index-tracking ETFs such as SPY and VOO have managed to generate double-digit yearly returns on average since inception (+14.5% and +14.6% respective annual average returns over the past 10 years). Let the professionals deal with the stock picking and portfolio management.
Hassle-free passive income generation
One more advantage of stock investing is the potential of hassle-free passive income generation. Many companies reward shareholders with regular dividend (i.e. cash) payments for simply holding their stocks, and this makes dividend stock investing one of the best if not the best way to produce passive income.
Yes of course you can also generate passive income by investing in rental properties or running some form of online businesses such as selling courses or monetizing tools. But instead of having to deal with bad tenants, endless bills and fees, or spend a long time developing monetizable intellectual properties, dividend stocks will pay you essentially for doing nothing.
Now, a couple of potential downsides for stock investing.
Stock investing requires patience and time
Historically, most long term buy and hold stock investors would have made money in the stock market with enough patience and time. But the keywords here are patience and time. Most of the best stock investment returns are realized over years or even decades of holding period. Even though the US stock market has grown significantly over the past 100 years, in a shorter period, there is no telling whether the market is going to go up or down (like the current market volatility we are experiencing right now).
Stock investors will need to be patient, and have a long-enough time horizon for the investments to perform over time. Only invest with money you don’t need to access for a long period of time.
Emotional rollercoaster
Another challenge for stock investors is to be prepared for the emotional rollercoaster. The stock market is volatile and can have large price swings in a shorter time frame (I think many of us are familiar with this experience since last year). Many beginner investors make the mistake of buying high and selling low, due to the greed and fear cycle. This can be detrimental to any investment portfolio.
Instead of taking emotion-driven actions based on price action, treat the investments as owning part of great companies and their business success, or owning part of a growing economy and advancement of innovation. As long as these are solid investments, just let the businesses and the economy do the work, give them time.