Tourists visit the Wall Street Bull Statue in the Financial District, New York City.
Drew Angerer | Getty Images
Americans are less comfortable with long-term investing in the stock market, although this is one of the best ways to move forward.
In 2021, according to a Bankrate poll, 28% of Americans said real estate was their preferred form of investment over a period of 10 years or more. About a quarter said investments like savings accounts or CDs were their best long-term investment method, and only 16% said they would choose the stock market, according to the finance website.
This is a big departure from the convenience of investing in the stock market. Just a year earlier, the markets were high on the list with around 28% of Americans choosing them as their favorite investment.
“To see the market perform as well as it did last year was surprising,” said Greg McBride, chief financial analyst at Bankrate.
The pandemic may have affected the way investors think about investing, making more Americans aware that they have cash to hand in case of emergencies.
“Unfortunately, investors tend to chase performance,” said McBride. “That’s often the pattern we see. Building long-term wealth really takes the opposite.”
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Investing in the stock market with discipline and patience for decades is generally the best way to build wealth, say financial experts.
“Over the long term, over long holding periods, we’ve seen stock market returns generally outperforming other asset classes,” said Roger Ma, certified financial planner at lifelaidout and author of “Work Your Money, Not Your Life.”
For many people, their first stock investment is made through an employer-sponsored retirement plan, such as a 401 (k) plan. But even for those looking to invest outside of these accounts, it’s relatively easy to get started through multiple online brokers that don’t offer any fees.
“It has never been easier or cheaper for retail investors to get involved in the stock market in a diversified way,” said McBride.
Managing a retirement portfolio or other long-term stock investments can also be quite straightforward, Ma said.
“You don’t have to know what to invest in, when to buy it and when to sell it,” he said. “It could be as simple as buying a one-fund portfolio or a fund with a target date that is around the time you want to retire.”
And compounding your savings on the stock market can multiply your savings exponentially. Lauryn Williams, CFP founder and founder of Worth Winning, describes investing in the stock market like climbing an airport moving walkway.
“You can go and you should still go, most people leave when they get on the moving walkway,” said Williams. “You still save more, but the moving walk will help you get to your destination faster.”
Even if the market collapses or stagnates in the months and years to come, experts recommend staying on track and being more selective with the companies you invest in.
“In terms of my long-term outlook, stocks are the best place to be honest, but I just wouldn’t expect much from the big averages,” said billionaire Leon Cooperman during CNBC’s Financial Advisor Summit. “I’m ready to be in an environment like this where I have to choose my path to success.”
Stocks versus cash
In the long run, cash is usually not a good investment for building wealth. It’s much more helpful to have cash for something like an emergency savings fund.
“Cash is perfect for short-term needs because there is no volatility,” said McBride. “But the lack of returns means that not only will it fail to build your wealth over long periods of time, but it will undermine it.”
This is because of inflation or because goods and services have become more expensive over time. If you’re just saving money and not getting strong returns, you’ll have to keep saving more and more to buy the same things when inflation rises.
This could be especially important to Americans after the coronavirus pandemic as inflation warms and prices rise.
One of the best ways to fight inflation is to invest in assets that will bring you a higher return, such as the stock market. In return for the volatility risk, investors are rewarded with higher returns.
“Your biggest long-term risk is investing too conservatively,” said McBride.
When real estate makes sense
Of course, owning real estate is also a great way to build wealth, especially one that can be passed on to future generations.
Right now, people may be looking at properties for rising prices that add value to the homes they bought years ago.
“Primary residences have made a lot of millionaires,” said McBride.
But there is a much higher barrier to entry into owning real estate than investing in the stock market and much higher buying and selling costs that can affect overall returns. That means that for those just starting out, it generally makes more sense to start with simple stock market investments and plan to buy a property later.
“Getting started in the stock market is easier because you don’t necessarily need a large amount of money to pay a deposit,” said Ma.
He added that if you want real estate exposure it can also be achieved with a balanced portfolio by investing in real estate companies or real estate investment trusts.
The stock market will also offer people much greater diversity in investments than real estate, which is a way to protect assets over decades of saving and investing.
“Diversity is about playing in different pools so if one doesn’t work, something else is likely to work and overall you’re ahead of the game,” said Williams.
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