With the stock market down substantially, many financial discussions nowadays focus on what other investment options are available apart from stocks.
Stocks vs. Other Assets
One can invest in several other assets – bonds, property, gold, cash, commodities, bitcoin, etc. However, are they worth investing in?
No one can predict the future, but we can look at the past to see how these options have performed relative to stocks.
The short-run performance is all over the place. Sometimes property does well, sometimes commodities do well, sometimes stocks do well, and so on. There is really no way to predict what will happen in the short run.
However, when we look at the long term, the results are pretty clear – stocks outperform everything else. In the book Stocks for the Long Run, Jeremy Siegel looked at over 200 years of data on different asset classes. The results were pretty clear:
There are brief periods when other assets do well. For example, Gold rose a lot during the 1960s and 1970s. But stocks outperformed everything else over the long run. The above chart does not have real estate, but real estate is not a good financial investment. Commodities are going up right now due to inflation. But inflationary periods do not last for a long time, and commodities perform poorly over the long term.
Importance of Cash
Cash is a terrible asset, as seen from the chart above. That is because cash loses its purchasing power as things get more expensive over time (inflation).
Although cash itself loses value, it has a vital role in a portfolio.
Let us look at Mickey, who understands that stocks are the best investment out there. He invests 100% of his money in stocks. But when a downturn comes, he loses his job. He is forced to sell his stocks to cover his expenses until he finds another job. And since stocks are down during a recession, he ends up selling his stocks for a loss.
Instead, if he had cash to cover his expenses, he would not have been forced to sell his stocks and could have taken advantage of their long-term growth.
Although this may seem obvious, very few people build an emergency fund.
Time in the market is more important than timing the market.
In Summary
Although it may be tempting to stop investing in stocks given the recent downturn or to stop investing entirely, it is essential to keep investing. You can buy stocks at a discount during these times.
Also, keep some cash handy so that you can stay invested for the long term. Good luck!!