While there are many investment options, they all fall into a few categories. The three main types of investments are stocks, bonds, and cash equivalents. Everything else, including real estate, gold, and cryptocurrency, is considered an alternative investment.
Most investors have a mix of stocks, bonds, and cash, plus maybe some alternative investments. But the stock market has historically provided a fantastic combination of growth potential and reliability, so some people opt to invest all their money in stocks. It's especially popular with younger investors who have decades until retirement.
Is this a good idea, or is it too risky? To help you figure out if this option is right for you, let's look at what you can expect with a stock-only portfolio and the potential pitfalls.
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Your portfolio will likely perform very well over the long haul
A stock-only portfolio is a great way to maximize growth. Over long periods of time, the stock market has delivered excellent returns for investors. The S&P 500, an index of 500 of the largest publicly traded U.S. companies, is a perfect example. It has an average return of about 10% per year, before inflation.
Nothing else has done so well for so long. The potential returns with stocks are far higher than what's possible with bonds or cash.
It's worth mentioning that past performance is no guarantee of future results. Just because the stock market has returned an average of 10% per year doesn't mean it will continue to do so. Still, it has historically been an extremely effective way to build wealth. If that continues, then putting all your money in stocks will pay off in ways that a more balanced portfolio won't.
Some years will be much better than others
Although the stock market has done well over long periods of time, its year-to-year performance is highly volatile. Don't expect a steady 10% per year, because returns are anything but predictable. As far as performance goes, here's a more accurate idea of what it's like:
- Some years deliver fantastic returns. For example, the S&P 500 rose 34.1% in 1995, 29.6% in 2013, and 28.9% in 2019.
- There's the occasional year with big losses. This hasn't happened too much in the 21st century, but the S&P 500 declined by 23.4% in 2002, 38.5% in 2008, and 19.4% in 2022.
- Many years are in between those two extremes. Occasionally, gains or losses are very low or practically flat.
Fortunately for investors, the good years far outnumber the bad years. However, you need to be prepared for that volatility when you invest in stocks, especially if you put all your money in them.
You could be short on cash when you need it
This is only going to be a problem if you invest absolutely all your money in stocks. If that's your plan and you don't keep any cash on hand, you're going to run into problems with any big bills that come up.
For example, let's say your car breaks down and you need $3,000 to get it fixed. If you have all your money invested, you may be forced to sell some of your stocks. If they've gone down in value, that will mean selling at a loss.
You can put your entire investment portfolio in stocks if you want. The key is not to put literally all your money in stocks. Outside of your investment portfolio, you should have an emergency fund with enough to cover at least three months of expenses, as well as savings for any short-term goals and large future expenses you need to plan for.
You'll need to make changes when you're close to retirement
A stock-only portfolio works when retirement is still a long way off. If you're not planning to retire for another 20 or 30 years, you have enough time to ride out the year-to-year ups and downs.
As you get closer to retirement, wealth preservation starts to take precedence over wealth building. You can still keep the bulk of your portfolio in stocks, but it also becomes important to diversify.
Once you're about 10 to 15 years from retirement, start adding bonds to your portfolio for more stability. Those who are retired or getting close to retirement often go with a 70:30 or 60:40 stocks-to-bonds ratio. The right ratio for you will depend on your risk tolerance.
Even if it sounds extreme, a 100% stock portfolio can be a great choice for investors who don't mind the volatility and have plenty of time until retirement. Just make sure you have a diversified stock portfolio with a large number of companies. You can do that yourself or by investing in index funds, such as an S&P 500 or total stock market fund.
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FAQs
Stocks work like this: Companies sell shares in their business, also known as stocks, to investors. Investors buy that stock, which in turn provides the companies money for expanding their business through creating new products, hiring more employees or other business initiatives.
Is it wise to invest all your money in stocks? ›
The right ratio for you will depend on your risk tolerance. Even if it sounds extreme, a 100% stock portfolio can be a great choice for investors who don't mind the volatility and have plenty of time until retirement. Just make sure you have a diversified stock portfolio with a large number of companies.
Is $500 a month in a 401k good? ›
The short answer to what happens if you invest $500 a month is that you'll almost certainly build wealth over time. In fact, if you keep investing that $500 every month for 40 years, you could become a millionaire. More than a millionaire, in fact.
Is it worth investing $500 in stocks? ›
Investing in an S&P 500 index fund is one of the most reliable ways to build wealth. Vanguard ETFs are known for extremely low fees. A $500 monthly investment could grow into $1 million over 30 years.
Do you get money back from stocks? ›
“When you sell that stock, you're then turning your ownership stake back into cash. Selling stock is a perfectly normal and regular part of the investing process which helps investors collect profits or change strategies.”
How long do you keep your money in stocks? ›
Short-term and long-term goals
Stock market investments should be held as part of a long-term investment plan, which means you shouldn't expect to need the money for at least five years, if not longer. However, sometimes goals change, so it's important to reevaluate them periodically.
Is 100% stock risky? ›
An internationally diversified portfolio of stocks turned out to be the least risky strategy, both before and after retirement, even though a 100% stock portfolio did expose couples to the greatest risk of a drop in wealth that may be temporary or last several years.
Do you make money everyday on stocks? ›
The best investors sit on their stocks for years and years, letting them grow. It may seem like successful investors are trading every day to earn big gains. And while some traders do successfully do this, they are few and far between.
How to invest $100 dollars to make $1000? ›
How to Turn $100 Into $1,000
- Opening a high-yield savings account. ...
- Investing in stocks, bonds, crypto, and real estate. ...
- Online selling. ...
- Blogging or vlogging. ...
- Opening a Roth IRA. ...
- Freelancing and other side hustles. ...
- Affiliate marketing and promotion. ...
- Online teaching.
With the $1,000 per month rule, if you plan to withdraw 5% of your savings each year, you'll need at least $240,000 in savings. If you aim to take out $2,000 every month at a withdrawal rate of 5%, you'll need to set aside $480,000. For $3,000, you would aim to save $720,000.
A fixed annuity typically provides a set rate of return over a determined time period. If you have a fixed annuity with a starting principal of $10,000 and a rate of 5%, you could expect to get around $100 a month for 10 years. A variable annuity may have a rate that fluctuates depending on market performance.
How much will I have if I save $1000 a month? ›
Investing $1,000 a month for 20 years would leave you with around $687,306. The specific amount you end up with depends on your returns -- the S&P 500 has averaged 10% returns over the last 50 years. The more you invest (and the earlier), the more you can take advantage of compound growth.
Is investing $50 a week good? ›
If you invest $50 per week, that's the equivalent of $200 per month, or approximately $2,400 per year. Over a 30-year period, that would result in more than $72,000 in savings. It's a good chunk of savings, but it isn't a life-changing amount.
Is it okay to not invest in stocks? ›
Although investing poses risks, such as market declines, not investing also can be a risk to your financial future. The key is finding balance – taking on an appropriate amount of risk to ensure you have enough growth potential to reach your long-term goals.
Is it worth putting a dollar in stocks? ›
Investing $1 a day can turn into tens of thousands of dollars over a long period of time. You can get started by opening a brokerage account and researching low-cost index funds.
Who gets the money when a stock goes down? ›
Therefore, if the value of the entire company fluctuates, so will the value of the stock. When a share's price decreases in value, that change in value is not redistributed among any parties – the value of the company simply shrinks. The stock market is governed by the forces of supply and demand.
Do you owe money if your stock goes down? ›
Do I owe money if a stock goes down? If a stock drops in price, you won't necessarily owe money. The price of the stock has to drop more than the percentage of margin you used to fund the purchase in order for you to owe money.
Does money from stocks go to the company? ›
For companies, money comes from the payments they receive when investors first buy their shares. This cash infusion can help companies in a variety of ways, such as helping to pay off existing debt and funding growth plans they can't—or don't want to—finance with new loans.
Do you get cash from stocks? ›
Stocks can be cashed out by selling them through a broker on a stock exchange. Selling stocks can provide cash for major expenses or to reinvest in other assets.
