Why invest in stocks, anyways?

“Stocks for the long run.”  Everybody knows that, right? Ask why, and you’ll be told “historically stocks have returned 9% (or 10%, or 12% depending on who is talking) over the long run.”

And that’s true.  Long term returns on US stocks have historically been in the 9-10% range, depending on how you slice it.  But that explanation deserves an explanation, and it is important for investors to remember why they own stocks to begin with:

To participate in the long-term growth of corporate earnings.

That’s it.  Simple.  When you buy shares of a company (or preferably many, many companies through a low-cost index fund), you are buying an interest in that company’s future profits.  And over time, as economies grow and populations grow and productivity grows, those earnings grow.

And that growth is surprisingly consistent.

100 Year Earnings Per Share (with Trendline)

100 Year Earnings Per Share (with trendline)

Outside of a few major recessions (notably the great depression in 1929 and the “great recession” of 2008), long term corporate earnings growth has been steady.

Of course, those aren’t the numbers we see every day.  Despite the remarkable consistency of corporate earnings growth, stock prices have no such consistency. When the market is doing this:

That's a 50% decline

That’s a 50% decline

it’s pretty hard to stay focused on that nice long-term earnings growth trend line.  But the truth is that successful  investing requires us to stay focused on the long-term results, ignore the daily noise of the market and obey the discipline of a well crafted investment policy.

This entry was posted in economy, investing, markets. Bookmark the permalink. Comments are closed, but you can leave a trackback: Trackback URL.