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
The potential benefits of investing in stocks include: Potential capital gains from owning a stock that grows in value over time. Potential income from dividends paid by the company. Lower tax rates on long-term capital gains.
What if I put all my money into stocks? ›
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.
Should you invest all your money in stocks? ›
Even for those who cannot easily borrow, a 100% equity allocation might not offer the best return based on how much risk investors want to take. The problem when deciding between a 60%, 100% or even 200% equity allocation is that the history of financial markets is too short.
Does investing in stocks actually make you money? ›
Investing in the stock market can be a legitimate way to grow wealth over time, and many individuals have successfully made money through prudent investments. However, it's crucial to understand that the stock market involves risks, and not every investment will yield profits.
How much money can you make from stocks in a month? ›
Well, there is no limit to how much you can make from stocks in a month. The money you can make by trading can run into thousands, lakhs, or even higher. A few key things that intraday profits depend on: How much capital are you putting in the markets daily?
Who gets the money when you invest in a stock? ›
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.
Is 100% stocks a bad idea? ›
What explains the superior performance of the 100% international equity portfolio? Stocks have a much higher expected return than treasury bills and bonds. The authors estimate real expected stock returns to be four times those of bonds. After a period of decline, stocks tend to rebound.
Is investing $100 in stocks worth it? ›
The Bottom Line
Investing $100 a month adds up over time, especially with compound interest. Making small sacrifices every day to consistently add $100 to your stock investments every month will benefit you in the long run.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
Should I hold cash or invest now? ›
A savings account is the ideal spot for an emergency fund or cash you need within the next three to five years. Good for long-term goals. Investing can help you grow money over the long term, making it a strong option for funding expensive future goals, like retirement.
How much money do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How to become a millionaire from stocks? ›
Diversify your investments
Millionaires think defensively, too, and they often get rich by diversifying their portfolios through a mix of stocks, bonds, mutual funds, ETFs, and various other securities. They reduce the risk that any one investment – especially a particularly large one – hurts them too much.
What is the best stock to make money fast? ›
Money Making Stocks To Invest In
- Airbnb, Inc. (NASDAQ:ABNB)
- Novo Nordisk A/S (NYSE:NVO)
- ASML Holding N.V. (NASDAQ:ASML)
- Lockheed Martin Corporation (NYSE:LMT)
- Cisco Systems, Inc. (NASDAQ:CSCO)
- PDD Holdings Inc. (NASDAQ:PDD)
- The Home Depot, Inc. (NYSE:HD)
- Booking Holdings Inc. (NASDAQ:BKNG)
Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
How long do you keep your money in stocks? ›
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.
Can you take your money out of stocks? ›
You can only withdraw cash from your brokerage account. If you want to withdraw more than you have available as cash, you'll need to sell stocks or other investments first. Keep in mind that after you sell stocks, you must wait for the trade to settle before you can withdraw money from your brokerage account.
