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
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.
How much is $100 a month for 40 years? ›
According to Ramsey's tweet, investing $100 per month for 40 years gives you an account value of $1,176,000. Ramsey's assumptions include a 12% annual rate of return, which some critics have labeled as optimistic given that the long-term average annual return of the S&P 500 index is closer to 10%.
How much is $500 a month invested for 10 years? ›
What happens when you invest $500 a month
| Rate of return | 10 years | 30 years |
|---|
| 4% | $72,000 | $336,500 |
| 6% | $79,000 | $474,300 |
| 8% | $86,900 | $679,700 |
| 10% | $95,600 | $987,000 |
Nov 15, 2023
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.
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.
Do rich people keep their money in stocks? ›
High-net-worth individuals are opting to keep most of their assets in cash right now. Stocks are still a popular choice for wealthy investors. You don't have to be rich to come up with a plan for your own money.
How much is $10000 worth in 20 years? ›
The table below shows the present value (PV) of $10,000 in 20 years for interest rates from 2% to 30%. As you will see, the future value of $10,000 over 20 years can range from $14,859.47 to $1,900,496.38.
How to make 5k a month in stocks? ›
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Is investing $1000 a month good? ›
Investing $1,000 a month for two decades is undoubtedly going to help your money to grow, but the specific amount you'll end up with varies depending on the returns you earn. For many people, it's reasonable to expect a 10% average annual return.
How much do I need to invest a month to be a millionaire in 5 years? ›
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
How many years it will take you to double your money if you invest $500 at an interest rate of 8% per year? ›
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
Do you owe money if your stock goes down? ›
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.
What happens if my stock goes to zero? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
Do you get money back if you lose money on stocks? ›
You can't simply write off losses because the stock is worth less than when you bought it. You can deduct your loss against capital gains. Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year.
Should I invest all my money in one stock? ›
A widely accepted rule of thumb claims that a properly diversified portfolio must have no more than 10 to 20 percent of total investment assets in a particular stock.
Is investing $100 in stocks worth it? ›
On average, the stock market yields between an 8% to 12% annual return. Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100.
Is it realistic to have 100% of your portfolio in stocks? ›
The research by three U.S. finance professors led by University of Arizona professor Scott Cederberg comes to the surprising conclusion that a portfolio holding 100% stocks and no bonds is best, even for people already in retirement.
Should I put all of my savings into stocks? ›
“I advise my clients that any money they are going to need to spend in the next two to three years should not be invested in stocks,” says Itkin. “You do not want to have to sell during a bear market and risk losing principal.”
