Pros & Cons of the Stock Market

Pros & Cons of the Stock Market
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Investing in the stock market is already well known as a gamble, but when investors jump into the market without thoroughly researching the investment, they can be stacking the odds against themselves unnecessarily. You can build a fortune -- or lose that same fortune -- with stock market investing, so it is always wise to get a full understanding of the pros and cons of this type of investment before you put money into the ever-changing market.

Pro: Long-Term Returns

Stocks have historically performed better than other investment types in terms of long-term financial returns. Since the 1930s, there has been only one 10-year stretch in which the stock market had negative returns -- the 2000s. In every other decade, the return has been 10 percent or more, which well outpaces the return on other investments, such as bonds. Based on stock market history, this is expected by some financial experts to continue. In his book "Beating the Street," former Fidelity Magellan Fund fund manager Peter Lynch voiced the opinion that regardless of circumstances, stocks will always perform better than bonds.

Con: Short-Term Volatility

One of the significant drawbacks to investing in stocks is their potential short-term volatility, which can lead to some significant losses. Traditionally, "short-term" may have meant under 10 years, but a 2011 USA Today article by Adam Shell suggested that the definition of short-term may need to be reconsidered, since 20-year periods are perhaps a better way to measure stock market returns. Citing statistics compiled by Oppenheimer Asset Management, the article states that there has not been an average yearly stock market loss for any 20-year holding period since the 1950s. However, when the shorter periods, such as one year, three years, or even ten years are examined, stocks have had tremendous volatility. In a one-year holding period, for example, returns could be tremendous or non-existent. One thing seems clear: Those with a desire for stability are likely to find short-term investing too risky due to the volatility.

Pro: Returns Outpacing Inflation

The rate of inflation is always a consideration for those who are investing to fund their future or their retirement years. To stay ahead of inflation, an investment should outpace the past, current and projected future inflation rates -- and only stocks have outpaced inflation consistently. Inflation rates in the decade spanning 2002 through 2012 have been as high as 5.6 percent (in July 2008). With stocks historically returning an average of 10 percent, they may be the best bet for beating inflation, now and in the future.

Con: Risk Level

With stock market investments, you run a very high level of risk -- higher than investments like bonds or certificates of deposit will ever have. With more stable investments, you are assured of getting a return on your investment, albeit usually a small one, and you will never have to worry about losing your investment completely. With stocks, you will not only risk potentially losing any possible returns, but you may also lose your initial investment if the stock market takes a bad turn or if you are heavily invested in a company that fails.