There are a lot of misconceptions around the stock market. I meet a lot of people that are in doubt on wether investing in stocks is worth it in the first place.
The Short Answer
Yes, investing in stocks is absolutely worth it. Of course it depends what are you looking for. If you are looking for quick money or short-term gains then it is absolutely not worth it. But if you want to create long-term passive income for you and your family then investing is a very good option for you.
But Why is Investing Worth it?
Before we start Here is a little page I created for all the metrics. If there is something you don’t understand just take a look there.
Ok, now that you want to find out more let’s dig a little bit deeper. Let me first explain how this whole thing works. Investing in general means to exchange a lump sum of money now for the benefit of future cashflow.
Let’s say you put $200 in a broad index fund. This will give you on average around 8% return in a year. That means that you are exchanging your current $200 for a return of $16 every year. Of course you can reinvest those $16, so they will give you an additional return on top your return. This is called Compound Interest.
At the beginning it doesn’t look like a lot of money. After all $16 a year is like a bit more than a dollar a month. But the magic starts with compounding, patience and a plan.
This $16 is just from your initial $200. But what happens if you start adding additional $200 every month, reinvest your dividends and they grow in the meantime? I will give you an example with a man who figured out the magic of compound interest very early in his life.
Examples
Warren Buffett
Most of you probably know him- Warren Buffett. Here is his networth over the years- 
As you can see he started with $5000 at the age of 14. He made that initial $5000 by selling coca-cola cans and various other ventures when he was little.
As you can see this initial $5000 has made him incredibly rich as he is now the 3rd richest man in the world with over $70bn. in net worth.
He has done that by compounding his initial $5000 over and over again and reinvesting all the profits and dividends back into the stock market.
Of course the amount he has earned is really hard to be repeated. I am not sure if we will ever see the same amount of returns. But nevertheless I like giving him as an example, because you can trully see the full scope of compounding interest through his life.
Everyday Example
But let’s step back and see a more normal example. Let’s say you are 25 years old and are wondering whether you should invest or not. You have spare $300 and are considering putting them to work in the stock market.
First you need to know that the stock market is a long-term tool. If you want to invest for like a year ot two there is little point in doing it. After all it can go up, but it can also go down very quickly. Just last month the markets went almost 40% down. But more about that later. Let’s get back to the example.
So you are 25, have a spare $300 and you would like to invest for the next 35 years. Let’s do a little test and see what happens. Just for the record I am using this Compound Interest Calculator. It’s a nice tool you can play with and see how compound interest works.
So after 35 years you will have almost $700,000. Or $697,640.28 to be precise. Of course this sum can be bigger or smaller depending on wether you reinvest your dividends, wether you decide to invest more once your income grows and many more. But this is a good middle ground.
Also bear in mind that this return is adjusted for inflation. The market on average returns 10% before inflation or 8% after inflation. In our case we have 8% after inflation.
So you can play around with this calculator and decide for yourself wether investing in stocks is worth it or not. For some people it is, for some people it’s not. Usually people start thinking about those things once they turn 30-35, settle down and start thinking about family and the future. But the sooner you start the easier it will be to compound your money.
You saw with the example with Warren Buffett. His main advantage is that he started when he was only 14. The magic comes from the time that the money is left to compound. As you can see in Warren Buffett’s graph his networth really starts taking off after he turns 50, or 36 years after he started.
So you saw some examples, you have the compound interest calculator so you kind of get the bigger picture of investing. Now let’s take a look at some pros and cons.
Pros
Trully Passive Income
I have said it before and I will say it again- it doesn’t get any more passive than collecting dividend checks. People talk about passive income, but nothing beats the stock market in terms of the work you need to do in order to get your income.
Of course you need to do your homework beforehand and invest in good companies and ETFs. But once you do there is little more you need to do, except of course adding to your positions.
It is similar to plantting a tree- it takes some time in the beginning. But once it is all you have to do is water it every now and again and pick up the fruits.
Control
In the stock market you can invest in all kinds of things- stocks, ETFs, commodities, real estate, different industries, countries and all kinds of stuff.
This means you have control on how to structure your portfolio. If you understand tech- invest more in tech. If you know real estate- invest in REITs. If you know about India- invest in India. If you don’t want to spend much time- invest in index funds and so on.
My point is that the stock market gives options to everyone to invest and pick his own Investing Strategy.
Freedom
The more your Portfolio grows the more freedom you get. What I mean is that your passive income will start growing once your portfolio starts growing. This gives you more freedom later on in life.
You don’t have to count on your job to the same extent, you can maybe start working less hours. Maybe you want to pick up a hobby that the passive income can subsidise and so on.
My point is that the additional income gives you more freedom and more options once your portfolio starts growing. How are you going to use it is completely up to you. That’s the beauty of the stock market- it’s not one size fits all, but you can make it your own and model it to your plans and visions for the future.
Cons
Risky
There are a lot of good things about the stock market, but you need to know that it can also be a slippery slope. One of the things is that it can indeed be risky. Nothing is guaranteed there. As I said earlier just last month we had a stock market crash of almost 40%. All of that happened in less than a month.
Imagine you put all your money there and 3 weeks later 40% of that is gone. Yes, that’s a risk you have to be willing to take.. But you need to remember that this is normal and happens to everyone.
Markets are volatile and this is inevitable. If you want to invest in the stock market you need to know that such a crash will happen to you sooner or later.
Doesn’t Work for The Short-Term
Exactly those crashes are why it is not a great idea to invest for just a couple of years. If you want to invest better do it with a time horizon of 5 years the very least. Anything less than that is looking for trouble. I will give you an example why.
Here is a chart of the S&P500 for the last 20 years:
Let’s say you invested all your money in 2007.
As you can see with red we have the top in 2007 and the bottom in 2009. Sadly you have invested in 2007, so 2 years later your portfolio is down by 50%. If you want to take your money out now you will lose 50% of your investment. But if you hold during all those years you will have your money up by 120%, not even counting for dividends and reinvestments.
So I hope you now understand what is the difference between the short-term and the long-term. In the short term you could have lost 50%. But in the long-term you would have more than doubled your money. If you managed to even continue buying in 2009, you would have more than tripled them.
I hope you understand my point. In any 3-5 years period your investment can be down, but in longer stretches the market inevitably goes back on an upward trajectory.
Requires Patience and Persistence
If you are not ready to invest month after month you will be in a disadvantage. Even if you don’t have much money patience wins over the long-term any time.
I will once again give you an example. I am using This Website as it provides a good dollar-cost averaging calculator. Dollar-cost averaging means investing money every month no matter if the market is up or down. This way you buy stocks in the lows and the highs, reducing your risk.
To understand it better I will give you another example.
So let’s say Gabby invests $300 a month since 2007. She invests every month no matter the market conditions.
Robby also started in 2007. He on the other hand invested $20,000, but stopped investing straight after that.
Today Gabby will have $80,649.78. Robby on the other hand will have $40,110.83. Or the difference is more than double for Gabby. That happens because she had the persistence and discipline to invest every month since she started.
Robby on the other hand started with much more money, but his returns diminished over time.
Hope you get my point. It doesn’t matter with how much money you start. It’s more important to go with your plan.
Some months you will be able to put more money, others less, but what’s important is to just keep adding when you can. You can see what kind of difference it makes over time.
Conclusion
That’s about it from me today. Hope you now know wether investing in stocks is for you or not. If you are interested I have plenty of guides about the stock market. You can check them all out Here.
Thank you all for reading. Don’t forget to subscribe if you want to stay updated. Hope everyone is well, wish you all the best and stay safe.