The population of Americans that own stocks have declined throughout the decade according to Jones (2017). Only about 62% of U.S. adults on average have owned stocks from 2001 to 2008 but has now dropped to 54% from 2009 to 2017. It is important to understand that investments can benefit a nation in economic stimulation in return for unrealized gains, but the implications of the decrease of investment to almost half of the American population would have underlying consequences for companies that benefit in developing societal progression. Although the recent decade has brought higher volatility into the market due to the COVID-19 recession, I agree that people should be investing in the United States stock market for risk management and portfolio stability, passive gains, and retirement opportunities
Investment is an integral part of our economy in that it benefits the investor and the company. In practice, investment is to allocate money to fund a company for benefits in the future as higher returns. For instance, you would provide a principle of ten dollars for a reliable company for one year and the return is twenty dollars – a net profit of 100%. However, this varies between the performance of companies and sometimes you may lose what you paid for as a risk. As said, no matter what company you will invest in, there is no promise in a higher or lower return. Despite the uncertainty, this principle has been the basis of the richest companies today by their success in reliable returns. In the United States stock market, we have defined the value of companies through a unit of securities which in all distributed securities combined for one company is equal to its net worth. Security is represented through different forms – such as equities, bonds, and derivatives – and they vary in their liquidity of exchanging itself to their unrealized value by their risk, as investor James Chen (2020) classifies investments with a risk ‘ladder’ that “identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile”. Although there are many varieties of securities, the benefit of investment is that you can create profit from almost anything by speculation – a prediction of the performance of the company value. Even a declining company can be profited by short-selling or dividends. So regardless of the performance of one company, it is possible to create profits. The only factor then is the time of which the occurrence will end. Such predictions can be found by staying informed upon the performance of the company and by professional consultants, but your decision is final as an investor. By determining the risk of each company through careful analysis, you can manage your risks of what you can tolerate, or afford to lose.
In the case of a scientific report (2013) states “risk is not uniformly spread across financial markets and this fact can be exploited to reduce investment risk contributing to improving global financial stability… can be used to build a well-diversified portfolio that effectively reduces investment risk”, by investing in multiple selected companies with different securities and performances you essentially create a diverse portfolio, which is defined as “constructed of investment products with different risk levels and yields, which seeks to lower the assumed risk and leverage a significant percentage of the variability of the portfolio performance.” (“What is a Diversified Portfolio?”, 2020). By diversifying your investments that have a higher probability of return, you can compensate for your losses. As American entrepreneur, stockbroker and writer William J. O’Neil has once said “The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.”, his quote is the acclaimed success to sustain profitability in the United States stock market. As traders today strive for the optimization of profits, they must compensate for the unpredictable market losses from external affairs such as politics and society. Not all diverse portfolios are finalized: as the economy changes its interests in an instant, portfolios should change accordingly to maintain stability and positive growth of unrealized gains.
By maintaining reasonable risk and a diverse and sustainable portfolio, the ability of a passive income is achievable. Investments pose solutions to inflation and depreciation of items over time. Bank accounts are not sustainable from inflation despite being the most secured. Depreciating assets such as a car will decrease in value over time and therefore becomes worthless. On the other hand, passive income from a diverse portfolio reflects over appreciation assets, such as real estate trust, that increase over time. Such appreciations are divided into four sub categories: stock, cash, bonds, and government securities. Regardless of your investment, the important factor is the absence of yourself. Investments will grow regardless if you work or not. Investments are not invasive to your life, as simple as the chapter interprets “your money earns money” and “you buy something with your money that could increase in value.” which can also “do both at the same time— earn a steady paycheck and increase in value” (“Making Money Grow”, 2020). Once you start your first initial investments then it will guarantee returns upon its growth. The returns may be small at first, but by investing monthly using a small percentage of your paycheck, you should be able to get greater gains. By building value into your portfolio, you can create a guaranteed passive income that will help your potential net worth and expenses in need of instant liquidity of appreciation value over time.
To start investing in the United States stock market would entirely depend on the investor’s intentions of opening a brokerage account provided by a firm. Today all brokerage firms must adhere to governmental regulation and registration to respect individual brokerage accounts, allowing guaranteed investment and return. In one article differentiating between standard brokerage accounts and retirement accounts are dependent on “your savings goals, eligibility, and who you want to retain ownership of the account” (Yochim, 2020). Standard brokerage accounts are taxable investments and usually benefit the investor in free selection of investments for a diverse portfolio of cash, margin, and options. For typical accounts, the brokerage would require a small fee per investment transaction whether by percentage or flat fees, but this has recently been changed by the advent of technology using online brokerage accounts that require no transaction fees. Furthermore, brokerage accounts undergo taxation upon realized gains – the net positive upon a sold stock during tax return. Despite being the most common brokerage account, “Most investors use taxable brokerage accounts only if they have already maxed out all of their tax-advantaged investment opportunities” (Yochim, 2020). This implies that tax-advantaged investment should be prioritized first before general investment.
Individual Retirement Accounts, or IRAs, are tax-advantaged investment accounts that are taxed before remaining in your account for withdrawal as tax-free. A traditional IRA is a tax-deferred account that taxes the net realized total gains before withdrawal. A Roth IRA, on the other hand, is a tax-free account that you pay alongside investment intervals so you can withdraw without paying taxes at retirement. Despite these tax-advantaged investment accounts, there are limits towards the amount of funds contributed along with a limited variety portfolio, and that such accounts are to be liquidated towards retirement decades later rather than immediate use. In a documented report upon retirement accounts in 2011, some quarter percent more Roth IRAs are created among individuals ages 25-34 than traditional IRAs. While account contributions are more frequent than rollovers from 401K transfers to retirement accounts, that “almost 13 times the amount of dollars were added to IRAs through rollovers than from contributions” (Copeland, 2011). Through the context of the current economy, it can be interpreted that tax policies have changed public sentiment to favor Roth IRAs for young investors upon an uncertain economy in the future, as evident by the rollover contributions higher than from contributions. Regardless, Individual Retirement Accounts are among the first prioritized tax-advantaged investments alongside an occupation because of low risk assurance in investment portfolio and tax benefits.
The stock market is a man-made marvel of societal economics: developed artificially from centuries of free market economy to enterprises and not found in nature, the concept of investment is interpreted from human understanding. Today we face a new artificial recession from the COVID-19 outbreak. Unprecedented from the 1929 and the 2008 recession in that while previous events were due to self-evident corrections from misconduct of human actions, this pandemic has directly impeded our economic efficiency and development. The common misconception upon recession is that they are too risky to invest in doubt of recovery, but investor and author Kennon (2020) dismisses as “there’s no one single, technical definition of “recession” … Most agree, however, that it means more than just a few months of depressed economic activity occurring after a point in time when the economy has peaked. Most recessions are relatively brief” in his defense; that recessions pose an opportunity of which “can be the best possible time to begin investing because asset prices often fall hard. You can pick up stocks, bonds, mutual funds, real estate, private businesses, and more for far less than you could just a few years earlier”. In truth of this statement, the economy has always recovered throughout the United State stock market history for over a century about the Dow Jones Industrial Average index. Even in the 2008 recession Dow Jones has recovered average losses after six years, and at the apex in 2020 had doubled in value. I can almost certainly conclude that the same pattern of recovery would occur for the COVID-19 recession, with the only difference being that the time of this event in history is much shorter. In the approach of investing in a recession with the slogan “buy low and sell high”, the benefits of recovery would always outweigh the risks. In this case of initializing your portfolio, the best time to invest safely is based on definite signs of recovery over time in the midst of a recession.
To summarize, I advocate for you to invest into the stock market because it is an integral part of the economy that you can benefit over time. Investments can support your net worth passively alongside your life and allows great flexibility in how and when you wish to use your investments. Although the most difficult part of investment is to start a brokerage account and diversify your risks to your preference, once you overcome this hurdle and update your portfolio routinely as according to the economy you create a safety net of guaranteed passive income. Even in contemporary times of the COVID-19 recession there is opportunity to invest in the market in an anticipated recovery this year. So no matter the age or status during this time, you have a chance to make this your finest hour.
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Citations
Jones, J. M. (2017, May 24). U.S. Stock Ownership Down Among All but Older, Higher-Income. Retrieved March 29, 2020, from https://news.gallup.com/poll/211052/
stock-ownership-down-among-older-higher-income.aspx
Chen, J. (2020, February 11). A Beginner’s Guide to Asset Classes. Retrieved March 29, 2020, from https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp
Pozzi, F., Matteo, D., & Aste, T. (2013). Spread of risk across financial markets: better to invest in the peripheries. Scientific Reports. Retrieved from https://www.nature.com/articles/srep01665
What is a Diversified Portfolio? (2020). Retrieved March 29, 2020, from
https://www.myaccountingcourse.com/accounting-dictionary/diversified-portfolio
Making Money Grow. (n.d.). In Saving and Investing, A Roadmap To Your Financial Security Through Saving and Investing. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-savings-and-investing.pdf
Yochim, D. (2020, February 4). 4 Types of Investment Accounts You Should Know. Retrieved March 29, 2020, from https://www.nerdwallet.com/blog/investing/types-investment-accounts-know/
Copeland, C. (2013). Individual Retirement Account Balances, Contributions, and Rollovers, 2011: The Ebri Ira Database. EBRI Issue Brief. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271780
Kennon, J. (2020, March 26). Investing During a Recession. Retrieved March 29, 2020, from https://www.thebalance.com/is-it-better-or-worse-to-start
-investing-in-a-recession-357892
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Date of publication: 29 March 2020
Author: Joshua Kim
All rights reserved.