Since 1957, the S&P 500 has averaged an annual return exceeding 10.5%, highlighting the potential for long-term investments in the stock market. For instance, an initial investment of $100 in this index could grow to approximately $97,000 by August 2025, a staggering figure that does not account for inflation and the diminishing purchasing power of the dollar.
For those considering stock investments as a means to build wealth over time, there are strategic choices to make. However, certain types of stocks may be better left alone. Financial experts emphasize the importance of investing in what you understand. Jay Zigmont, a certified financial planner and founder of Childfree Trust, cautions against picking investments in companies or sectors that are unfamiliar. He suggests taking the time to understand the specific stocks you are eyeing, the impact on your financial plans, and the risks involved. For those new to investing, Zigmont recommends the book “The Simple Path to Wealth” by J.L. Collins as a foundational resource.
Another one to watch out for is meme stocks, which have surged in popularity thanks to social media dynamics. These stocks are characterized by rapid fluctuations influenced heavily by online communities. A particularly notable example is GameStop (GME), which saw its shares soar to nearly $500 in early 2021, spurred by online discussions and a viral push from influencers. However, the subsequent volatility of such stocks often results in steep declines, as seen with GameStop’s plunge to around $10 by 2024. This showcases the inherent risk associated with meme stocks; while they might offer tantalizing returns, they are also subject to unpredictable market whims.
Investors are often tempted to try their hand at selecting individual stocks, but experts warn against this approach. Zigmont cautions that choosing single stocks is akin to gambling, equating it to placing a bet at a roulette table. He advocates for the safety and diversification provided by index funds and exchange-traded funds (ETFs), which allow investors to ride the overall market rather than taking concentrated risks on specific companies. Zigmont shares that his own portfolio includes three ETFs: one covering the entire U.S. stock market, another for the global market, and a third focused on bonds.
Penny stocks, or shares priced under $5, also pose unique challenges. They often provide an accessible entry point for investors, but with this ease comes significant risk. Low demand can lead to difficulties in selling these stocks, and the market is rife with scams and dubious brokers. Therefore, investors should proceed with caution and conduct thorough research before venturing into penny stocks.
In summary, while the stock market offers avenues for wealth creation, it is essential to approach investments mindfully and strategically, steering clear of stocks that are not fully understood or that present undue risks.
