Saving and investing in accounts or assets that let your money grow over time is essential to build wealth and have the financial means to do what you want during retirement. Holding a collection of different stocks, known as a stock portfolio, is a common investment strategy. Maintaining a stock portfolio offers several notable advantages over other types of savings and investment options.
The main reason to own a stock portfolio is that stocks tend to produce greater investment returns than other types of investments over the long-term. According to CNN, stocks have historically provided annual returns of almost 10 percent for long-term investments, which is highest rate of return for any asset class. Since stocks offer high potential returns, investing in stocks can increase the chances of growing wealth despite the effects of inflation.
Stock investors maintain portfolios of many different stocks as a means of reducing investment risk. If you put all of your money into a handful of stocks, you could lose a large percentage of your total wealth if one of the companies you invest in does not perform well. Maintaining a portfolio of many different stocks in a variety of industries reduces risk, since you won't lose a large proportion of your total wealth if you make a few bad investments. Mitigating risk by spreading wealth across many different investments is called "diversification."
The gains you make from stock investing enjoy favorable tax treatment. If you hold a stock longer than a year before selling it, you face a maximum tax rate of 15 percent on the gain. By contrast, interest generated by a savings account or similar interest-bearing account is considered ordinary income, which may be taxed at rates as high as 35 percent. Capital gains are subject to your normal income tax rate when you hold an investment a year or less.
Limiting Annual Expenses
Some investors choose to buy mutual funds rather than maintain their own stock portfolios. A mutual fund is a type of professionally managed investment that holds a pool of underlying assets, such as a portfolio of dozens of stocks. Investors earn returns based on the value of the assets the mutual fund holds. Investing in a mutual fund essentially lets you earn returns based on a stock portfolio maintained by professional financial managers instead of one you put together yourself. Mutual funds impose an annual fee on investors to pay managers and to account for fund expenses, which you can avoid by maintaining your own portfolio.
- CNN Money: Investing Your Money Basics
- Financial Industry Regulatory Authority: Stocks
- Forbes: Why Stocks Are Still The Best Long-Term Investment
- CNN Money: What are the Advantages of Stocks for Retirement?
- CNN Money: How are Stocks Taxed?
- U.S. Securities and Exchange Commission: Invest Wisely - An Introduction to Mutual Funds
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.