The stock market is a broad term that represents the concept of investing in the ownership of companies. The idea behind owning stocks is to earn money when the company’s value increases over time. When you own a company’s stock, you’re called a shareholder, and your stake in the company is called your stock portfolio or portfolio of stocks.
What are stock market returns?
You probably know that the stock market is a place where businesses can raise money by selling ownership stakes in their companies to investors. But what you may not know is how the value of your investment in these businesses will change over time. The change in value is referred to as “stock market returns.”
Investment gains and losses are typically measured by comparing your original investment amount against its current value at some point in the future. The percentage gain or loss within this comparison gives you an idea of how profitable your investment was over time (how much more than what you put into it). Your overall return can be expressed as either an arithmetic average or percentile rank for each year that you held onto the shares, depending on which method works better for highlighting positive results or minimizing negative ones.
Historical Returns
The stock market has had a positive return for the last 100 years, returning an average of 7% over that time period.
That’s not to say there haven’t been some rocky periods. The Great Depression was one such example, followed by Black Monday in 1987, when the Dow Jones fell 22%. But history shows that since 1928 (when it began tracking data), the S&P 500 has always risen more than it fell—and by quite a lot: Its lowest point was -38% back in 1932; its highest point was +633% in 1999.
S&P500
The S&P500 is a stock index and it is an index of the 500 largest US companies by market capitalization. It’s a market-capitalization weighted index, meaning that it includes more representation from large companies than small ones. This means that if you’re investing in this particular index, your returns will be dependent on how well larger companies perform relative to smaller ones.
Dow Jones Industrial Average
Dow Jones is another stock market index. It’s a price-weighted average of 30 blue chip stocks, and it was created by Charles Dow in 1896. The Dow Jones Industrial Average is the oldest and most well-known stock market index in the world.
Investments
An investment is a long-term commitment, and it should be treated as such. Like any other form of asset ownership, an investor must be prepared to weather the ups and downs of the market in order to reap the benefits of their investment in the long run.
Investing in the stock market is a smart way to build wealth over time, but it does take some patience. The best investors are those who can remain calm and collected during times of uncertainty and volatility.
Building a portfolio
When building a portfolio, it’s important to consider your risk tolerance and goals. You should also understand the different types of investments available and how they work. The most common approaches are:
- Diversification: To spread your money across different asset classes in order to mitigate risk.
- Asset allocation: Choosing specific investments based on your time horizon, risk tolerance, and appetite for volatility.
- Rebalancing: Adjusting the allocation of assets when their values have drifted too far from the original target allocations set out at the beginning of an investment period (usually one year).
In general, investors should focus more on building a well-diversified portfolio rather than trying for perfect asset allocation within each asset class—this can be difficult because different markets move differently at any given time due to changing economic conditions or geopolitical events that affect market dynamics (e.g., Covid).
Setting up a portfolio is as easy as choosing a mix of stocks and bonds that suits your goals and risk tolerance. There are many types of investments available, including: Diversified stock funds: Mutual funds or exchange-traded funds (ETFs) that invest in the shares of many different companies. Diversified bond funds: Also known as “fixed income” funds, these invest in fixed-income securities such as government bonds, corporate bonds and mortgage-backed bonds. Money market accounts: Accounts that offer very low returns but also provide liquidity (i.e., you can withdraw money at any time without penalty).
Managing Risk
One of the most important factors in determining how to invest your money is understanding and accepting your own risk tolerance. As with anything, there are no set rules when it comes to investing; only guidelines that can help you make decisions that work for you. If you’re just starting out, or don’t have much invested yet, it’s best not to take on too much risk.
Like previously mentioned, asset allocation is the process of deciding how much of your portfolio to invest in different types of assets. It’s a way to spread out your investment risk by diversifying across different types of investments. For example, if you have 100% invested in one sector or asset class (like stocks), it will be more volatile than if you had a balanced portfolio with investments in multiple sectors and asset classes.
Asset allocation is one of the most important decisions you can make when investing. You should consider your investment objectives, time horizon and risk tolerance before deciding how much money to put in each type of asset. If you want to invest aggressively with a longer-term horizon, you may allocate more of your portfolio to stocks and less to bonds than someone aiming for income stability.
Here’s an example of how to create a simple asset allocation plan:
Start with your investment goals: Do you want income or growth? What’s your time horizon? (This is important because it determines how much risk you can take on.)
Determine what percentage of your portfolio should be invested in cash equivalents, like money market accounts and CDs. Cash is considered one of the safest investments since it has very little risk and doesn’t fluctuate in value like stocks do.
Decide how much of your portfolio should be invested in stocks and bonds. This can be anywhere from 20% to 80% for stocks and 0% to 50% for bonds. -You can choose between index funds or actively managed funds. If you have a long time horizon and are willing to take on more risk, invest more in stocks. If you want stability and less volatility, put more money into bonds and cash equivalents.
Once you’ve established your portfolio and how much money to put into different investments, be sure to rebalance it every year or two. This means that if stocks go up, you may have more than the original percentage of stocks in your portfolio. In order to keep things balanced, you could sell some of your stock gains and put them into cash equivalents (such as CDs) until they reach the desired percentage of your total portfolio again.
If you follow these steps, you will have a diversified portfolio that is well-suited for your investment goals. If you have any questions about investing or want help with how much money to invest in each category, contact us!
Conclusion
The stock market is an exciting and volatile way to invest your money. Whether you’re looking for income or growth, there are many different investments to choose from. Knowing how the market works can help you make better decisions about your portfolio, but it’s important not only know what returns look like today but also where they came from historically so that we can understand what may happen in the future.
