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There are plenty of prejudices against investing in stocks. Often one of them is that stocks seem too risky to people. Of course, there are some stocks that actually pose a huge risk as an investment. Namely, whenever the valuation of the company is so high that the company’s fundamental data no longer support it. The high valuations of some companies are often the result of speculation in the stock market.

However, there are also enough counterexamples, such as companies that have continuous sales and profit development over the long term and whose investment represents a very calculable risk. This is also due to the fact that they set themselves apart from their competitors through their competitive advantages and the associated economic moat they have created. 

In the long run, stocks offer several advantages over other asset classes. In the following, general benefits are shown that can be achieved by investing in stocks:

1. Chance of a higher return than in other asset classes:

In particular, investments in stocks offer the chance of a relatively high return.

The S&P 500 Index shows that, in the very long term, an investment in the largest 500 listed companies in the USA can be expected to generate an average return of around 10% per year (from 1926 to today). In principle, it is good to keep this average 10% return per year in the back of your mind and use it as a benchmark, especially when self-appointed stock market gurus promise unrealistically high returns on certain investments. 

For example, compared to the 10% average return across the broad equity market, long-term US government bonds have returned 5 to 6% annually over the same period.

2. Protection against inflation:

In addition, investments in stocks offer protection against inflation. By achieving higher prices, companies can increase their sales and profits and, in the long term, this can, in turn, have a positive effect on the corresponding stock prices, from which in turn investors benefit.

The inflation rate in the US from 1960 to 2020 averaged 3.68%. If one takes into account that an investment in the S&P 500 index would bring an average return of 10% per year, it becomes clear that the return of an investment in the broad stock market would outperform the average inflation rate and thus serve as good protection against inflation. 

In the following you can find a table in that compares the return of the S&P 500 and the inflation each year from 2000 until 2021. We can see that in 16 out 22 times, the S&P 500 outpermormed the inflation (in those years, in which the S&P 500 outpermormed the inflation, the row is marked in blue): 

Source: https://www.usinflationcalculator.com/inflation/current-inflation-rates/

3. Generation of additional passive income:

Many companies pay out a portion of their profits to shareholders as dividends. There are companies that pay dividends annually, quarterly or monthly. With the help of these dividend payments, you can generate additional passive income.

Companies that are named dividend aristocrats can be of particular importance when it comes to generating additional passive income. Dividend Aristocrats are those companies that have managed to increase their dividends in each of the last 25 years. In this way, you can not only succeed in building up an additional passive income, but you can also achieve that this additional income increases a little every year. The dividend aristocrats include companies from a wide range of industries: Some examples of dividend aristocrats are Coca-Cola, PepsiCo, Procter & Gamble (all non-cyclical consumer goods), Johnson & Johnson (health care), ExxonMobil (energy) and IBM (technology).

4. Opportunities for broad diversification across different industries and countries:

By investing in companies from different industries and countries, you can build a diversified investment portfolio to spread your risk. This helps you to protect your assets even better.

In the following, I will use the Thomson Reuters Business Classification (TRBC) to show you how an investment portfolio could be diversified over different industries. The TRBC is an industry classification schema which includes over 70,000 companies from 130 countries. 

In the following will be shown the 10 different industries, the description of the industries and it will be shown examples of companies of each sector and its corresponding country, where the company is from. Please note that those companies are examples and not investment recommendations. It should show you as an example of how an investment portfolio could be diversified over different sectors and countries:

 Source: Investmentanalysis.co

How am I most likely to benefit from these advantages?

To be able to benefit from investing in the stock market, it is of crucial importance to make the corresponding investments with a long investment horizon and, in particular, to carefully analyze the corresponding companies and understand their business models before investing in them. In this article, you can read why time horizon is so important when investing. 

Here you can find the currently available investment analysis. 

 Sources:

https://www.fool.com/investing/how-to-invest/stocks/why-invest-in-stocks/

https://www.macrotrends.net/countries/USA/united-states/inflation-rate-cp

https://www.usinflationcalculator.com/inflation/current-inflation-rates/

https://www.refinitiv.com/en/financial-data/indices/trbc-business-classification