Investing in the stock market is one of the best ways to build long-term wealth

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Tourists visit the Wall Street bull statue in the Financial District, New York City.

Drew Angerer | Getty Images

Americans are feeling less comfortable about investing in the stock market long-term, even though it’s one of the best ways to get ahead.

In 2021, 28% of Americans said that real estate was their preferred way to invest over a period of 10 years or more, according to a Bankrate survey. About one-quarter said cash investments, such as savings accounts or CDs, are their top long-term investing method, and only 16% said that they’d pick the stock market, according to the financial website.

That’s a large swing away from comfort in investing in the stock market. Just a year earlier, the markets topped the list with some 28% of Americans selecting it as their favorite investment.

“To see that when the market has performed as well as it has over the last year, that was surprising,” said Greg McBride, chief financial analyst at Bankrate.

The pandemic may have impacted how investors are thinking about investing, and made more Americans aware of having cash on hand for emergencies.

“Unfortunately, investors tend to chase performance,” McBride said. “That’s often the pattern that we see. Building wealth over the long term really requires the opposite tact.”

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Why the stock market makes sense for lasting wealth

Investing in the stock market with discipline and patience over decades is generally the best way to build wealth, financial experts say.

“What we’ve seen in the long term, for long holding periods, is that returns in the stock market have generally outperformed other asset classes,” said Roger Ma, a certified financial planner at lifelaidout and author of Work Your Money, Not Your Life

For many people, their first stock investments are through an employer-sponsored retirement plan such as a 401(k) plan. But, even for those that want to invest outside of those accounts, it’s relatively simple to get started through several online brokerages that offer no fees.

“It has never been easier or less expensive for individual investors to participate in the stock market, and in a diversified fashion,” McBride said.

Managing a retirement portfolio or other long-term stock investments can also be quite easy, said Ma.

“You don’t need to know what to invest in, when to buy it and when to sell it,” he said. “It could be as simple as just buying a one-fund portfolio or target date fund that approximates when you want to retire.”

And, the compounding seen in the stock market can multiply what you save exponentially. Lauryn Williams, a CFP and founder of Worth Winning, describes investing in the stock market as like getting on a moving walkway at the airport.

“You can walk, and you still should walk, most people do walk when they get on the moving walkway,” Williams said. “You still continue to save, but the moving walkway is going to help you get there faster.”

Even if the market slumps or stagnates in the coming months and years, experts recommend staying the course and being more selective with what companies you’re investing in.

“In terms of my long-term outlook, to be honest with you, stocks are the best place to be, but I just wouldn’t expect much from the major averages,” said billionaire investor Leon Cooperman during CNBC’s Financial Advisor Summit. “I’m prepared to be in that kind of environment where I have to stock pick my way to success.”

Stocks versus cash

In the long-term, cash is generally not a great investment for building wealth. It’s much more helpful to have cash for something such as an emergency savings fund.

“Cash is perfect for short-term needs because there is no volatility,” said McBride. “But the lack of returns means that it not only won’t build your wealth over long periods, it will erode it.”

This is due to inflation, or goods and services becoming more expensive over time. If you are just saving money in cash and not seeing strong returns, you’ll have to save more and more to buy the same things as inflation ticks up.

After the coronavirus pandemic, this may be especially top of mind for Americans as inflation is heating up and lifting prices.

One of the best ways to combat inflation is investing in assets that will give you a higher rate of return, such as the stock market. In exchange for the risk of volatility, investors are rewarded with higher returns.

“Your biggest risk over the long-term is investing too conservatively,” said McBride.  

When real estate makes sense

Of course, owning property is also a great way to build wealth, especially a kind that can be passed on to future generations.

Right now, people may be looking at real estate because of surging prices that have added value to homes bought years ago.

“Primary residences have made many a millionaire,” McBride said.

But there is a much higher barrier to entry in owning real estate than investing in the stock market, and much higher costs of buying and selling that can eat into overall returns. That means for those that are just starting out, it generally makes more sense to start with basic stock market investing and plan to buy property later.

“It’s easier to get started in the stock market because you don’t necessarily need some huge chunk of money for a down payment,” Ma said.

He added that if you want exposure to real estate, that can also be accomplished with a balanced portfolio by investing in real estate companies or real estate investment trusts.

The stock market will also give people much better diversity in investments than real estate, which is a way to protect assets over decades of saving and investing.

“Diversity is about having your hand in various different pools so that if one thing doesn’t work out, something else is likely to work out and overall, you end up coming out on top,” said Williams.

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