I’m getting close to graduation, so I’m beginning to think about my finances and how I’m going to save money (once I start working, of course!). I think I understand the basics: spend less than you earn, invest early and often, and so on.
But I have a question: why stocks? It seems like stocks (and bonds, I guess) are what everyone invests in. But I also know that other things can be valuable–jewelry, for instance–and that some of these things can grow in value and act as investments. So why does everyone gravitate towards stocks? Why not invest all of my money in a house, for instance–then I could live in it and make money at the same time! What am I missing?
For the most part, the things you say are valid–yet it’s undeniably true that stocks and similar investment vehicles are the most popular investment options you have when saving for retirement (just over half of all Americans own stock in some way, including through vehicles like mutual funds–but most of the rest of us are invested in nothing at all, not in alternative investments). Why is this?
Let’s start by going back over the things you pointed out. You’re quite right that jewelry is valuable, say product curators at Mountain Brook, Alabama-based jewelers Bromberg’s. In fact, some investors do invest in jewelry, or at least in the precious metals and stones that make it up: gold, silver, and platinum are all things you can invest in if you choose.
But imagine for a moment that you truly did invest in jewelry–that instead of a stock portfolio you had a box of jewels. Let’s put aside the fact that you would have to keep it safe–perhaps you have a safety deposit box, or something, and that’s taken care of. You own tens of thousands of dollars in jewelry, and it is holding its value (or perhaps even increasing in value), and so you decide you have saved enough to buy a house.
Well, that’s great–but you can’t pay the mortgage in jewels, so you need to sell them. And that’s the trick: it’s hard to quickly swap your jewels for their fair value in money. You may have to take a discount if you want to get cash out of your “investments” quickly. It will be particularly hard to cash out if there’s a recession going on, as fewer people might be interested in buying your jewelry then.
You’ve run into a problem related to liquidity. In finance, liquidity means how quickly something can be sold. If you had the same amount of money in stocks that were frequently traded (and that’s most large, relatively “safe” stocks), you’d have no problem selling off your stocks and quickly getting the money you needed for your house. With a box full of jewelry, not so much!
By now, you likely recognize the problem that many of us have in treating real estate as an investment: a house, too, is tougher to sell than a stock. That doesn’t necessarily mean that you shouldn’t view your home as an investment (as some experts argue), or that you can’t ever own a second property as an investment. Home ownership makes sense in part because of the potential to increase your wealth, say realtors at Bratenahl, Ohio’s Chestnut Hill Realty Inc., and the right property can really grow in value over time. But it does mean that you need to consider liquidity when you contemplate holding real estate as an investment–unless you want to pack up and move out every time you want to take some money out of the market!
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” — Robert Kiyosaki
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