With great risk comes great reward – and it’s no different in the world of investing. Today’s investors are increasingly taking on more risk though, in the form of owning more stocks, in order to achieve a higher return on their investments. According to A Wealth of Common Sense, a blog by Ben Carlson, investors now own about as much stocks as they did at the market peak in 2007. Here are some reasons why investors are increasing the equity exposure in their portfolios today:
- Low Rates Elsewhere. With interest rates on savings and money market accounts as low as a fraction of 1%, investors are starting to feel that they need to put their money in the stock market if they want to see any reasonable return. For example, the S&P 500 yields about 2%, while the 10 Year Treasury yield is even lower. By embracing the risk that comes with owning more stocks, investors are hoping for better performance from their portfolio.
- More Money for Retirement. With people living longer, investors are going to need more money for those golden years. While savings certainly help, buying more stocks and keeping a longer-term perspective are also important – especially since stocks have outperformed bonds and cash over longer time frames. Investors realize that taking on more risk may actually be the only way they will be able to afford a comfortable retirement.
- Easy Access. Compared to as recently as ten years ago, technology has made investing and owning more stocks very easy. How? With a few taps on the smartphone, investors can bypass human interaction and efficiently put in their buy or sell orders. There are no prompts to follow or pitches to listen to. In addition to individual stocks, investors can also undertake greater stock ownership through straightforward, diversified vehicles like ETFs or mutual funds that dampen volatility.
- Stocks Have Marched Higher. The S&P 500 Index has actually tripled since its low in 2009. Even through one of the worst recessions on record, investors who have stayed the course from the market’s 2007 peak have fared well, earning their money back and then some. This shouldn’t come as a surprise; historically, investors who have been disciplined have earned a respectable return on their investments. The rising stock market has also brought out the skeptical investors, who have waited for the bull run to end and a better opportunity to emerge. More and more of these investors are realizing that market timing is perhaps not the best strategy and that they finally need to take the plunge.