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Historically, the stock market has been the best place for individual investors looking for high returns for their money. Possible high returns involve higher risks, and as a result, investing in stocks is not a guarantee of stable returns. However, investing in solid, well-managed companies with stable results can generate average returns close to 10% per year for decades.
CNNMoney reports that from 1926 to 2010, the S&P 500 – one of the main indexes for measuring the health of the US economy – averaged an annual return of 9.8%. The average included catastrophic falls such as the Great Depression and the Great Recession. As a result, CNNMoney and The Motley Fool financial advisory service recommend investing your money in the capital market over a long period of time to get high returns.
CNNMoney notes that the shares are not simply pieces of paper and not all shares are issued the same; When you buy a stock, you buy a portion of the company. Some companies produce good profits for decades, some bankrupt in a few years and others engage in illegal practices harming their investors (Enron). The Motley Fool strongly recommends investigating the records and financial statements before buying any stock – look for the reports made by the securities and exchange commissions and review them carefully, reading all the notes.
People lose a lot of money in the capital market. Most of the money is lost when companies go bankrupt when new overvalued companies report mediocre profits causing the price of their shares to sink, and when investors sell stocks during difficult times related to macroeconomic factors and not just to the administration of the companies. The Motley Fool repeats that one of the tricks to obtain high returns in the capital market is to invest in stocks that you plan to hold for a long time and never buy or sell on a whim.
If the capital market seems very risky or complicated but you also want an average return of 9.8% annually, consider investing in index funds. These are investment funds whose portfolios replicate the S&P 500, the Dow Jones industrial average and other common reference markets. Index funds perform similarly to the general economy and are “passive” funds, that is, the fund manager rarely trades shares, resulting in low fees and taxes.