Investing provides many potential benefits, but also has some risks that investors should consider carefully. The main pros of investing include building long-term wealth, compound interest gains, inflation-beating returns, and more control over your financial future. However, the cons can include market volatility risk, lower liquidity, higher costs and fees than saving, and the chance of losing principal. Overall, investing tends to provide significantly higher returns over the long run compared to saving in a bank account, but requires accepting higher short-term risk.
Investing Allows Building Long-Term Wealth
One of the biggest pros of investing is that it provides a way for people to steadily build long-term wealth. By investing early and consistently, even modest monthly contributions can compound into a sizable nest egg over decades thanks to compound returns. Studies show that investing is one of the most reliable paths toward millionaire status over an investing lifetime.
Investing Can Beat Inflation
Another major benefit of investing is that market returns tend to exceed inflation over longer time periods. This helps preserve the purchasing power of an investor’s money. Conservative investments like bonds may struggle to match inflation. But a diversified portfolio of stocks and other assets has significantly outpaced inflation historically.
More Control over Financial Future
Investing also puts people more in control over their own financial futures. Relying solely on pensions or government programs can be risky. But by proactively investing, individuals have much more ability to build the assets they need to afford retirement and other financial goals.
Investing Has Higher Risks than Saving Accounts
However, investing does carry more risk than keeping money in FDIC-insured savings accounts. Investors face the risks of volatility, lower liquidity for some assets, and potential loss of principal if investments decline. Dollar cost averaging and portfolio diversification can help mitigate some investment risks.
Higher Costs and Fees than Saving Accounts
Investing also tends to come with more costs and fees than basic savings accounts at a bank. Account fees, trading commissions, expense ratios, advisor fees, and other expenses can eat into investor returns over time. However, lower-cost options like index funds and robo-advisors help reduce this drawback.
In summary, investing provides major benefits like building long-term wealth, achieving inflation-beating returns, and taking control of your financial future. But it also requires accepting higher volatility risk than bank accounts, lower liquidity for some assets, as well as higher costs and potential principal loss.