Why Orman thinks every investor should stick with stocks

Even as the TSX, Dow, S&P 500 and Nasdaq rise and dip with anxiety-inducing volatility, Orman contends the stock market offers a more direct path to building wealth. Cash and bonds are safe, but Orman cautions that they can’t keep up with inflation.

“Over the long term, stocks have produced the best gains after factoring in inflation,” Orman blogged. “Bonds and cash struggle to keep pace with inflation; only stocks have a track record of earning more than inflation.”

Considering the TSX briefly turned negative in October 2023, it’s hard to blame average investors tempted to stampede the exits. And with inflation remaining untamed, hunkering down with cash may seem inviting.

Orman, however, wants to assure stock skeptics that investing in the market remains the best way to deal with inflation. That’s a tough sell these days, but her advice to current-but-weary investors is this: Hold the line.

The nature of stocks means high real returns, which are earnings on investments after inflation and taxes. Other savings methods such as bonds or cash don’t account for the rate of inflation, which equals lower returns versus stocks. Orman explains that, even in periods of poor market performance — and we’re certainly in one — the TSX still outpaces today’s higher-yield savings accounts. And it’s not even close.

Now that Orman has laid out why you should invest your savings in stocks, here are some practical ways to minimize risk and maximize returns when using stocks to build your net worth.

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'Buy blue' (aka: blue chip stock)

Stock investments in established “blue chip” companies offer a great start for the investment beginner. These stable companies serve as a lower-risk investment option because they typically only include well-established, capitalized firms with large profit margins. Examples of blue chip stocks include Royal Bank of Canada (TSX:RY), Toronto-Dominion Bank (TSX:TD) and Enbridge (TSX:ENB), as well as Apple (NASDAQ: AAPL), and Google's parent company, Alphabet (NASDAQ:GOOG).

While stocks in blue chip firms can be quite expensive — a lot, or 100 shares, of Alphabet (NASDAQ:GOOG) could cost you between USD$12,300 to USD$19,400 — getting exposure to blue chip stocks using exchange-traded funds (ETFs) can be a great place to start. For instance:

  • iShares S&P/TSX 60 Index ETF (TSX:XIU) has a low management expense ratio (MER) of just 0.18%. As a complete basket of 60 of the largest, most heavily traded stocks on the Toronto Stock Exchange (TSX), this ETF is a good way to buy holdings that represent the S&P/TSX 60 Index.
  • iShares Canadian Select Dividend Index ETF (TSX:XDV) holds 30 of the highest-yield Canadian stocks and factors in dividend growth and payout ratios to determine shares to hold. The MER is just 0.55%.

Practice makes perfect

To gain market acumen, test your risk tolerance without putting real skin in the game. Many brokerages provide paper trading or virtual accounts that simulate stock trades. This can be a fun and eye-opening way to get comfortable with stocks before investing actual money.

Since paper trading functions alongside legitimate capital, you can easily translate your practiced investment decisions into the real thing. Paper trading, paired with a financial advisor, can provide you ample education and strategic investment practice.

To start, open an online brokerage account that offers a practice account. Most big bank brokerages offer this option, including:

However, big banks aren't the only ways to set up low-fee trading accounts that offer practice trading accounts. Fintechs and financial firms dedicated to providing responsive, easy-to-use online brokerage access include:

Read More: Learn about the best discount brokerage options in Canada

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Diversify, and consider mutual funds

You’ve likely heard the term diversify before. Even when working with a small amount of money, spread your investments over several stocks to distribute your risk and protect against big losses.

Instead of individually investing in different companies, which can be daunting for beginners, consider exchange-traded funds (ETFs) or mutual funds. These provide instant diversification through holding a basket of stocks or other assets. They’re accessible and affordable, with low minimum investment requirements and fees. What’s more, they’re managed by professional financial institutions, which takes away the stress of decision-making.

Sources

1. SuzeOrman.com: Can Your Retirement Plan Withstand Inflation? (July 8, 2021)

— with files from Romana King

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Chris Clark Freelance Contributor

Chris Clark is freelance contributor with Money.ca, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.

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