Why are stocks in your portfolio?

March 22, 2024

Allworth co-founder Scott Hanson shares a few key reminders about stocks.

In this space a couple of weeks ago I wrote about bonds and their role in a portfolio as, among other things, a hedge against the volatility of stocks.

This week, just for perspective, I thought I’d turn the tables and write about some of the advantages and nuances of stocks.

Simply, what are they and why are they almost certainly a key component of your investment portfolio?

First, a stock is a share in the ownership of a company. It represents a claim on a company’s assets and even its earnings. The more of a particular stock you buy, the larger your stake in the firm.

When it comes to investing and references to stock, the words “shares” and “equities” are often used, as well. Technically, however, “share” is a more specific term than stock. A share is a unit of ownership in a particular company or of a certain financial instrument, while “stock” can be more generic and might be used to refer to a collection of holdings in a portfolio.

In this light, you could say, “All my money is tied up in stock.” That could mean you own parts of dozens of companies. Whereas when you use the term “share,” you might say, “I own one share of stock in the ACME Corporation.”

So, why are stocks an essential investment in most portfolios?

One main reason is that throughout its history the stock market has created untold amounts of wealth. (The S&P 500 has returned an average of between 8% and 12% annually since its inception in 1923.¹)

But, despite those average yearly gains, the S&P, and other indices, obviously don’t go up every year. (For example, historically, the S&P has suffered a year-over-year loss 30% of the time.¹)

Aside the fact that stocks offer the potential for excellent returns, another key reason people invest in them is to protect their money from inflation. Case in point, in the last 100 years, inflation has run about 3% per year, but over that same period, the average return on stocks has been almost four times that amount.²

Which is why - outside of an emergency fund, along with money for daily expenses - that most people should resist any temptation to keep their money sitting in cash. Take 2021 and its 7% inflation. If you had $1 million sitting in cash, year-over-year, you lost $70,000 of purchasing power. Simply, if fear keeps you out of the market, and you keep your money in cash, even in low inflationary periods, your money is still losing value every year.

Next, stocks are also a popular investment because, in certain circumstance, they can provide passive income. Consider dividends. While it’s true that not every company you invest in offers them, some do pay their shareholders either a monthly or a quarterly payout.

Another fact that makes stocks such a popular investment is that most are publicly traded on a major exchange (NYSE, Nasdaq, Hong Kong Stock Exchange, etc.). This makes them a more liquid investment (easier to buy and sell) when compared to things like real estate, debt instruments, and art.

And lastly, it’s likely that you own stocks for their ease of diversification. If you’re a regular listener to our podcasts, you’ve no doubt heard us talk about the importance of a well-diversified portfolio. Owning stock not only makes it easier to diversify your risk among various stocks, but they also serve to balance your portfolio opposite other types of investments such as bonds and real estate.

Just as a reminder, the information in this article is for educational purposes only and should not be construed as financial advice. Always remember that every investment carries risk, so I urge you to speak with your fiduciary advisor before investing in stocks or in any other vehicle.

Allworth Financial is an education-based, fiduciary advisor, which means that we believe that the more you understand about investing, saving, and finance, the better your decisions about money will be. If you aren’t already a client of Allworth, whether you just want an unbiased second opinion, or even if you’ve never worked with an advisor before, I encourage you to make an appointment with one of our fiduciary advisors for a complimentary, no hassle assessment of your investments and overall financial situation.

^{1 Why invest in stocks}

²^{U.S. Inflation Rate by Year: 1929 to 2024 (investopedia.com)}

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¹Barron’s 2024 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking of independent advisory companies is based on assets managed by the firms, growth, technology spending, succession planning, and other metrics.

² Retention Rate Source: Allworth Internal Data, FY 2022

³ The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.

⁴ As of 7/1/2024, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $22.5 billion in total assets under management and administration.

⁵ InvestmentNews 2020 and 2021 Best Places to Work for Financial Advisers. The ranking reflects survey responses and scores completed by both employers and employees. Employers report their organization’s workplace policies, practices, and demographics. Employees complete a survey designed to measure the employee experience.

⁶ 2021 Value of an Advisor Study / Russel Investments

⁷ Ranked 9th Top Wealth Managers By Growth in Assets in the U.S. from RIA Channel, 2022. RIA Database and RIA Channel are registered trademarks owned by Labworks, LLC.

⁸USA Today Best Financial Advisory Firms 2024. The ranking is based on the growth of the companies’ assets under management (AUM) over the short and long term and the number of recommendations they received from clients and peers.

⁹NBRI Best in Class Ethics 2023. The Best in Class level is bestowed upon clients performing at or above 90 percentile of the NBRI ClearPath Benchmarking Database.

^✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

^✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

^†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.