Why investing in a public company is different and why it matters

The pace of innovation and change we are seeing in retail investing is exciting, both in terms of the opportunities it gives existing investors and the way it’s getting more and more people engaged with investing for the first time. Every day, it seems like new asset classes and types of investment products become available to investors—ranging from new investment strategies in precious metals, collectibles, NFTs, cryptocurrencies, and beyond.

Generally speaking, that is a good thing. A core principle of successful investing is diversification, and more asset classes generally lead to more diversification. I am personally invested in a broad range of asset classes, including many of the new ones. 

That said, I think it’s important to remember, particularly for newer or younger investors, what makes investing in public companies different from investing in many other assets. 

When you invest in public companies you are investing in an entity focused on delivering growth and returns to shareholders. What do I mean by that? Company leadership is focused on this goal daily, and if they fail to deliver, they risk being replaced. That creates a virtuous cycle of growth and shareholder returns—the companies that perform the best will deliver results for shareholders. Simply put, company management is working to create wealth for you, the investor.

That same engine of growth is not built into many other investments people make. For example, when you invest in a coin, collectible, or precious metals you’re typically investing in the scarcity of the asset and the belief that over time people will pay more for access to that asset. These types of assets can absolutely play a role in an investment portfolio, but it’s not the same as investing in a public company. 

Decades of data show the power of investing in publicly traded companies. I’ll use an example close to home here at Schwab: A hypothetical investment in the Schwab 1000 Index, an index of the top 1,000 U.S. companies by market capitalization, nearly 35 years ago when it first launched would be up more than 3,000% today.

That is the power of compounded growth over time delivered by an operating model that is focused on generating growth and positive returns. 

So yes, while there are lots of investment options out there today, and broadly diversifying across many investments is a good thing, as I tell my kids, don’t overlook the potential of owning a part of a company where management and the entire business model are working to deliver returns to shareholders over time. 

That is real wealth-creating power.