Tuesday, 31 July 2012

Why Stocks?

Past performance is no guarantee for future performance.  There are no guarantees that any asset will thrive in the future because it has in the past.

This leaves two choices:

1.  Keep hard cash and save enough during your working years to last your retirement years; or
2.  Take some risks and invest the money in assets that have a reasonable chance of increasing in value over time.

Keeping cash:  Most people cannot save enough to support them in retirement especially when inflation continuously erodes the purchasing power of money.  Therefore, most would not choose this option.

Investing the money in different asset classes:  Here is where the problem of choosing investment options comes in.  It is definitely wise to spread your wealth across various asset classes like stocks, bonds, real estate, art or gold.

Why Stocks
Stocks increase in value faster than inflation decreases the buying power of money.  The best way to have money in the future is to make money in the future.  So, forget about which asset class will appreciate in the future but rather focus on owning a business that profitably sells products or services.  Of course, most do not have the inclination, the money or the skills to start their own business, so the next best way to share in the profits is through the stock markets.

Stocks represent ownership interest in businesses.  When you invest in stocks, you become a partial owner of the concern that will hopefully make money in the future.  Stock ownership will reward the owners either because the stock prices go up or because the firm/s profits will be distributed as dividends.  In the short period stocks may rise for reasons having nothing to do with profitability or dividends.  But over the long periods of time it has been proved that stock prices rise in relation to a company's earnings and distribution of profits to shareholders in the form of dividends, bonus share and rights.  Learn and acquire the knowledge to consistently identify specific companies that will thrive.  In the absence of this ability, employ the services of a professional.

If you don't plan to tap into your long-term savings for a period of at least five years, stocks should probably constitute the bulk of your portfolio depending upon your emotional strength to deal with the ups and downs of the market.  Even retirees who draw their current income from their investments should have a portion of their savings invested in stocks so that their money will grow faster than inflation.

To be a savvy investor, know the difference between investing and speculating.

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