Not all stocks are going to live up to their early promise, no matter how much time you devote to making a selection.
In the other hand, even if you pick your stocks blindfolded, you will have some winners.
Investing into Common Stocks
Let's suppose that you want to invest $100,000 in 20 stocks, or $5,000 in each. Some will work out and some won't.
So so news - 10 of 20 stocks will just plug along
Hypothetically, it does not seem unreasonable to project that 10 of these stocks will just plug along, making you neither rich nor poor. Suppose we assume that these 10 stocks will appreciate (rise in value) an average of only 7% per year over the next 10 or 20 years. Toss in a 2% annual dividend and the total return adds up to 9% per year. That is not exactly riches, since stocks over the last 75 years have averaged about 11%.At any rate, here is what your $50,000 will be worth at the end of:
10 years - $118,368
20 years - $280,221
Good news - 3 of 20 stocks performed above your wildest dreams
Next, let's look at the 3 stocks that performed above your wildest dreams. They appreciated an average of 15% per year. Add in a modest annual dividend of only 1%, and you have a total return of 16%.Assuming you invest $5,000 in each of these stocks, that $15,000 will be worth over the next:
10 years - $66,172
20 years - $291,911
Bad news - 2 of 20 stocks skid and never recovered
So far, so good. Now, for the bad news. Two of your stocks hit the skids and never recovered. Total results for the $10,000 invested in these losers is: zero
10 years - $00,000
20 years - $00,000
Fair news - 5 of 20 stocks performed about averageFinally, 5 of your 20 stocks do about average. They appreciate an average of 9% per year and I have an average yearly dividend of 2%. That's a total return of 11%. Since you have 5 stocks in this category, your total investment is $25,000. Here is what you end up with in the next:
10 years - $70,986
20 years - $201,558
Adding Up these Returns
If we add up these various results, the final figures make you look reasonably rich:
10 years - $255,525
20 years - $ 773,690
Investing into CDs
By contrast, had you acted in a cowardly manner and invested exclusively in CDs that gave an annual return of 4%, you would have only the following at the end of the two periods:10 years - $162,889
20 years - $265,330
One final note. If you figure in taxes, you look even better, since the capital gains (on your stocks ) are taxed at a much lower rate than ordinary income (which applies to CDs). And, you wouldn't even have to worry about capital gains on your stocks if you elected not to sell them.
(Comment: My personal guideline is this. Of 5 stocks you buy, expect 1 to do very well, 3 to be average, and 1 to do poorly.)
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice