During the long term, US stocks gave a historical compound annual return of 11% to its investors. During the period January 1960 to December 2000, you could have earned a compound after tax return of 16.9% a year on your shares on the South African stock market.
Equities are one of the few asset classes that give you a real chance to fight inflation over the longer term.
The reason for this lies in the nature of equities. Equities are investments that give you part-ownership in a company.
Companies issue shares because they need money (or capital) to expand.
- When you buy shares, you own part of the company, including its assets.
- That explains why, although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases.
Note that we say a 'good' company.
- Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow.
- That is why it is important to be clever when you make equity investments.
Besides your share in a company's capital (i.e. its assets less its liabilities), you can also share in its profits by way of dividend payments to the company's shareholders. This is another reason why investment in equities provides one of the few opportunities to safeguard the REAL VALUE of your capital. The term 'real' is very important in investment terminology. It means that you have taken the impact of inflation into account.
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