Do you still have those nightmares from the stock market crash a few years ago? Many people do. In fact, if you’re like most people you still have some major losses, and…
- You’re concerned about the stock market’s poor, erratic, and sometimes scandalous performance;
- Your portfolio needs greater diversity;
- You know that real estate is a great place to invest, but you don’t want to be a landlord;
The stock market has been the source of many booms & busts in our economy, so let’s get a little more information.
When you buy a share (or a hundred or a thousand), you’re buying an ownership interest in a company. The information we use to choose a company’s stock is usually based on what a bunch of people are saying about the company’s past, it’s future, and it’s personnel. In most cases, the people telling you this information get paid when you buy and then sell the stocks, even though they might be unaware of the real status of the company’s past, present, and it’s personnel. This is one of the main challenges in choosing a stock. Remember Enron? Many stock brokers were touting the conservative nature of Enron’s stock, but didn’t know the true status of the company. Or more recently: How many in-depth conversations did you have with Mark Zuckerberg before deciding to buy 50 shares in Facebook? Even with all the recent hype surrounding the IPO of Facebook, shareholders have now seen losses, simply because most of the information was hype. Information and mis-information can make or break your portfolio.
Still not sold? Ok, look at the following charts:
This shows that in the last 10½ years, the Dow and S&P averaged less than 2% growth. Not too impressive, is it? Even NASDAQ’s 3.45% isn’t much better.
Here are the 20 year averages:
So in 20 years, stock lovers have enjoyed between a 5½-8% annual return, with a ton of roller-coaster ups-and-downs. If you had invested $50,000 in the Dow in 1992, and re-invested without touching interest or principle, your portfolio would be around $185,000.
Not too bad, you might say. What this number doesn’t take into account however, is the emotional trauma inherent in the tech bust in 2000, or the recent recession that took 40% of some people’s retirement accounts. If anyone tells you that they were feeling fine in 2008 (somehow ‘knowing’ that they would still average 6.74 % after the market crashed), you’ll know they’re lying
Ask THIS question: “If the stock market performs this poorly, why do people usually invest most or all of their retirement portfolios in it?”
The answer is simple: Marketing.
- The capitalization of the US stock market equals over $13,000,000,000,000. (Yes, 13 trillion dollars)
- This doesn’t include any of the ancillary companies and industries (media, servicing firms, etc.) that teach, sell, and convince potential investors about the benefits of a company, a stock or an investment firm.
- Because stocks, mutuals, and ETF’s, are constantly being touted as ‘conservative’, ‘smart’, or ‘simple’, the public perceives this to be true.
Go out and do the research. Get the information and make smart choices. Don’t let the people who are paid to sell you something be in control of your financial destiny. I know. It’s tough. It takes time. But do it NOW, and reap the rewards later in life. Mom and dad may have had it right all those years ago: “Do your homework!”