There are many types of investments (stock market, real estate, fixed income, art, etc.), and none of them is perfect. All of them have their advantages and disadvantages, and there is no investment that is better than others in absolute terms. The good thing is that, with rare exceptions, different types of investments are not mutually exclusive so you don’t have to choose just one of them and give up all the others.
I was recently talking to my friend who had a recent windfall of roughly 10K, and she finally (she’s almost 40) realized that the interest she’d been earning on from CDs and savings account just wasn’t worth it. However, she was hesitant to invest her money in stocks because she thought it was too complicated. I realized that there are millions of people who have this same mindset so it was time to go back to the basics. The next series of articles will cover the basics starting with today’s lesson the stock market.
Investing in the stock market is much easier than most people believe, since it is something that anyone can, and should do, without the need to have any prior knowledge or superior intelligence. I think that everyone should devote at least part of their money to investing in the stock market, as it has been proven that the long term stock market is the most profitable investment there is. And it is not only the most profitable, but through dividends, provides a more stable and growing income than real estate or fixed income. That being said, particularly as you age, you should Â certainly have a portion of your money in fixed income.
The US Stock Markets (S&P, Dow Jones, Nasdaq etc…) haveÂ more security, profitability, liquidity and flexibility than any other type of asset class such as real estate or art. Here are just a few reasons why you should invest in equities:
1.Diversification of assets: You’ll need some serious coin to buy, for example, a housing property with considerable living space, vs a relatively smaller dollar amount that will allow you to invest in several companies at once. The time and money commitment are significantly lower. When investing in real estate in another country or another continent, the minimum equity and the costs (time and money) of management and maintenance are skyrocketing, while when investing in foreign stock exchanges the costs are very similar to those of the US.
2.Liquidity: In case you ever need money due to some unexpected event(such as job loss or medical bills), there is no possible comparison between the stock exchange investment (the sale of some shares takes approximately 5 seconds) and real estate. Obviously, if it coincides with a bad market moment the sale price of the shares will be lower than what you’d obtain during a rally, but when you try to sell a property at a bad market moment, chances are that you simply won’t get anywhere near market value.
3.Transparency: On the internet there are aÂ multitude of websites that offer free information around the current price, history, management, revenue etc..of any publicly traded company. Anyone can access this information and really know what has happened to company X in the past Y amount of years. There is nothing remotely similar when it comes to investing in real estate. Figures for purchases, sales, rentals, etc. are estimates at best. Thanks to this transparency at all times we can know the price at which we could actually sell our shares in case you want to do it, something that’s just not possibleÂ with property.
4.Profitability:Â The growth of profits and dividends of solid companies in the long run is higher than that of salaries. In addition, the maintenance costs of a portfolio of shares are very low whereas real estate needs “new money” constantly (community expenses, levies, insurance, IBI, repairs, updates, …). Although these expenses are usually ignored, they are of decisive importance in the calculation of the final profitability and of the disposable income that we can obtain.
5.Security in the collection of an income: There is nothing special required on your part to collect dividends. Simply by having the shares deposited in any bank, company or securities agency, the amount of the dividends is automatically entered into your account. There are many solid and well-managed companies that have not stopped paying dividends for a single year for many decades, even centuries. When you want to rent a flat there are many potential problems. It’s almost impossible to rent a property uninterrupted for decades. In the vast majority of cases, the property will be empty sooner or later, and not only will it take several months, or years, to find a new tenant, but most likely you’ll have to makeÂ repairs to the building in order to correct the damages caused by the last tenant before being able to rent it to the next one.
More and more people are investing in the stock market, and sooner or later it will be rare to find someone who doesn’t.Â So what are you waiting for? At the very least, pick a stable ETF, index fund, or a set of stable companies in an industry that you’re familiar with and watch your money grow! For more advice, check out this article from our friends at CNN.