Today’s blog is for anyone who is new to investing, and will go into some of the most basic terms and tips. The old adage about every journey beginning with a first step begins, if you’re a new investor, right now. Enjoy.
First, when it comes to stocks, over the long haul they have historically outperformed almost every other type of investment. In fact they outperformed practically every other asset class with 10% returns, which is nearly double the next best-performing asset class, long-term U.S. Treasury bonds, at 5%.
However, in the short term, stocks can be very risky. Just ask anyone who was around on October 19, 1987, when the stock market lost 22.6% in one day. In 2009 they lost a heart attack inducing 37%! In other words, stocks are something that you purchase for the long term and hold onto for many years.
When it comes to risk, the higher the risk an investment has, the more it will return (generally speaking). Stocks have a higher risk than bonds, for example, and tend to return more than bonds as well. Of course, as we talked about in the last paragraph, occasionally those risky stocks end up collapsing and you lose everything. That’s why financial advisors always tell their customers to diversify their portfolios.
Speaking of the long term, when it comes to stock prices, the single most important factor is earnings. If you focus on what stock prices do every day you might just drive yourself crazy because they fluctuate all the time.
When it comes to bonds, rising interest rates have a very negative effect on them. The reason is simply because bond buyers don’t want to pay as much for an existing bond that has, for example, a fixed interest rate of 5%, because the fixed interest rate on a new bond, since rates have gone up, will pay more.
When it comes to a “sure thing”, the only asset that qualifies are U.S. Treasury bonds. The American economy has historically been very strong and, when need be, the government always has the ability to print more money. Add that to the fact that the US government is very unlikely to default on its bonds, and you have what is as close to a sure thing as an investor could possibly get.
We mentioned a diversified portfolio above and, in almost every respect, it’s better to have more diversification than less. While it’s true that a diversified portfolio more than likely will not outperform the market by a very big margin, it will definitely protect your assets much better.
Finally, if you have the choice between mutual funds and actively managed funds, you should probably choose the former because they almost always outperform the latter. In fact, it’s a rare actively managed fund that can consistently outperform the market enough to cover their higher expenses.