Why Stocks MUST Be in Your Portfolio
Whether retirement is in your near future or not, the stock market affects your investment portfolio now and later. A large number of workers depend heavily on 401(k) plans and simplified employee plans for their retirement income. More than ever is it important to understand the impact of the stock market and how it can positively affect your portfolio over time.
Sure over years and decades there will be plunges and surges of stock prices, which raise skepticism from those on the outside of the market. These skeptics view the market as a ticking time bomb waiting to destroy everyone’s retirement. So, instead of investing for the long-term, they will continue to watch from the sidelines as their peers accumulate a strong net worth and position them to retire comfortably and satisfied.
On the surface, it can appear to be a dangerous area to put your money into as the disastrous 2009 market collapse opened the door for skeptics to scream how right they were. Sorry skeptics, the subsequent five (5) years after, the market returned a total of 178% to investors. That is an annualized rate of return of over 22%.
The housing market will experience their own share of occasional dips in prices and suffer from inflationary climbs. As an investor, the long-term prospects more than often provide a strong return on investment. Even as this era has seen a major increase in the real estate investment industry, there still is not a greater return than stocks can potentially provide. The astronomical numbers investors like to toss around are generally seen from flipping homes. The issue is: not everyone has the capital for an initial investment to flip a house. The majority of real estate investors choose the rental properties approach, which sees steady income and growth. But unlike bonds or metals, real estate does have a potential for high investment returns.
Corporate bonds provide a fixed rate of return on investment. This is why some investors rely heavily on bonds for the security of receiving a return – no matter how low the interest will be. Stocks are directly correlated to business performance. As a shareholder you have a stake of that particular company. Yes, this means when a company performs poorly the stock price will drop, and there is no limit to how much a stock price can drop. So, there is significant risk, but on the other hand there is no limit to how high a stock price can soar. Due to the limitless of stock prices, the return on investment potential exceeds any other asset play.
• From 1950 to 2015, the S&P 500 market index has seen an annualized gain of 7.7%.
• From 1985 to 2015, the Dow Jones Industrial Average has raised an average of 9% annually.
When the term annualized is used, it means the average rate returned on a yearly basis. Some years will be much higher than others, while some will experience losses, but overall the gains outweigh the losses to create a positive return. This is why over the long-haul stock returns almost always average out to stronger rates than other investment options.
Understanding that yes it may be a roller coaster ride at some points throughout your investment journey, but every dip in market prices is an opportunity to invest more – for high returns. Say there is a company in your portfolio you strongly believe in their long-term growth and value. The stock price has been steady for some years, then market volatility plummets the price down more than 5% in one week. Since you feel strongly about its future potential, this presents the opportunity to buy more shares at a lower price than it was just a week ago. Now you own more shares at a good price and created the position to possess more market value later on. When other investment vehicles drop in price, they simply drop in price with very little opportunity to double down on the investment.
Blue chip stocks are companies with sound business reputations and strong financial operations that hold the larger market capitalizations in the stock market. The Dow Jones 30 is a good representation of blue chip stocks with the likes of Coca Cola, Disney, Microsoft, and many more. These stocks have earned their reputations as industry leaders, continuous growth track records, and strong shareholder value. Investing in blue chip stocks provide the opportunity to hold a stake in great companies with most likely the lion’s share of their markets, that will continue to return steady value to you as a shareholder.
Not to mention dividend paying stocks.
Dividends are earned income given to shareholders from the profit a corporation makes during a specific time period. This can be monthly, quarterly, semi-annually, or annually. Some investors may treat dividends as passive income, while some use dividends as a source of reinvesting. Either method is fine, it is simply a sweet deal to know as a long-term shareholder you will be rewarded with the most sought after item – cash. What investment provides residual income with little worry, while being an owner of a great business who sits on the sideline?
Investing in dividend paying stocks not only provides you with a strong business in your portfolio – in most cases, but also creates a passive income stream. Seeing that routine cash payment in your account is an awesome feeling and potentially an increased amount each year you are a shareholder. Companies that pay out steady dividends over time and are consistently raising their payments show strong performance and a valuable business. When it comes to blue chip stocks, more than often the annual dividend payouts will increase.
Dividend investors seek companies with high dividend yields in order to receive higher cash payments per share. Dividend yield is calculated as the annual dividend income per share divided by the current share price. Knowing the annual dividend or yield will show you how much dividend income you can receive based on the number of shares you own.
At times of a struggling economy, the market can begin to see falling stock prices across the board. A bear market occurs from pessimism and heavy selling from investors. It is often measured as a 20% drop in stock prices throughout the major indices. However, the market will not interrupt scheduled dividends and dividends can soften the current lows of falling prices.
Most brokerage firms allow for investors to reinvest their dividends into more stocks without having to pay a commission. This is an excellent way to jump into more stock positions if your funds are low, when it does not make a lot of sense to take on trade fees. Also, reinvestment programs can be set up for automatic trades for specific stock picks.
Potentially the best reason for dividend stock investing is the extra earned cash on the investment throughout its holding period. If a stock is held long-term, all the dividends earned can be rolled into the overall return of the investment. When reinvesting those dividends into the same stock over time, it builds on the value of the position and continues to compound its worth as well.
Why It All Matters
The difference maker in building the best possible retirement portfolio is time. The longer an excellent stock is held, the greater the compounding will be. It is the best vehicle to maximize an investment portfolio. Honestly, having stocks in your portfolio can be the difference between having a comfortable or stressful retirement. From time to time market prices will decline and the skeptics will appear, but keep in mind the history speaks for itself. The investors who stick with their stock positions are the ones who benefit from the appreciation over the years. It is not a race to retirement, it is a strategic marathon.