Stock Market Information

So, let’s say that you’re in a pretty good financial spot right now. You have 3-6 months living expenses saved up and stashed away in a low risk investment vehicle such as a high yield savings account or money market fund, and you’re looking for the next step. First time investors are initially worried about the time of their first stock purchase. After all, start at the wrong point (look at recent market losses) and you could be looking at big losses initially.

Thankfully as a new investor, time is on your side. Over the long haul (decades, typically) the compounding returns provided by a well-chosen investment begins to add up, and you’ll be looking at gains no matter where you start out.

if you’re risk averse, there are a number of dependable return options for shorter time frames. The short-term U.S. Treasury bills, for example, have given about 3.7% from 1926-2003 annually. Long-term government bonds have averaged 5.4% from 1926-2003, but returns have been more volatile.

Stocks, for their part, have been good to investors historically speaking. Overall, large-cap stocks are looking at a 10.4% annual return from 1926-2003. There’s also more volatility here, ranging from declines in the 1930s to large gains in the 50s, 80s, and 90s.

This leads is to the real question: when do you need your money. If you’re looking to use the money in the next 5 years, you’ll avoid stocks and mutual funds for the most part. Instead, consider bond mutual funds or real estate investment trusts.

If your investment horizon is 10 years or more, stocks are the most attractive option.

If you decide to invest in individual stocks, be sure to keep a close eye on your portfolio. Any investment portfolio requires regular care and attention. You need to check on your investments and make sure you’re beating the market, otherwise you’re better off going with a plain old index fund like the S&P 500.

If you’ve been reading my posts about getting started as a dividend investor, hopefully I’ve piqued your interest. There’s a lot to learn out there and plenty of reason to get started asap on creating a dividend-healthy portfolio. With that in mind I’ve compiled a short list of blogs that I read on a regular basis and that I feel you should, too:

• Living Off Dividends: Living off dividends provides you with a wealth of information on investing and generating dividends, but it doesn’t stop there. From various investment vehicles to other ways of generating passive income, there’s a lot to take in and plenty to learn. Highly recommended.
• Dividends Matter: Let’s face it, dividends matter in investing, and this blog does a great job of showing you a proper way to analyze a dividend paying stocks. Of course it’s not updated as often as I’d like, but it’s a great starting point if you’re looking into dividend analysis.
• The Dividend Guy: The dividend guy has been writing for some time now, and he hops from topic to topic related to dividend investing, and he does a great job. His weekly round ups also help lead you to other blogs about investing you may find interesting and insightful.

Given the fact that over the long haul stocks have easily beaten out bonds in terms of rate of return, many investors believe they put all of their investment money into stocks and not worry about the lower returns that bonds offer. However it’s important to ask yourself a number of questions about the money you’re investing:

• What am I saving for? What’s your ultimate goal for this money?
• What’s my timeline? How much time can I leave this money to grow? When will I need it?
• What’s the volatility of this investment? Does this suit my comfort level?

Knowing how much risk you’re taking on and whether you’re comfortable with that risk is important before getting into any investment vehicle. Also the amount of time you’ll be investing this money is equally important. The less time you have to watch your money grow, the more you’ll be vulnerable to short-term fluctuations in the market (see: right now). As an example if you hold your investment for 1 year before selling, you have about a 60% chance of having better performance in stocks than you do in bonds. At 5 years that number jumps to 70%. At 10, 80%m and at 20, 91%. Finally if you hold on to your investment for 30 years or more, you have a 99% likely hood to beat our bonds with a stock investment. That’s historically speaking, anyway.

Knowing what kind of investor you are is a vital step in deciding where you want to put your money. If you’re not comfortable with the idea of losing money in the short term, consider an allocation slanted towards more bond or other safer investment vehicle exposure. Also be sure to note how long you plan on holding onto this investing before selling it or when you’ll need to sell it when you need it.