Comments on: Finances 101: Are Stocks Really That Great Of An Investment?

By: felix

felix — Sat, 10 May 2008 16:39:34 +0000

Hi Trent, regarding the comparison between the DOW average and CD’s, it’s not really a fair one. First of all, as another reader points out, the DOW average is just that, an average. You lumped the losers together with the winners. Secondly, stocks not only appreciate in value but they pay dividends as well. Suppose you own a stock that grows 5% a year in the last 5 years but it also pays a dividend of 5% each year. Now what would be better?

If stock investments aren’t that great there wouldn’t be a Warren Buffet, right? (Even though that is an extreme case)

By: gretchen

gretchen — Wed, 06 Feb 2008 14:24:00 +0000

one must remember that if one invests in the stock market 1. there are broker fees and other costs which averagae 2% and 2. you have to keep watch of your portfolio and read and evaluate to make sure you are in safe territory. also, all these averages (above) assume you put money in on a given date and left it there for the period mentioned. your particular situation may be different. my point of view is: by putting my money into cds, i have no fees whatsoever and when a cd comes due, i can renew it or cash it online or on the phone w. my bank. i have no day to day or week to week worries about managing my money. my money just keeps growing slowly. i think my money has grown on average by 5% apy over the past 15 years or so. all of that return is mine. my retirement is in an equally safe and slow growing plan and in spite of being a modest one income household with children, i will have a very healthy situation at retirement and i always have money to buy a new car outright or pay for vacations, etc. i ask: why are the stock market and other noninsured and uncertain investments so popular? why is there no emphasis put on simple saving and economizing?? (remember how much peace of mind i have.) please comment on this if you would — i cannot find anyone who discusses this.

By: tanya

tanya — Sat, 06 Jan 2007 02:39:42 +0000

Is there a difference in txing CD’s, Savings account or stock market earned money?

By: Toby

Toby — Thu, 04 Jan 2007 21:46:02 +0000

Quote:
But in the last five years, you would have beaten your stock investment in the Dow if you had purchased a 6% certificate of deposit.

But you forget that 6% CDs haven’t existed for the past five years, rates have just recently climbed to these levels. The US had some of the lowest interest rates in long while in the last five to ten years.

Perhaps you should compare these numbers against US Treasury Bond rates or CD rates over same time frames to get a better comparison. I also second the notion of comparing against the S&P 500 or Russell 2000 indexes instead of the Dow.

-Toby

By: Lazy Man and Money

Lazy Man and Money — Wed, 03 Jan 2007 16:31:48 +0000

It’s worth noting that there’s a huge difference between 6% and 7.5% (using the 100 years). After inflation you could be looking at a 2% gain vs. a 3.5% – the later being nearly almost twice as much.

As EasyChange said, I’d love to see more stocks involved like a Wilshire 5000 and possibly something involving some foreign stocks.

As to what efipo.com said, I’m not convinced that you have any more control over real estate than you do over the stock market. That said, real estate does allow for cheaper and greater leverage it would seem.

By: Jim Lippard

Jim Lippard — Wed, 03 Jan 2007 04:29:19 +0000

Ralph: The whole point of shifting your asset allocation into more stable investments as you approach retirement is a decline in appetite for risk (and the decline of available time to recover from loss).

BTW, my “95% of the value of the dollar” lost since 1915 was from memory; some online websites say it’s 87% lost since 1950 and 95% since 1913 (not 1915).

By: Ralph Morgan

Ralph Morgan — Wed, 03 Jan 2007 02:18:05 +0000

I’d be wary of the idea that “as you reach your financial goals, you should move your investments into more stable forms such as treasury notes” – this only makes sense if you have a set goal (eg. $1m for retirement by age 65) and you then want to spend down that money to $0 by a certain date (eg. by age 90). In that case investing in treasury notes with a known return will give you maximum certainty that you meet you goal (having $0 left when/if you reach age 90).

However, if your financial plan is more general and has no fixed time frame (eg. to achieve best possible return on your investments for a particular level of risk over the long term) you would stay more heavily invested in growth assets (eg. stocks, real estate) even after you’ve “retired”. In this case you never “reach” your financial goal, so you would maintain the same asset allocation regardless of age or financial situation.

By: Jim Lippard

Jim Lippard — Tue, 02 Jan 2007 23:18:35 +0000

Regarding keeping money in CDs, keep in mind that inflation has eaten away 95% of the value of a dollar since 1915. If you want to compare cash to stocks over the long term, don’t forget to account for fluctuating interest rates, as well.

As for real estate, I think investing in real estate in 2006 is, in many cases, like investing in tulip bulbs in the Netherlands in 1636. BTW, it’s far easier to purchase and liquidate holdings in the stock market than to purchase and liquidate real estate holdings. The “control” you have over a real estate holding is that you can fix it up and make it look nice–but you can’t change its location or change market conditions. And while you hold it, you’ve got maintenance, insurance, and mortgage costs to account for.

By: Sean

Sean — Tue, 02 Jan 2007 21:11:42 +0000

What EasyChange said… the DOW is nothing but an index of 30 of the largest and most widely held public companies in the United States. It certainly wouldn’t be a well-diversified investment. As a matter of fact, I’d call it an extremely un-diversified one, consisting pretty much exclusively of extremely large cap value stocks.

That said, you are of course right – there are no guarantees with stocks, especially over a time period as short-term as 5 years. Over the long term, those terrible years of dismal performance are usually moderated with those wonderful years of incredible performance.

By: EasyChange

EasyChange — Tue, 02 Jan 2007 20:38:51 +0000

I think using the DOW as the benchmark is somewhat part of the problem here.

If you were to use a different index like the S+P500 or Russel2000 or the TotalStockMarketIndex by vangard, you’d find some better numbers.

In this day and age, I sincerely hope that people arent putting all their eggs in the Dow’s Basket.

By: efipo.com

efipo.com — Tue, 02 Jan 2007 19:44:22 +0000

I’m still a bigger fan of real estate. Leverage with return is better than investing a ton of money with a smaller return. But I still love the stock market. It’s a lot of fun, but you have 0 control over it while real estate you have some.

By: Trent

Trent — Tue, 02 Jan 2007 19:36:09 +0000

You’re correct, Doug. It’s merely an average. However, given that it is an average, you have a 50/50 shot at beating that average or having the average beat you. If you’re good at picking stocks, you might beat that average over time, but are you willing to wager that you’re good enough to beat the market?

By: Doug Alder

Doug Alder — Tue, 02 Jan 2007 19:31:34 +0000

For that to work you would have to be investing equally in all the stocks included in the DOW would you not? An average is just that and is composed of big, small, and medium winners and losers as well as break even stocks. So unless you are investing in a mutual fund that does invest in the whole DOW then it’s not really a good way to look at stocks as your chances of picking the ones that will return that average are practically nil. At least that’s how it looks to someone who does not invest in individual stocks.