Long Term Planning

Stocks

Stock ownership makes you an owner of a tiny part of a company. Your small part of ownership does allow you to vote for the board of directors and to get a tiny part of the profits in the form of a cash payment known as a dividend. You also get any appreciation or increase in the price of the stock. When you sell for a higher price than you paid fro the stock, you have a capital gain. Of course, stock prices can also decrease, causing capital losses.

The risks involved

Ownership of corporate stock has returned about 10% per year averaged over the last fifty or so years. Unfortunately, stocks do not move up or down wit any guarantees or predictability. In fact, they average one down year for every two up years. But that pattern has no reliability. Even so, there are differences in the way the stock in one company moves compared to a basket of stocks such as the largest 500 companies in the US (Standard & Poor’s 500).

Stocks are rightly perceived as risky since there are ten year periods when a basket of stocks has done worse than bank CDs or bonds. What’s more, there are companies whose stocks have become worthless. Stocks are most appropriate when you can own a mix of companies and have at least en years before you will touch the investment.

Shares of stock are purchased through stockbrokers, directly from some companies or in mutual funds. Stocks or stock mutual funds are typically a good place for most of your long term investments like retirement savings, of course assuming you have at least ten years before you retire. If you own individual stocks, you should have at least 15 different stocks to get reasonable diversification across industries.

You should know: Even the most aggressive investor usually wants to keep a percentage in bonds, real estate, or bank accounts as a hedge against a huge market drop. The longer you hold a stock portfolio the better your chances that will earn you more for your money than other, safer forms in investments.

Investment clubs

If you are interested in individual stocks but you do not have the understanding or money to buy reasonable quantities of 15 different stocks, a good way to get started is through an investment club. Club members are a group of like minded people who meet on a regular basis, report on company research, and decide on stocks to buy with their pooled funds. In any one club, some members may be experienced investors and some may be absolute beginners at it. It is a great way to learn and take in the many different aspects of investing in stocks. You will be able to diversify your portfolio, meet other people just like yourself and maybe even pick up a bunch of new righteous advice. Any earnings are split with the group, but pooling your efforts takes a bi of the risk away since you are deciding together as a team where to invest.

If you do join an investment club, you want to be certain it is a well run and very organized club. If you wish to start one, there are tons of books at your local book store that cover this. There are also regulations you need to follow so it is best to go slow.

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