Tuesday, March 31, 2009

consider the real risks when investing stocks vs. bonds

To purchase a share of a company or to invest in a mutual fund is to say that you are taking a role as "owner" in the business you are the defacto part-owner of.

This sounds so lovely, that you can get the chance, through your investment of your savings, to get into "the game" with the purchase of equities. The demand for your wise investment will only increase over time as the earnings of the company continue to grow. The stable management team understands their marketplace, creates a great product and knows how to market it through all economic cycles.


Except that maybe something changed. A new competitor saw a different way to do the same thing the company you invested in does. suddenly people who you never saw before are telling you that your investment has been "overheated", over-valued, over-bought. Everyone is "taking their profits". you better be sharp or you'll get burned.

Or the Treasury Secretary of the United States announces that the entire economic system is hours away from total bankruptcy and the value of everything evaporates by over 50% in 6 weeks.

It's the same old tired story. One way or another. there are a million ways to make money in the stock market. Everyone loses money the same way- they were confident in placing a bet and they could not predict the future.

if you listen to investment advisors they tell you it's part of the learning process and mistakes are what will make you a better investor... maybe. but the great thing about learning is that you can avoid the mistakes that everyone before you made. The advisors, experts, gurus, talking heads, they ignore the fact that your life-savings are not something you can simply make a mistake with. If you can start out smart, why be stupid?

It's not stupid to buy stocks. If you make a lot of money, it's a great way to invest some of your extra income into a form of savings that will help you reduce some of your overall taxes. But the truth is, it's not much more than that. For years, mainstream culture repeated the idea that equities are the ideal savings vehicle for everyone. Only, for the average person, to understand the amount of fundamental statistical knowledge, historical and current market data, and all global, national and individual corporate revenue projections in the future is MONUMENTAL! it's a full time job. It's why people believe a mutual fund is a good idea. Except that your mutual fund likely lost just as much value as the overall stock market during the meltdown of 08-09.

The conclusion can be reached, from the performance of virtually all mutual funds, that a mutual fund will general perform no better than the overall stock market index. During good times it may outpeform, but will always suffer when the economy as a whole suffers. Is that important to you? I sure know that it is important information to think about when investing in something that charges a lot of money for the service it is supposed to provide.

you could have always been prepared to suffer minimal losses during the meltdown, and you can always avoid meltdowns if you first pick appropriate investments for your unique set of circumstances. Most banks, advisors, and institutions treat human beings like they are nothing more than their job, income and dependents. it's a fallacy and if you take control, educate yourself, and screen out the crap advisors from the good ones, you will invest wisely.

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