For many individuals long term investment considerations rarely have any significance and a glance at this information often leads us to flip the page or change the channel. Most of the time after receiving a paycheck and settling the bills for the plasma TV, cable, car and rent, there is too little money left to even consider long term investment. However, with a salary of say $50,000 a year and a good budget it is possible to save 10% of this amount every year. Based on reports in the papers from the convincing brokers of the 90’s many have developed the wrong assumption that investing in stocks guarantees a lot of profit with little or no risk (Bodie and Clowes, 85).
Unfortunately there is a downside to the stocks option due to the fact it’s difficult to measure what a stock price will be in the future. Stocks can be extremely unstable and as such should be considered with serious caution especially for investors engaging in such ventures using hard earned savings interested with long term goals. Those in favor of trade in stocks will most likely hit back at this by quoting examples such as the case of Sam Walton, once listed as the richest man in the US and his loss of billions of dollars in a single day. Following this loss a reporter asked Mr. Walton what his next course of action was to which he replied he would ride it out (Bodie and Clowes, 84). This response is based on his knowledge that the stock market will eventually bounce back.
However we must remember that most of us can not manage to make such losses especially since we haven’t invested billions. Unlike the billionaire investor, many of us set some money aside to prepare for retirement, save up for our children’s education or to bail us out on a rainy day. The fact that the reasons we set money aside are not too distant does not allow us make the same choices Mr. Walton. This is because the profit expected on a particular stock is determined by a calculation similar to the average on rolling a pair of dice (Bodie and Clowes, 92).
Taking the example of a pair of dice each roll can produce numbers ranging between 2 and 12 thus giving us an average value of 7 for each roll. However it would be untrue to say that the most likely number expected on a roll of dice is 7 especially since there is a possibility of hitting straight set of 2’s for three consecutive rolls. This is the reason why even owners of once popular stocks such as Polaroid, Enron and WorldCom have managed to run into huge losses (Bodie and Clowes, 92). Mr. Walton by virtue of having a multi million investment can survive through a series of unfavorable results.
The popular hoax about the stability of stocks that characterized the 90’s was based on short term information and the increased participation in the stock market was in fact over excitement (Bodie and Clowes, 85). The confusion on stocks has been complicated further by terrorism and corporate corruption leaving the majority of potential investors asking what the future holds for these markets. Statistics from a long term analysis of the global economy also indicate that stocks do not represent a favorable long term investment (Dimson and Staunton, 207).
Though this information tends to place a damning opinion of the stock market some advisors have provided some sensible advice that may be of use to investors. To begin with they advise that long term investment in stocks is better when the investor is young. This suggests that investment decisions to support retirement are not suitable for the stock market. Another suggestion that was thought useful was the fact that investing in the stock for the long term is best when the investor is already financially secure. This suggests that long term investment in stocks should not be the first investment decisions made by an individual (Bodie and Clowes, 107).
That being said on individual long term investment in stocks one may wonder what options remain for the individual interested in long term investment. It has been reported that there is a significant amount of evidence that indicates options such as investing in mutual funds are likely to offer you more security and thus suitable for long term investment decisions (Dimson and Staunton, 207). Another suitable option that provides much more security with slightly lower returns is investing in bonds. The bond market provides investors security due to the fact that returns on bonds are protected from changes in the value of currency. Because of this the rate of return is very stable and thus suitable for a long term investment.
References
Bodie, Zvi and Michael J. Clowes. Worry- Free investing: A Safe Approach to Achieving your Lifetime Financial Goals. New Jersey, Pearson Education Inc., 2003. Print
Dimson, Elroy, Paul R. Marsh and Mike Staunton. Triumph of the optimists: 101 years of global investment returns. New Jersey: Princeton University Press, 2002. Print.