Of all the asset classes available to invest in, I prefer stocks. Besides some cash and Government treasuries, my investment portfolio is exclusively made up of stocks. I’ve bought real estate in the past, but found this type of investment full of headaches (see post Why I Don’t Invest in Physical Real Estate). Exclusively investing in one asset class, you may think it is too risky and I have all my eggs in one basket, but through diversification these risks can be mitigated. There are infinite paths that lead to wealth, but I’ve chosen to invest in stocks for the following reasons.
Lifestyle: I like my freedom and don’t want to be tied down because I may have some real estate or business that I need to manage. I don’t enjoy receiving phone calls in the middle of the night because of some problem. Owning a piece of a company through stocks requires no hands-on management other than periodically collecting your dividends and checking the stock price every so often and you can do this from anyplace in the world.
History: From 1926 to 2010, the S&P 500 returned an average annual 9.8% gain. Over the long term, stocks have outperformed all other investments. I have a long term investment horizon and although there have been periods of time where stocks have done poorly, if you are a buy and hold investor, most likely you have done relatively well even when the poor periods are factored in. Every stock I buy I intend to hold for at least 5 years, if not the rest of my life.
Interest: Ever since I can remember, the stock market always intrigued me. I actually enjoy reading through financial statements, assessing the value of a business, anticipating their future growth, then watching the progress of the company. Investing in stocks is where science and art mesh.
Liquidity: Unlike most other investment assets, stocks are highly liquid. Within seconds I can cash out of an investment and have the funds deposited into my account. Also, because the stock market is highly efficient, I am most likely getting the best market price for that asset at that point in time.
Taxes: Investing in stocks are relatively tax friendly. You don’t pay any tax on a stock that has appreciated unless you sell it. This is why you hear of people worth millions of dollars who paid very little taxes. If you held the stock long term before selling, this gain is taxed at a maximum of 15%, which is not bad. If you own stocks in a 401K or IRA, you can buy and sell withing these accounts at any time and taxes won’t be due until you begin withdrawing funds from these accounts. Better yet, if you own stocks in a Roth IRA, you will be able to withdraw those funds without a future tax obligation. Dividends that are paid out during the year are also subject to taxes, but are also limited to 15% – at least until 2012.
Simplicity: I like things simple and investing in stocks is pretty straight forward. You can easily set-up a brokerage account online, pay a marginal transaction fee to buy and sell stocks, and most financial information in order to do research on a company is readily available online. Once you decide upon a stock you buy it and then sell it when you no longer like it as an investment. Of course before delving into stocks, you need to educate yourself on the stock market and come up with an investing philosophy and strategy to suit your goals.
Diversification: To mitigate risk, diversification is highly encouraged. The stock market provides numerous types of business to invest in – small businesses and very large businesses, domestic business and foreign businesses, commodities and real estate, old stable companies to new hyper growth companies, dividend paying to no dividends, the list goes on and on. I like to invest in them all.
Over the years, my philosophy and strategy in stock investing has been refined through the school of hard knocks. This is something I don’t think you can learn in a book, experience is the best learning experience. I’ve had some super investments that have done very well (Netflix, Intuitive Surgical and Amazon), stocks that I sold way too early which I still kick myself for (Apple and Ameritrade), and stocks that have lost almost their entire value (Worldcom and Allied Irish Bank). This is something that will happen to anyone who invests in stocks, but through these experiences, I have been able to refine my strategy and make better stock picking decisions – although I know for a fact there will still be some lousy investment choices, I just hope I make less of them.
I will close by saying that stock investing is not for everyone, you have to possess the right temperament and willingness to take some calculated risks in order to be successful. If you are the type of person who won’t be able to sleep at night because one of your stocks dropped 30% or the market was down 10% for the day, then you may be better off keeping your money in more conservative investments such as cash, treasury bills, or even real estate.