Stocks Are The Perfect Investment

For me, stocks are the perfect investment.  Here’s why:

• Over time (20 years or more), stocks as an asset class have almost always performed better than any other investments.  (This is for investments in the developed, western countries).

• Stocks pay dividends.  I like the cash in hand.  Dividends receive favorable tax treatment over earned income.  At a certain level of wealth, dividends can completely cover your living expenses.  Yes, given today’s low yields, this takes a lot of money in stocks to get there.  Note, please don’t pick stocks by focusing on a high dividend yield.  This is almost always a mistake.

• Stocks are a good hedge against inflation.  If inflation ever starts to rear its ugly head in a meaningful way, companies will start to bake the inflation into their pricing.  Inflation will likely erode the wealth even of stock investors, but stocks are a pretty good hedge–and WAY better than cash.

• When you own stocks, you feel like you are a participant (as an owner) in the overall economy and the innovation that drives progress.

• Unlike owning a specific piece of real estate, you don’t have to deal with renters, maintenance, etc.  I’m willing to put up with the volatility in exchange for an investment that doesn’t require my constant effort and attention.  This allows me to focus on higher ROI activities that I also enjoy more than maintaining real estate.

A Word of Warning

Though stocks work for me, they are not for everyone.  Stocks are incredibly volatile.  If you can’t handle a drop of 30 or 40 percent of the value of your equities, watch out.  You may end up panicking and dumping shares at the worst possible moment.  Personally, the volatility of stocks has never bothered me.  However, I have never invested more than 50 percent of my total assets in equities.  So that may be why the ups and downs don’t bother me.

There is also the risk that even over a period of 20 years you won’t make any money invested in stocks (you just tread water), though this is a very rare experience in the United States.

Finally, when investing in stocks there is the real risk of total disaster.  The world economy could collapse, and you could lose 90 percent or more of what you put into stocks.  It’s a risk that any stock investor bears.

Despite these risks, for me, stocks are the perfect investment.

A good, short book that explores the long-term risks associated with stocks is Deep Risk: How History Informs Portfolio Design by William J. Bernstein.