Why Should I Buy Stocks?
By Conner W. Mays.
I get asked this question quite frequently. If you watch almost any evening news program at some point during the broadcast you will hear how much the Dow Jones Industrial Average, The S&P 500 and/or The NASDAQ Composite increased over the course of the day. The vast majority of my generation (the infamous millennials) are either underinvested, or they aren’t invested at all. If you are one of the people that aren’t invested at all, you may find yourself wondering “How much am I missing out on?” when you hear about the recent increases of these stock indices. That question is what I am seeking to answer today.
According to the data from our friends over at NYU, the average long run annual return is somewhere in the 9-10% range – there is a lot of debate about the true average annual return – so let’s just keep things simple and use 9.5%.
Imagine you invest $1,000 today and $100 at the end of each year. The average retirement age is 66, so let’s assume you begin investing at 26 which gives us a time horizon of 40 years. Assuming your portfolio’s average annual return matches our estimate for the market or 9.5%. The day you retire, your portfolio will be worth $76,271 – this may not sound like a huge amount of money until you consider how much you actually invested over the 40 years. Under the scenario above, the total amount invested is $5,000. Meaning over 40 years you invested a total of $5,000 and on retirement day you have a stock portfolio worth $76,271 from a perspective of total return that amounts to a 1,525% return if your portfolio only earns the market average.
This point also demonstrates the compounding effect. I will discuss the math and economics behind this rate at a later date – the point here is that the earlier you start investing, the better.
Now that we looked at the average scenario, let’s look at two of the best performers in today’s market.
On May 23rd, 2002 NFLX made its Initial Public Offering (IPO) at $15.00. Yesterday, March 21st, 2017 NFLX closed at $142.42. If you invested $1,000 at the IPO price of $15.00 and held the stock until today your investment would be worth $9,494.67, which amounts to an average annual return of about 17% – just shy of double the long run average return of the stock market.
Apple, Inc. (AAPL)
On June 29th 2007 Apple launched the first iPhone. On that day, their stock closed at $17.43 if you had invested $1,000 in Apple and held it all the way through today where the stock closed at $139.84 your $1,000 investment would be worth $8,022.94. Over your investment period of approximately 10 years your average annual return is equal to about 23% – more than double the long run average return of the stock market.
The two scenarios above have one thing in common – a long term investment strategy. In order to earn the profits on either of these two scenarios you would have to own these two stocks for more than 10 years. One of the biggest proponents of long term investing is an investor by the name of Warren Buffet, you may have heard of him. One of his many investing quotes is “If you don’t plan on owning a stock for 10 years, don’t consider buying it for more than 10 minutes.” What Mr. Buffet is trying to say is the best way to invest, and how he invests, is for the long term.
There is no way around the fact that financial markets are volatile and often unpredictable, this applies especially to stocks. No matter how much we analysts like to say we know what is going to happen, we don’t. The key is to buy solid companies, with rock star managers and great products (or in other words great fundamentals) and own them for the long run. There are very few Apple’s and Netflix’s out in the market but they are out there and if you happen to find one and invest at the right time, you can earn a great deal of money.
Investing takes patience, prudence, persistence and perseverance, at Copper Street we refer to these characteristics as “The Four P’s.” Each and every one of these traits requires a great deal of practice and we have the perfect place for you to begin practicing.
If you have any questions / comments or general topics you would like me to discuss please let me know. Shoot me an e-mail at firstname.lastname@example.org
Thanks for reading!
I wrote this article myself, it expresses my own personal beliefs and opinions. Nothing contained herein should be considered actionable investment advice.