Although it can be painful to own stock in a
bear market, these securities still offer a combination of key advantages not found in any other type of security or investment. Here are several reasons why stocks should still constitute a significant portion of your
portfolio, assuming that you are seeking any type of long-term growth:
- Long-term growth potential
History clearly shows that only two asset classes have grown faster than
inflation over time:
real estate and
common stock, the two basic forms of
equity or ownership in an asset or company. Common stock has grown by an average of about 8-12% over the decades. Small company stocks have grown more than
blue-chip stocks, albeit with much greater
volatility. But the stock market has a general long-term upward trend.
- Liquidity
Stocks are one of the easiest types of assets to
liquidate if cash is needed. Even the stock of a closely held business that is not traded on a major public
exchange can usually be sold more quickly than real estate or other real assets. Liquidity like this can help put your mind at ease, knowing that in an emergency, you will be able to access your cash.
- Variety
There are thousands of publicly traded companies to choose from. Stocks of small companies will have more growth potential and greater volatility, while stocks of large firms offer greater stability and
dividend income.
Penny stocks are suitable for speculators, while blue-chip stocks are found in many retirement portfolios. Some stocks pay high dividends and are suitable for investors seeking income, while others pay little or no dividends but post strong
capital gains. There are hundreds of stocks to choose from in every
sector of the economy, from healthcare to technology to heavy industry, transportation, communications, natural resources and entertainment. (Are the countless stock categories leaving you puzzled? Let us help you sort through the confusion; read
The Alphabet Soup Of Stocks.)
- Available Information
Most publicly-traded stocks have a wealth of information available for investors. Rating agencies such as Morningstar offer analytical breakdowns on many companies and provide such technical data as
alpha,
beta,
standard deviation and
historical performance, along with
analyst commentary for larger or more popular companies. Most company websites have an investor section that provides the company's financial statement and stock performance. A plethora of investing websites also recommend stocks and offer sophisticated tools that can analyze stock price movements.
-
Dividend Income
Some stocks pay a periodic dividend to investors. This dividend can be higher than current interest rates in some cases and can be an attractive alternative to
CDs or treasury securities for moderate investors seeking current income. Many blue-chip stocks pay dividends, and
preferred stocks usually pay a dividend equal to a set rate of interest such as 6%. Preferred issues also usually have a higher rate than guaranteed instruments. (For more on dividends, read
5-Star Dividend Stocks.)
These are just some of the advantages that stocks provide to investors. Despite their volatility, stocks as a whole have historically risen in value over time more than any other type of investment. For more information on stocks, visit our section on stocks or consult your
broker or
financial advisor.
Catch up on your financial news; read
Water Cooler Finance: The Unrelenting Claw Of Bernie Madoff.
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