Treat Stocks Like Savings

By Investopedia Staff | May 15, 2012 AAA

It's amazing how contradictory individuals can be when it comes to matters of money. Ask someone why they have a savings account and the likely answer is to have that money earn interest over the long term. Ask someone why they invest in stocks and the likely answer is something similar. So why don't people treat these two types of investment in a similar way? In fact, if you invest prudently, both a savings account and a stocks account can be used the same way - the only difference is that you're likely to get a much better return with stocks.

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Tune Out the Noise
To a true investor, investing in stocks and putting money in a savings account should be treated the same. Like savings, money for investment should be allocated from additional funds after expenses and an emergency reserve fund are established. In other words, it's long-term money. So, while the rebuttals that you can't treat stock investments like savings in a bank - stock prices fluctuate, there's no FDIC insurance for investment accounts, etc. - are valid considerations, their impact is mitigated if you think about investing with the same discipline as saving. In other words, ignore the random noise.

SEE: The Value Investor's Handbook

Invest in Quality
Of course, to invest in stocks for the long term and to treat them like your long-term savings account, you need to invest your money in quality companies at attractive prices. Fortunately for investors, doing so hasn't been this easy in a long time.

Today, some of the best value-to-price gaps exists within the best blue chip type businesses. While they have done well, they have not responded to the rally like the stock prices of inferior businesses that have weaker balance sheets and an inconsistent history of profitability. And since many of these names today pay out unbelievable dividends, the annual returns should be very attractive over the next several years.

For example, it might be just as comfortable (risk-wise) to put $10,000 into a low yielding CD or invest in shares of companies like Kraft (NYSE:KFT), Pfizer (NYSE:PFE), or Johnson and Johnson (NYSE:JNJ). All three of these businesses make and sell things essential to day to day living. Second, they all have dominant positions within their industries. Third, they are well capitalized to survive through the toughest of economic environments. Finally, each pays a very attractive dividend yield: 3% for Kraft, 3.9% for Pfizer, and 3.8% for JNJ.

Over the next five to 10 years, odds are quite good that you will have more money than you put in, and that you will earn that return at an annual rate that exceeds bank interest rates. Since 2001, when it was spun off from what is now Altria (NYSE:MO), Kraft shares have delivered 26%. But when you consider the annual dividend, investors enjoyed an even healthier positive return.

SEE: Dividend Yield For The Downturn

Today, even businesses like oil giants Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) have a very respectable long-term outlook if you believe we will be using oil 10 years from now. Over the past 10 years, the "lost decade" for the S&P 500, both shares are up over 100%, not counting dividends. And this was a time period where we had $20 oil, $80 oil and $140 oil. It is probably a safe bet that the next 10 years will be similar for oil price volatility. What matters is that these quality names have the resources and assets to benefit from the demand in oil all over the world, not just in the U.S.

Simple But Effective
This particular approach to investing is geared toward the 95% of the investors who truly do not have the time necessary to devote to the serious analysis of stocks. But rest assured this is not a "dumb man's" approach to investing. Quite the contrary: it's a rational approach, and had you held quality names over the past decade, your returns would have beaten the pants off the majority of "pros", who often fail to beat the market at the best of times. Most importantly, your stock market savings would have grown over the years.

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