If you don't have all your holiday gifts purchased, or perhaps you can't think
of what to give the person who has everything, then consider stocks instead of
socks. If buying, or giving, stocks isn't something you feel comfortable with,
here's a quick course on how to get started.
Although many people view the stock market as risky, over the long run it has
generally performed better than any other investment.
Over the past 75 years, the Standard & Poor's Index, representing the 500
largest companies, increased an average 11 percent a year, nearly four times the
average annual inflation rate of 3 percent during that time.
The stock market this year has produced an effect much like a roller-coaster ride-long,
steady climbs, followed by stomach-churning declines.
Wall Street's top economists and strategists expect this volatility to continue
for five more years, with an annualized return of 9 percent, according to a survey
of 66 international investment institutions by the accounting firm of KPMG Peat
Marwick.
The year 2001 should be a moderately good one for stocks even though it's the
first year-traditionally one of the worst-of a new four-year election cycle, notes
Richard McCabe, chief market analyst for Merrill Lynch & Co. Inc., one of
the world's premier stockbrokers.
Now also could be a good time to get started on, or perhaps add to, your stock
funds in the 401(k) retirement plan at work.
The market tends to perform better in colder months, especially in January, according
to the Hulbert Financial Digest. Part of this can be traced to more money becoming
available for investing because of holiday gifts and year-end maturing of bank
certificates of deposit.
The most important thing to do before investing is to educate yourself. Take a
class from a local college or brokerage house. Go to the library and read the
financial magazines, or perhaps take a trial subscription to one of the dozens
of market newsletters advertised on the CNBC television network or in Barron's,
the financial weekly.
Stock prices are influenced by investor expectations of a company's earnings,
the national economic outlook, and interest rates, as well as rumor, inference,
and innuendo.
No one can say for sure that a stock will increase in value. Yet, despite the
"crashes" during the 1930s and again in October 1987, the market is
at a higher overall level today.
To make money in the market, be prepared to hold your investment for a year. It
may even take three years before you will see a real return.
Warren Buffett, one of the nation's wealthiest, believes that if you cannot be
in the market for 10 years, you should not be in it for 10
minutes.
In general, the younger you are, the more risk you can afford to take with your
investments.
For example, a 30-year-old single person with good career prospects may choose
high-growth, high-risk stocks that don't pay a dividend, but are expected to increase
in value. A 55-year-old, on the other hand, may favor stocks that pay steady dividends,
but grow at a slower rate.
A suggestion to determine how much of your portfolio should be in stocks or more
conservative government bonds: subtract your age from 100. If you are 60, then
40 percent should be in stocks; if you are 40, then 60 percent should be in stocks.
How to determine what stock to buy, once the decision has been made to invest?
Many financial advisors suggest investing in companies you're familiar with, such
as the manufacturer of the car you drive, or the chain store where you like to
shop for groceries or housewares. If still reluctant to buy only one stock, then
consider purchasing a professionally managed mutual fund, which usually holds
25 to 100 or more stocks in its portfolio to smooth out the risk of any one stock
going bad.
You can buy a mutual fund through a stockbroker, who will usually add a sales
charge to the purchase price. Or you can buy no-load (no sales charge) funds directly
from the company itself or through an organization like the American Association
of Retired Persons.
Some funds require only a small amount, perhaps $50 or so to open an account,
while others require as much as $2,000. Some funds waive the usual investment
minimums for people who sign up to have $50 or more transferred each month from
a bank account to the fund.
Not everyone can take the ups and downs of the stock market. If you don't have
the nerves for risk, you are better off staying with steadier, more conservative
investments.
If you prefer dealing with banks or credit unions and want an investment that
is federally insured, stay with certificates of deposit, which have guaranteed
rates of return.
Other totally safe investments are Treasury bills, bonds and notes, and U.S. savings
bonds.
The economy could enjoy a few more years of healthy growth if consumers return
to more cautious behavior and stop overspending, writes Gary Thayer, chief economist
for A. G. Edwards, in the investment firm's Money Talks newsletter.
"The economy tends naturally to grow. There is nothing that says the economy
must have a recession every few years," writes Thayer.
Resources for educating yourself on stocks:
Barron's
Business Week
Fortune
Hulbert Financial Digest
Investor's Business Daily
Money
Money Talks
Moody's
Morningstar
Standard & Poor's
The Wall Street Journal
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