Monday, January 31, 2011

Why Buy Stocks?

I was doing my regular reading on Fool.com and came across this : http://www.fool.com/investing/beginning/2011/01/31/back-to-the-basics-why-buy-stocks.aspx

The part I want to highlight is this since a lot of people are thinking of investing in gold/property and other investments (palm oil investment schemes come to mind) is this:

" Returns. Over the long term, stocks have delivered impressive returns. According to the 2002 edition of Jeremy Siegel's book Stocks for the Long Run, stocks returned 6.8% per year above inflation between 1871 and 2001. That compares with a loss of 0.1% per year for gold and an average gain of 2.8% per year for bonds. Cash, of course, almost always has a negative return as it earns nothing and simply absorbs the impact of inflation. But over the past 10 years, the stock market has actually fallen more than 6% as measured by the S&P 500, which is a good reminder that the returns from stocks may not always be consistent. However, the stock market's history gives us good reason to think that over longer stretches investors can do very well."

So, if this doesn't convince you, I don't know what will! Also, being Malaysian, we are in an emerging market - there will be lots of money will be flowing in the middle of the year. The only worries about investing in Malaysia for me are these:

1) The Credibility of the Financial Reports- This is a problem in general, it also happens in the US as was the case in Enron. But this problem is more prevalent in Asian countries as our financial reporting standards is not up to par and that old joke comes to mind where an accountant is looking for the job is asked - How much is 1+1? And the accountant replies : Anything you want!

2) Market Manipulation - Compared to the SGX and US markets, we trade in rather low volumes which mean stocks can be more volatile and move quickly. Anecdotal advice of syndicates in Malaysia is plenty and you do worry at times!

Best to stick to bigger, blue chip stocks which would be harder to manipulate and would have better accounting standards.

My suggestion is to look abroad to other markets as well. But start small. Start with a tracker fund which will track , an ETF which can do the same or a mutual fund - All these options takes away the stress of actually picking stocks. ETFs have much lower management fees than mutual funds and are easily trade able.

But you still need to research on how close to they track and in the case of mutual funds, whether the manager is any good. There is matter of timing the market and holding it for the long term.

Pick up some books, learn and read to make your money work harder for you! You don't have to be day trader and/or do momentum investing. The biggest downfall of stocks is one's emotions. I have said it many times but it is worth remember what Warren Buffet says - "I will tell you how to be rich : When others are greedy, be fearful, when others are fearful, be greedy!"

So be patient. Now, being the CNY and being the holidays - the KLSE is really quiet and stocks are down so now, would be an ideal time to pick up some stocks actually!

If you're interesting in looking at the US market, check out www.fool.com and they services give you the option of a one month trial period. They also occasionally will offer free reports on certain picks.

Full Disclosure: I have said this before but yes, I am a subscriber of the Fool's Stock Advisor Service.

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