While the crash of 2008 may have soured many on the stock market, stocks still remain one of the easiest ways to build wealth. Stocks have historically enjoyed between a 7-10% average annual return, beating most investments including, according to many experts, investments in real estate.
A recent Pew Research Center report reveals that part of the great black-white wealth gap is due to the fact that white households are much more likely than minority households to invest in stocks. Since the 2008 recession stocks have rebounded faster than real estate, widening the black-white wealth to an even greater extent.
But, before you take the plunge and take advantage of the wealth building benefits of stocks, there’s a few things you should take into account.
Don’t even consider stocks if you have significant credit card debt.
Let’s say you have $2,000 which you can use to either (1) invest in stocks, or (2) pay off your $2000 credit card debt with a 19% annual interest rate. Paying off the credit card debt automatically guarantees you a 19% return on your investment (by paying off the debt, you save the amount of interest that would have accrued on the debt). This is much greater than the average 7-10% return you would have gained by investing the same amount of money in stocks.
Stocks are a long term play.
Over the short term, stock prices rise and fall. Ask anyone who felt the pinch of the 2008 stock market crash and they’ll attest to that fact. But, over the long term (5-10 years), the general trend is for stocks to appreciate in value. In fact, over the long haul stocks offer one of the best returns on investment that exists. This is crucial. If you’re thinking about investing in stocks you must consider a minimum five to ten year timeline. Therefore, never invest money that you may need in the next few years or so.
Remember, you’re not buying a piece of paper but part of a business.
When you purchase a stock you’re actually buying a tiny piece of a business. Evaluate your purchase that way. Don’t just pick a stock because it sounds sexy or is popular. Instead, do your homework. This is where most people fail miserably.
Treat your stock investment the same you would any business investment. Just like any business you want to know if the company is making a profit, does the company have a competitive advantage or great product, is it run by ethical and competent management, does it have room to grow, and does it have adequate cash flow to guarantee its immediate survival? All of this information and more can be found through publicly accessible documents like the form 10-K, a comprehensive financial report that the Security and Exchange Commission requires all companies to make available annually.
A little bit of research will help you identify quality companies that will make you a significant amount of money over the long haul. Stay tuned. Over the next few months I’ll be providing you with all you need to know in order to make smart investment moves for a more profitable future.
BMWK, Do you invest in the stock market?