Why
Invest In Stocks?
By
Hari Wibowo
Have you
ever wondered why investors behave the
way they do? For example, why do people
invest in bonds or stocks or not at all?
Since I am an advocate of stock
investing, let me make the case for
stock investing.
So, why
invest in stocks? No, I won't just
invest in any kind of stocks. There are
goals associated with investing in
stocks. For starter, stock investors
would want to be compensated more than
if they put their money in the bank.
Anything else? Yes. Stock investors
would want to be compensated more than
the risk free interest rate which
currently yield around 4.7%. For your
information, risk free interest rate
here is the 10 year Treasury bond which
is backed by the United States
Government. These bonds are deemed to be
free from the risk of default.
Therefore,
when we invest in stocks, we would want
a return in excess of 4.7%. How much
more? That varies within individuals.
Some wants a 5% return. Others are
satisfied with 6% return. Personally, I
would want at least 7% return for my
stock investment. There are reasons for
this. Stock investing is relatively
volatile and full of uncertainty.
Interest rate goes up and down which
will hamper our return as stock
investors. For example if interest rate
rises to 8%, would aiming a 7% return
for your stock investment worth the
risk? Probably not. In this case, most
people prefer to put their money in the
bank and enjoy the higher return.
Having said
that, we need to know how much stocks
have given investors historically. For
the US stock market, the return for the
last century has been in the
neighborhood of 10%. That, my friend, is
the sole reason to invest in stocks. Not
because you want to own a piece of
corporate America. You invest in stocks
because historically it gives you a
better return that other investing
alternatives. No other investments boast
that high of a return over the last
century, not even real estate.
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Article
Source:
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