Ditch the stress of the stock market and ignore the popular investing ‘wisdom’ with safer investments
As a stock market analyst for nearly a decade, this one is going to hurt. I have spent a good part of my professional career helping people make sense of the stock market game and how to pick the best stocks.
Turn on the TV and the only financial news you’re likely to hear is about the stock market. It’s almost a given that you must be ‘in the market’ if you’re going to reach your financial goals.
Everyone invests in stocks…and most people do it very poorly.
A study by investor research firm DALBAR found that the average investor earned an annual rate of just 3.7% over the 30-years to 2013, a period over which the S&P 500 increased at an 11% rate annually. Ten-year returns (shown above) were even worse with a stock/bond blended return of just 2.6% annually.
Why do investors continuously throw their money at the stock market and struggle for painfully-low returns?
The ironic truth in all of this is that you may not need stocks to reach your financial goals and feel rich.
Get Rich the Easy Way without the Stock Market
It’s understandable that people would look to the stock market for financial freedom. Over the long-term, stocks have outperformed most other investments. The 11% annualized return in stocks over the three decades to 2013 would turn $10,000 into a $229,000 nest egg.
So investors skimp and save to open a stock trading account. More often than not, they fall victim to the Top 10 Investing Myths, end up paying huge fees and ultimately lose money.
But investing doesn’t have to be a stressful attempt to constantly ‘beat’ the stock market.
It all has to start with a Personal Investment Plan to find out how much you’ll need to meet your financial goals and how much you can save each month. After putting together an investment plan, a lot of investors are surprised how low a return they actually need to meet their goals. Working through my own financial goals, I found that I need an annual return of just 4.2% a year and really don’t need to take the higher risks in the stock market and commodities.
Investments Outside the Stock Market Game
Bonds of the highest-rated American companies are paying upwards of 5% for 30-year investments. These are loans made to solid companies like Wells Fargo and The Walt Disney Company which are not likely to default on their obligations. Yields on lower-rated companies in the ‘high-yield’ category offer returns of 6% with only slightly higher risk.
You receive an interest payment twice a year and the return of your investment when the bond matures. Bonds are safer than stocks because they offer a contractual return and bondholders get paid before stockholders even in the event of a bankruptcy.
Going a little further from conventional investment but still within bonds is the new opportunity with investing in p2p loans. These are just like corporate bonds except are made to individuals for personal loans and have returned just over 8% for loans made over the four years through November 2013. I recently updated an interview with one p2p investor that has made an average 12% annually over the last six years.
Investors on Lending Club Investing are earning an average 7.9% return on loans across all risk categories. Pick loans from lower-risk categories and you can still see returns well above corporate bonds. Investors pay no fees on their portfolio and it’s a great investment for regular cash flow.
Search for return on home ownership in Google and you’d get the idea that owning a home is a terrible investment. Don’t believe it!
Besides the non-monetary benefits to home ownership, the return on owning your home is actually around five percent.
- You’ll make about 5.5% from not paying rent, calculated on a 30-year loan with 20% down on the median home price.
- Most of the opinions on the internet about home ownership only use the after-inflation price appreciation, called the ‘real’ return. This isn’t right though if you’re comparing it against returns on stocks and bonds which are ‘nominal’ returns and don’t account for inflation. The nominal return on home prices would be the 2.73% annualized inflation over the last decade plus the additional 0.2% appreciation above inflation.
- Property taxes, maintenance and insurance are going to cut into your return but are partially offset by the benefit you’ll get on your income taxes.
A conservative 5% annual return on bonds and home ownership over the next 30 years will grow an initial investment more than four-fold. Put $5,000 into an investment account each year and you’ll have a $332,000 nest egg at the end of three decades. That’s more than most people have at retirement and a lot better return than the average stock market investor earns.
I’m not saying you need to avoid stocks completely to find a stress-free path to financial freedom. Follow these 10 Investing Basics to avoid the misinformation you’ll see from most sources and you can still benefit from solid returns in the stock market. Don’t feel you have to be invested in the stock market and put together a personal investment plan that will meet your needs.