A case for equities
Investment is a discipline, which if one masters, will get you very far. There are distinctively two main types of investments namely - fixed income (money market) and equities market. These are two main investments streams one can invest in.
However, there is also foreign currency trading, derivatives, properties etc. Most of these require savvy technical skills or large sums of money.
This week I am going to put a case for equities investment.
Return to the mean
Short-term volatility has always been part of equity investing, but investors have benefited from the market’s long-term upward trend.
Investors concerned about volatility would be wise to look closely at the market’s long-term history, especially following periods of weak returns.
If you want good returns in markets, you shouldn’t use the most recent trend to extrapolate the future. In most cases, market history tells a story that is very favourable to long-term investors.
A historical technical analysis on most of the stock market reveals that a negative 10-year return subsequently follows a historic 10-year positive return.
However, I should emphasise that stock market investment is not just for amateurs, find a financial advisor to talk to and help you create a long-term investment plan focused on long-term results.
The world is getting smaller
Today, you can send a package overnight, or communicate instantly by email.
As world economies grow ever more integrated, a rising global middle class is demanding a broader range of goods and services.
Investors can potentially benefit by owning global equities. While the US market for cars, computers and cell phones is relatively mature, there is still significant potential demand for these products in China, India and Brazil not withstanding Africa.
This untapped potential for consumerism translates into growth opportunities for companies doing business in these markets.
The best way of owning your company in these countries is through equities. The bottom line is globalisation has blurred the lines between investing in Namibia and investing overseas.
As the growing middle class collectively aspires to the goods associated with the wealth of more developed nations, this increases global consumption, drives global trade, produces investment opportunities and drives stock markets.
Innovation will surprise us
Throughout time, innovations have propelled businesses forward. Whether the innovation was a technological advancement a new business model, a medical discover, or some other transformational change, new ideas are at the very heart of the equity markets.
For example, look at the changes in music technology over the last 40 years. From records to eight-tracks, cassettes, CDs and now digital downloads. There has been tremendous change in how we listen to music over the years.
Quality companies not short-sighted
“Survival of the fittest” isn’t just a phrase from biology. It applies to free market economies as well. The strength of money is everything. You should also remember that “cash is king”.
Often, evidence of this financial strength takes the form of dividends. Dividend strength has historically tied to strong performance historically. Companies that have initiated or grown dividends have outperformed companies that have cut dividends. Quality dividend payers - those paying consistent and rising dividends historically - have offered better overall results.
The decade ahead
While financial strength may help company weather volatile markets, perhaps more importantly it may position a company for competitive gains.
High-quality companies often survive market downturns and can potentially become stronger and more efficient as a result. Dividends can be an indication of a company’s financial strength. Over time, compounding dividends have had a significant impact on cumulative returns, even in sideways markets.
Equities protect buying power
There’s a quaint charm when your grandfather recalls how he could see a movie for a dime as a boy. But there’s also an unpleasant reality there called inflation. Those who ignore it by failing to invest in assets with the potential to beat inflation may be facing a very unpleasant surprise. History shows that equities have outpaced inflation by a significant margin over the long term.
Investing to combat inﬂation
Inflation, by definition, drives prices up and pushes the purchasing power of your saved money down.
Stocks, despite their recent travails, have done the best job of providing returns after inflation is taken into consideration.
Over time, inflation shrinks buying power. Historically, stocks have generated better total returns after inflation than bonds, gold and cash equivalents.
It’s important to remember that while stocks have historically outperformed other asset classes over the long term, they can fluctuate dramatically over the short term.