What would be the best investment; stocks, government securities or bonds? Most of the investors have this question, whether they should be investing in bonds or government securities to play a safe bet or invest in stocks for higher returns by taking a risk? An appropriate mix of investments should be based on time horizon, financial situation and tolerance for risk. Typically, for the longer investment horizon, the exposure to the stock is best option. Historically, the conservative mix has provided much less growth than a mix with more stocks owing to the following:
Surplus money over and above primary needs: When you have some extra money lying around, you can invest in stocks and wait to gain better returns. This is important, as you don’t burn through your earnings that quickly. While bonds and government securities give secured or assured returns, investment in stocks help you to create wealth but the key is stay invested and take profits at the right time. It has been proven that the investment in equity class gives you the maximum return, it however is also very risky asset group, as fall in the market erase your gains completely within a very short time. But by staying invested one may ride this downturn. For instance, Ainsworth Game Technology Limited (ASX: AGI) generated a 466.27% returns in the last five years (as of August 15, 2016). But the stock corrected over 17.54% in last one year due to challenging conditions across the globe impacting the stock, while again recovering over 8.29% in the last five days alone. Further, latest drops in interest rates and bond yields have worked well for gathering more momentum towards stock markets.
FTSE All-World Equity Index (Source: Financial Times)
Investment in stocks rewards dividend yield and capital gain: Investment in stocks helps you earn dividend which is your return on your investment while others reward that investor gets is capital gain through rise in value of your investments. A dividend yield, that is the dividend income you earn on your market investments while capital gains are gains due to the appreciation in value of your investments. Investing in companies with long dividend history is the rising trend. Investing in businesses that have higher income also helps to ensure that dividends won’t be cut during business downturn. Real world data can help an investor find companies, which are much less cyclical than others. Investors need to find such companies, which are not affected by recession and managed to pay returns through dividends.
Invest for long-term: The more time your money is invested, the more time it has to grow. One of the best way to invest for long term is to invest in stocks or stock mutual funds. The investment in stocks for long-term help you earn more than bonds despite the regular ups and downs in the market. It is not a constant straight line up for the whole timeframe. However, it has been observed that stocks have historically offered more potential for growth over the long term.
High yield being derived from stocks against the bank deposits (Source: ASX)
Withstanding in volatility is a key feature of stock investments: It is advisable not to panic when your stock is falling in values, or there is flow of bad news. From a long-term perspective, the current downfall might be meaningless as market does not move in one direction and there would be upswing in the market. What is generally believed is that one should use the low value or fall in stock value as opportunity to average its current holding or enter into defensive or blue chip companies, which over the time would be paid off. It may be painful time when stock prices are falling but the stock does not have one side movement. The trend is going to reverse the current scenario and would start moving upward over a period of time. Of course, this goes without saying that the fundamentals and growth recovery has to be borne in mind for such stocks. Nonetheless, one should not panic and sell the falling stocks in haste. This is an opportunity to enter the strong growth stories stocks or average the current holdings of good companies.
Improving economic scenario: Australia’s business confidence has been resilient as per the latest data and the economy has also rebalanced itself from a mining-driven state. At the same time, Central banks’ efforts on monetary policies post-Brexit seem to have adjusted for some turbulence. These together have boosted the shares to some extent.