Stock Market Advice - Essay Example

STOCK MARKET Since 1802, stocks have returned an annual average of about 7% after inflation while US treasury bonds have returned about 3%.'' ---James Glassman (author of Dow 36000) in Stocks are still the best bet,' The Guardian, May 26, 2003 For the equity markets overall, returns of about 5 percent to 7 percent annually above inflation. This range has been the same for long-term investor for over 100 years and, I suspect, will be the same for many years to come.'' ---Scott Evans (Executive Vice President, CREF Investments) in Stock Investing: Take the Long-Term View,' TIAA-CREF Participant, May 2003.

Investing in the stock market calls for and requires a certain degree of experience and expertise. It is no place for amateurs looking to make a fast buck. Most analysts also advise that investments in the stock market should be made with a long-term perspective of at least five years. Over the long-term minor fluctuations usually average out with each successive peak being higher than the previous one. That said there are several other aspects that need examination before deciding when and where to invest.

Efficient Market Hypothesis postulates that "only fundamental factors, such as profits or dividends ought to affect share prices" (Stock Market). But this is true only in an ideal situation - a perfect market - which is hardly the case. Over shorter periods, there are wide variations in stock prices on account of any number of reasons, some of which are not even technical in nature. The stock market is driven by investor confidence - and that is a matter of personal choice that cannot be predicated.

The general mass of investors invests with a 'herd mentality'. Inexperienced players can rarely, if ever, 'time the market' and hence generally incur losses. Warren Buffet has said in his biography that, ".despite all this available information, [analysis, 'hot' tips, blogs etc], investors find it increasingly difficult to profit." He continues, ".Sometimes there appears to be no rhyme or reason to the market, only folly". The market crash of 1987, resulting in a 22.6 percent drop in the Dow Jones Index, could not be traced to any specific cause, and is just one example of this 'folly'.

Since timing appears to be the critical factor, it follows that one's holdings have to be monitored continuously. Non-performing assets have to be divested and new stocks acquired based on the intrinsic value of each stock arrived at after careful study and keeping in mind market sentiment. Investing in the stock market is not like investing in instrument offering fixed returns, where once the initial investment is made it does not have to be looked at again until its maturity. Some stocks may hardly show any movement, others may show steady appreciation, while others may have depreciated when it comes to selling them.

Nevertheless, it is equally true that stocks as a general rule have almost always appreciated over the long term. Obviously, it is not going to be possible to actively track one's portfolio from outer space or pass instructions to one's broker (even if Mission Control allows).Keeping all these facts in mind, it is felt that for an investor who will not be in a position to monitor his investments on a regular basis, the amount should be invested in any Index Fund. Over time, the economy grows.

Hence, if one were to invest the amount of $10,000 into a diversified stock index thereby owning an equivalent fraction of that part of the economy represented by those stocks that constitute the Index, one could reasonably expect, in the long term, to post profits that are in tune with the real growth of the economy. Since the Dow Jones and other Stock Market Indices record a slow but steady rise, the risks are minimized while at the same time assuring guaranteed returns. The best option however, would be to invest in mutual funds, thorough an investment house.

In this manner, the responsibility of investing and monitoring the market becomes that of the investment house that has the requisite experience and expertise. In this case although the risks are more, their are mitigated by the fact that experienced fund managers, with their collective wisdom are not likely to go wrong, plus the fact that the returns would also be higher.ReferencesHagstrom, Robert G. (2001). The Essential Buffett: Timeless Principles for the New Economy. New York: John Wiley & Sons.

'Stock Market', Wikipedia Online Encyclopedia. Retrieved from http://en.wikipedia.org/wiki/Stock_market