The Motley Fool

Step 8: Stock Market Investing! Seriously, It’s Simple!

What would you do if we said you were missing out on an investing strategy that, in the long run, has produced returns that far outweigh those offered by a bank?  One that outperforms cash in a fixed-deposit or savings account?  Well, meet the stock market.

The recent global financial crisis shook many people’s belief in shares. Some people, battered and bruised by the experience, have sworn off the stock market for life. Sure, they made some mistakes and some poor investments, but that’s part and parcel of investing. As the old saying goes, if at first you don’t succeed, try, try again.

How about this for some motivation: Investing is free!

Tax-free, that is. Living in Hong Kong, unlike most Western countries, we take for granted that we do not have to pay any capital gains or dividend taxes. This means that you get to keep all that you earn, without giving the Hong Kong government a portion of your earnings.

Shares vs. Property

Hong Kong people are traditionally real estate lovers. You probably saw most of Hong Kong’s wealthier people grow rich by buying real estate when they were young. (See our Special Report to discover the myths about investing in properties of Hong Kong. They will blow your mind!)

We’re not about to get into a debate here about the relative merits of shares versus property, but since we’re all about shares, we hope you don’t mind if we just stick to the share market for now. However, let’s just say that you’ll be hard pressed to find a nice condo at $5 million, and when you need the money, you can’t really sell off one square foot (or a tile, for that matter) at a time.

The bottom line: We think investing in the share market can be financially smart, simple, inexpensive, and over time, help you generate life-changing wealth.

Think back to those tables from Step 1. There are no guarantees in life, but if you invested $12,000 per year for 40 years and you generated 9% returns every year, as is possible by investing in the share market, you could become a multimillionaire.

Enough said?

Investing in the Stock Market: Funds vs. Stocks

You can invest in the stock market by buying shares in an individual company, or by investing in a fund, which consists of a variety of shares in different companies – sort of like a basket of shares. With shares, as the value of the share itself (a small piece of a publicly traded company) goes up or down, the value of your investment does the same.

With funds, the value of your investment is tied to the value of the fund, which reflects the value of the shares the fund comprises.  Therefore, one share’s movement has a smaller impact on the fund as a whole, and thus on you, than it would if you had all your money tied up in that share alone. You do pay a price for the relative stability of funds, and that’s the fund management fee – all funds have these. With shares, perhaps the biggest challenge with investing is knowing what to buy, when to buy it and when to sell it. It is a challenge, but if you get it right, the rewards can be truly remarkable.

But we believe funds have their place in your portfolio, too. Not every type of fund, mind you: We’re talking about one specific type of fund.  Learn more about what we think of funds in one of our Asset Allocation guides, “Managed Funds.”

Summing Up…

As a rule, the longer a period for which you invest, the greater the chance that you’ll do well. Investing for the short term, which we would describe as less than five years, is certainly risky. But when you’re investing for your retirement, you can afford to be a bit more patient.