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Investing Answers: Why Stocks Make a Great Long-Term Investment

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Many potential investors are wary of stocks, unsure whether they’re really a more lucrative investment than property or other places for your money. I’m here to show you how stocks’ long-term returns size up, and explain why they’re a smart choice for growing your wealth.

The Hang Seng’s long-term return: 10% p.a.

 

The Hang Seng Index (HSI) was launched in 1969 with a base point of 100 on 31 Jul 1964 according to Hang Seng Indexes Company Limited. To celebrate its 50th anniversary in 2014, a research institute used the end of July 2014 to establish a closing point of 24,732 – a total return of 246 times the original figure. That worked out to a compounded annual return of 11.6% without dividends, or 15% with them.

Contrast that performance to CEIC’s Hong Kong Real Residential Property Price Index. Its data isn’t an exact match for the Hang Seng’s above, spanning from the end of 1979 to the end of 2017, but we can still use it to compare annual rates. In that period, Hong Kong residential property gained 273%, or compounded yearly growth of 3.52%.  But over the same time, the Hang Seng grew 964%, or 6.4% per annum.

To be fair, a lot of that growth came from the rapid advances of the 1980s and 1990s, when the Hong Kong and Chinese economies grew at rates that they haven’t matched since. But even at today’s growth rates, Hong Kong stocks look like a sound investment in the future.

Nowadays, a lot of Chinese-funded or incorporated companies are listed in Hong Kong; seven of the 10 largest Hang Seng constituents are Chinese stocks. That means the HSI does not only reflect the economic situation of Hong Kong, but also the development of the Chinese market. And if Chinese economic development remains as rapid as it is today, it could still benefit Hong Kong in the longer term.

This analysis of the Hang Seng’s compounded return over 50 years proves that as long as you’re investing for 10 years or more, you’ll still make some kind of a profit, regardless of the ups and downs in between.

Now that you know stocks can and do provide long-term profits, you’re probably wondering: How can I achieve results like that? Stay tuned, and we’ll answer that question in the next part of this series.

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Johnny Chan does not own shares of any companies mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.