Alternatives to the Stock Market
David Bickings, Optionetics.com
April 19, 2002
April 19, 2002
There are many reasons for an investor to consider what type(s) of investment vehicles he or she will use. The bottom line for all of us is to buy low and sell high. That being said, what else is out there for the investor who wants to diversify against his or her equity portfolio? First, a quick overview on stocks, then let’s look at the other investment vehicles and see what their advantages and disadvantages are
Common stock is the most basic form of ownership in a publicly traded company. If you own 250 shares of company ABC and there are 500,000 shares outstanding, you own 0.05% of the company. It’s that simple. Keep in mind, most publicly traded companies have tens of million shares, so unless you are a billionaire like Warren Buffett, owning a significant portion of the company is not the objective. Through dollar cost averaging, you can, over many decades, buy enough shares to make you a millionaire and receive enough dividend income to live off of, as a neighbor of mine has done.
She's a 73 year-old female who worked for Bell Telephone out of high school and began putting $1.00 a week into company stock from her $5.00 weekly salary. Through diligent saving into the company’s stock purchase plan, and from mergers and splits, she holds stocks with a market value of more than $2.8 million and receives total quarterly dividend income of almost $16,000. Mind you, she has never sold a single share of the stocks except enough to pay for an Alaskan cruise last year for herself, her six children and their spouses. Trading stocks may possibly give you better returns over the long term, but you can’t argue with success like that.
The disadvantages of stocks? Did somebody say Enron? If the telephone services sector takes a big hit, my neighbor will find herself in trouble! Many people had their entire 401(k) allocated in Enron stock! You must diversify, just don’t overdo it! Research is critical in stock investing as you must find compelling reasons to put your money on the line where others control it’s destiny. Know the management of companies you choose invest in!
Bonds are basically a loan made by you to a company or governmental entity. You put up your money and they pay you interest. At maturity, you get back your original investment. CDs also fall into this category except bonds are not insured by the FDIC, where CDs are. There are bonds that offer low or no taxes on income, depending on the entity that issued them. Bond prices rise and fall as interest rates do. They are very sensitive to rate changes, but in the many cases, the income is stable. If you are using bonds as a trading instrument, you must be cognizant of rate changes and economic factors that affect the bond market. I have never traded bonds, or even owned a bond other than series EE bonds which granny gave me when I was baptized. As soon as I learned about stocks, the bonds were cashed in and I began gunning for growth, not income. For many of us it is easier to own a bond mutual fund than try to be a jack-of-all-trades. I’d rather spend my time finding trades that will generate major profits and compound my portfolio than look at income producing investments.
Real estate is an interesting investment because it offers significant leverage. By that I mean that you borrow money from a bank to finance your purchase; and, if it’s rental income, tenants pay a large sum, or all, of the loan for you. You can then borrow more money to finance another property. The properties themselves serve as the collateral and in general real estate does not fluctuate as much as the stock market. You probably won’t double your money as quickly unless you find an “up and coming” area and get in early or are buying and selling in a hot resort area. Real estate investors tend to be the get-rich-slowly type and often have some construction or building experience to help them buy and rehab properties for bigger profits. There are many people who are into real estate rehab and do well. It often requires a bigger time commitment than the stock market—unless you trade full-time. Many real estate investors are on their way to a nice comfortable retirement with income streams from rentals.
Supply and demand is the rule of the day in real estate and supply is limited. There are only so many ocean front lots in Stone Harbor, NJ. The demand for this limited supply is where real wealth can be built in the real estate market. Real estate is not nearly as liquid as the stock and bond markets. You can buy a stock now and sell it in 20 seconds if you want to. The sale of real estate requires showing the property and the closing. It can be done quickly, but more likely, it is a process that takes anywhere from a few weeks to a few months.
Precious metals are one of the most confusing investments to me. Gold is thought to be an excellent hedge against stock market fluctuation, but I know of no one who became wealthy from just buying and holding gold. I’m sure it has been done, but I wouldn’t hold my breath.
While no investment vehicle is a sure thing, the most likely way to become really wealthy is to invest in yourself. By that I mean to be a business owner and grow your business. We don’t all have skills or a great idea for starting a small business, but those who do often achieve significant wealth with hard work and dedication. According to the book, The Millionaire Next Door, by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D., the vast majority of millionaires in the U.S. are business owners. It’s no guarantee, but for many business owners, success is simply inevitable so long as they make good decisions and keep working hard.
Good luck and great trading!
David Bickings
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
dbickings@optionetics.com
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