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The Shock Market: Up, Down ... In or Out?

September 26, 2008 By:
Michael L. Schwartz, JE Feature
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Some things never change. One of them is the need to invest for the long term.

We know what we don't know. We have no idea what nominal returns or inflation or interest rates will be during the rest of our investing lifetime. We also know what we do know. Historically, stocks have earned returns that are higher than bonds.

Investing in common stock gives you a share in the ownership of a business. When you invest in bonds, you're a loaner to businesses. All of our common sense and life experience tells us that owners of good businesses make more money than do their lenders, if only because owners take more risk.

Still, many investors have trouble staying the course, especially when markets turn volatile.

"The challenge that investors face is that every day they read or hear what is going on in the world, and there is really nothing they can do about it," says Ron Baron, president of Baron Capital.

Baron says the media predict a lot more recessions than ever occur, and that when the stock market goes down, many of the investors believe the media may be right and that they need to get out before the market crashes. Baron thinks this is ridiculous.

Risky Business

What does the expert say?

"Inflation is what people should be thinking about, and how everything is going to cost twice as much every 15 to 20 years.

"People have to think about the money they saved becoming less valuable all the time and most businesses becoming more valuable all the time," adds Baron.

I believe the single biggest reason why people fail to achieve wealth and equity as investors -- bigger than all other reasons combined -- is that they never understand risk.

First, people generally overestimate the term risk when owning stocks. Second, people underestimate the long-term risk of not owning stocks, if suitable for their personal situation.

One of the best things investors can do is to understand history, including the Great Depression of the 1930s and other volatile periods such as 1973-1974. History tells us such declines are quite common.

Baron believes investment opportunities abound in today's world -- in health care, education and alternative energy, to name a few industries.

"In America, we have under-invested in infrastructure, bridges, tunnels, sewers and roads, which provides opportunities for companies," says Baron.

"Our stock market is worth $19 or $20 trillion, and there is $4 trillion sitting offshore just waiting to invest in America ... and you could just see it happen," he adds.

Although your experience may differ, Baron started investing in equities as a teenager and is a billionaire today. He strongly believes that we need to invest for the long term.

Michael L. Schwartz, RFC, CFS, CSA, is an investment advisory representative of First Allied Securities, Inc., and president of a Jenkintown-based wealth management firm.

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