Making Sense Of Stocks

You can't build serious wealth without owning shares in the market. Here's all you need to get started.

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Forget bonds, money markets, or CDs. These days, when people talk about investing, they mean stocks. Mind you, we’ll spend much of this book telling you why it’s good to balance a portfolio with those other items-bonds, money market funds, etc. All the same, there’s no getting around the fact that over time, owning company shares has been the way to make money. Think of it this way: today, owning stock is practically as important as drawing a salary.

You may be able to run from the stock market, but we’re willing to bet that you’ll find it quite hard to hide. To escape any news of the Standard & Poor’s 500, you’d have to retreat to the deepest recesses of the Amazon jungle. There are a lot of hermits out there who could tell you when the Dow Jones industrial average hit 8,000, 9,000, or 10,000. Your neighbors are keen on stocks like Cisco Systems or Amgen. The manager at the grocery store down the street thinks he knows a couple of technology stocks ready to go into orbit. Whether you check the morning paper, turn on a 24-hour cable news station, or chat current affairs with co-workers at the office, you’ll probably get a face full of the latest on the stock market. Almost anyone you cross on the street will have a sense of whether stocks in general are up or down. Little wonder, then, that over $13 trillion worth of stock changed hands daily on the New York and Nasdaq exchanges, according to 1998 average volume figures compiled by the Securities Industry Association.

It’s no mystery why we’re all captivated by the stock market. Stocks are simply one of the best investments around. Their total return on average far exceeds bonds’. And, perhaps most importantly, stocks have the financial power to trounce inflation, the sneaky rise of prices that can eat away at your savings over time. It’s a snap to accomplish all that and more if you’re generating average annual returns of 10% or greater.

For proof of the power of stocks, just witness what the equity market has done in recent years. To say that over the past two decades, the broad market has enjoyed a phenomenal run might be holding back. Looking back over the past 15 years, the S&P 500 index reaped a healthy 18.92% in average annual returns, almost twice the stock market’s historical yearly gain of 10% or so. In raw numbers, if you had bought a $1,000 piece of the Standard & Poor’s 500, say in a Vanguard fund tracking the index, back in 1984, you’d have an investment worth $15,998.47 today.

Reality Check
Dr. Anita Davis-Townsend figures it’s time to work her way into the stock market. Davis-Townsend, an OB-GYN who lives in Houston, got into investing two years ago, after contacting a financial planner, Cheryl Creuzot. Davis-Townsend had a lot of things to sort out. She was joining a multispecialty group practice and had to figure out a retirement program. Her

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