Cash is generally considered to be the safest asset, but it also likely give you the lowest return over a period of several years or more. Bonds are slightly more risky than cash but normally generate roughly the same level of long-term returns. Property tends to do well over long periods and the returns are quite stable. The returns from equities and commodities vary the most from year to year, but tend to be highest of all over long periods.
Long-term returns:
To illustrate what effect this can have, let's look at some numbers. Here is the average annual return for cash, equities and bonds over the last fifty years in the UK.
Asset
Average return
Equities
6.6% pa
Bonds
2.1% pa
Cash
2.0% pa
Expressed in percentage terms these figures don't look that interesting. So let's look at them another way. Say you invested £1,000 in each of these three assets fifty years ago. How much money would you have now?
Asset
Value
Equities
£24,426
Bonds
£2,820
Cash
£2,692
Now we're talking. Investing in equities would have resulted in almost nine times the amount you would have got from bonds or cash!!!
But everyone always say that the safest way to make money in the stock market is by investing for the long term. I don’t believe that. In fact long term investors might have some disadvantages.
There are a number of reasons why trading can be a safer strategy than investing in the long term.
·Traders can make money in all markets. Unlike a long term investor who only makes money in bulls market and loses money in a bears market, traders can take advantage of whatever the market does.
·Strong companies don’t have to go up. People seem to have a false image in their mind that if you own Disney stock and they make a sale your stock goes up. That is not necessarily true. You could buy a stock that makes loads of money with great fundamentals and still lose money. In fact this financial crisis has proved for us that even giants companies like Lehman Brothers and Bear Stearns have collapsed and gone forever.
·Successful traders base their conclusion off of price, the trends and patterns of it. This is a much better way to grow your money because what you make money off of is ultimately what the stock does not what the company does.
·Actively trading is a can give you higher returns. Think about it like this, if you are actively trading in the stock market you will be able learn from your past trades. The more learn the better a trader you will become. Where as someone who invest in the long term cannot use what they learned from their last trades into their new trades because their last trades lasted 40 years.
