In Focus

Why Invest In the Stock Market?

I have to share the worst news of the week with you. It's so dang upsetting that I'm sure we can find a lesson in here somewhere.

When I left Calgary last June I hid all of my jewelry in our freezer. Yep. The freezer. I thought it was a brilliant idea to wrap it in some paper towels and put it in a Ben and Jerry's ice cream container. This was much smarter than traveling around the world with it over the next two months. When I got up this morning, (my first morning back home) I remembered I had put it there. I opened the freezer and it was full of food. I remembered emptying the freezer before I left.except for coffee and the Ben and Jerry's container. Where did the food come from? Uh-oh. My husband arrived to our house three days before me.

The Ben and Jerry's container was gone. Panicked, I called him in the car, and sure enough... he had thrown it out. "Why would anyone want to save old ice cream?" he said?

"Ummmm... 'cause maybe that someone was hiding all of the jewelry you had given her over the past 18 years in it," I replied, holding back tears.

I ran out to the garbage bins... Gone.

I called the City of Calgary. They wished me luck, but there was pretty much no chance of finding it. The only jewelry I have left over the past 18 years, is on my body.

So the moral of the story (and I think I've finally learned it): don't invest in jewelry... it could end up at the dump with the Ben and Jerry's container.

I guess this is as good of a time as any to segue into why the Chicks have chosen to invest in the stock market instead of mutual funds, treasuries or bonds (or jewelry).

Over the history of the stock market, the market has had an average return of 11%. 11%! That's some kind of return!!

Karin, Karin, Karin... stop. Explain the word "return"?
Ooops, sorry Chick Julie. I will.

Return is the profit over a period of time. It is expressed as a percentage. If I invested $1000.00 into a stock and at the end of the year that stock was worth $1100.00, that would be a 10% return. Simple enough.

Why do Chicks want to put their money in the stock market instead of a mutual fund, a treasury or a bond? How are the returns on those investment options? First of all, what exactly is a mutual fund?

A mutual fund is made up of stocks. It's a conglomerate of a bunch of companies with a title slapped on it. You could find the best 20 companies in the world and put them into a mutual fund and call it The 20 Best Companies in the World Fund. Or the Chicks could take our stock portfolio and resell portions of it to you. We might call it The Chicks High Growth Fund B. (I added the "B" for the heck of it. I swear the people who title the mutual funds just add these letters to confuse us.) We can't really do this, but if we were a fund company like Fidelity or Vanguard, we could. So, if most mutual funds are made up of stocks, wouldn't they be getting the same kind of return as the stock market?

Not really. A mutual fund by law must be made up of no more than 5% of the same stock. So that means a fund has to have at least 20 different companies in it. (20 x 5% = 100%) They are required to be diversified. But sometimes they keep a couple of bad apples in a fund in order meet the diversification requirement. Even if they find a couple of great companies like Cisco and AOL, they would still have to fill out their fund with 18 more. They couldn't just have the two. This is why buying individual stocks is so smart. If you find great companies, you can buy them, and only them, without any of the unwanted junk that goes along with some mutual funds.

But how have mutual funds done compared to the stock market, you ask? (I knew exactly what you were thinking.) Eighty-five percent of the mutual funds out there do not beat the market each year. Eighty-five percent! I hope you're one of the lucky fifteen. I wasn't.

As far as Treasuries and Bonds... what are they? Treasuries are like the United States Government borrowing money from you. They are issued through the Department of the Treasury (hence titled, Treasury Securities). You loan them money via a treasury that you buy from them, and a guaranteed amount is paid back to you when you sell it.

Over history, our stock market has returned an average of 11% per year, U. S. Treasuries have returned an average of 3.3% per year. That statistic alone should be enough to steer clear of Treasuries. 11% kicks butt. But to add salt, this is all during a time when inflation has grown at a 3.3% rate. Now let me think about this. If you invest in U.S. Treasuries, you get an average return of 3.3%, only equal to the increase of your cost of living expense. Not Chicky.

If we look at corporate bonds, they too lose out to the stock market. A corporate bond is a long-term promissory note between you and an issuer (a corporation). They agree to pay you the face value of the bond over so many years. It is guaranteed when the bond matures, and you can receive sporadic interest payments over time.

Over their history, bonds have returned an average of 4.5% per year. The stock market has returned 6.5% more per year than a bond. (11% - 4.5% = 6.5% See, the math is getting easier.) No-brainer.

The Chicks have chosen the stock market because, over history, it gives you the best return. 11%. And 11% is better than any missing jewelry is gonna get ya.

Hey.check out the article on The Chicks in this Sunday's edition of the Sacramento Bee!