Sound Wealth-Building Plans Invest in Stocks

As professional financial advisors know, investing in the stock market is an essential component of any wealth building strategy. Those holding money in savings accounts, CDs and other cash investments will see their savings eroded by inflation over the years. On the other hand, the average annual return from the stock market is over 10 percent. By exercising skill in choosing the best stocks many people earn substantially better than average returns.

While many potential investors understand the power of market returns, they are often flummoxed by the question of how to find the best stocks. Often, the price of a stock that is chosen well on the basis of its financial condition simply doesn’t rise. In other cases, companies with poor financial performance rocket to the top of the gainers list for unfathomable reasons. In the face of this apparent randomness, many give up. There are even books about the randomness of the stock market and the futility of attempting to pick stocks. Nonetheless, many investors have done very well and many companies perform well consistently.

Supporters of random theories fail to recognize the fundamental necessity of having a system to select, buy and sell stocks. Trading systems need to separate the economic performance of the company from the price performance of the stock. For example, while the Coca-Cola Company is an excellent company, many investors that purchased the stock in 1998 have little to show for their 13 years of patience. On the other hand, those that purchased the stock in 2005 or 2008, at pronounced lows, can be reasonably satisfied.

Many investors use a “momentum” buying approach. In this approach, the investor finds a rapidly advancing stock and waits for “pull-back” or temporary drop in the price. They choose the minimum sell price when they buy the stock and lock that selling price in with a “stop-loss” order. Buying on the “pull-back” with a stop-loss has many advantages. First, if the stock continues to advance, the investor obtains more return than if they had purchased the stock at the peak of an advance. Second, if the stock declines, the sell price – and the amount of loss – is locked in.

Regardless of how an investor finds the best stocks, no wealth building plan is complete or sound without a stock investing plan. Ignoring the potential of the stock market is like throwing money away.