100% Equities Strategy

  

Oh, there are so many investing strategies, and this is one of 'em. All in. A hundo percent. Long equities. Long America. Long the world. The rationale behind the 100 percent equities strategy is that, simply put, over long periods of time, equities go up. A lot. So if you have plenty of time on your investing horizon, then be 100 percent long equities and enjoy great wealth in your '90s.

Related or Semi-related Video

Finance: What's the Difference Between S...186 Views

00:00

finance a la shmoop. what's the difference between stocks and

00:08

bonds? welcome to our little town. the last stop on our tour ends here at the

00:13

town square with an excellent display of stock. and then over here we have the [man in stocks]

00:17

bond .hey wrong tour! hi me again mister shmoop

00:23

you may remember me from such shmoop classics at the st. Valentine's Day

00:27

Massacre college 101 and the ever popular ode to a freakin comma. but today

00:33

I'm here to talk to you about the difference between a stock and a bond.

00:36

financial kind. yep long way to get here but the difference is really simple

00:40

stocks are about ownership when you own some shares of stock you own a piece of

00:46

something .when you own a bond you are essentially just the renting money to

00:50

someone .that's it .stocks and bonds get mentioned together all the time because

00:54

they're both investment vehicles .that is places to put your money. but as far as

00:59

what backed them up well they're really different animals. so let's dig in a bit

01:03

on stocks. meet whatever dot-com. it has 10 million shares outstanding. outstanding

01:08

not meaning that it's a strictly good company. it's just a term that refers to [kids smile on the couch]

01:11

the total number of shares of ownership of the company or said another way it

01:15

means that the Pie of whatever com is cited in to 10 million slices and each

01:20

slice is called yes shockingly a share. whatever.com trades publicly for 10

01:25

bucks share giving it evaluation of a hundred million dollars. that is

01:29

investors who are paying $10 a share for whatever com are valuing the company at

01:33

a hundred million dollars. that's 10 million shares times $10 to get you

01:39

there. yeah ten million slices of pie. big pie. okay so you decide to put all of

01:43

uncle Larry's inheritance money into whatever com at ten bucks a share.

01:47

that's a hundred grand. there we go. you are now the proud owner of 0.1% or [woman smiles holding money]

01:54

ten thousand shares of whatever dot-com congratulations.

01:57

maybe .well things with whatever dot-com go along just fine in one day you are

02:02

sweating on the Stairmaster and the ticker what scrolls buy on CNBC showing

02:07

up five hundred percent. the headline makes you giddy. woo of the whoo

02:12

you just turned your 100 from uncle Larry into 500 grand .why ?well

02:17

because Apple has just announced that it will pay 50 bucks a share on 10 million

02:21

shares that valued whatever dot-com it's 500 million dollars to buy the company.

02:26

yeah so whatever icon becomes now part of Apple. so you celebrate. but things

02:31

could have done different .condolences there .yeah stocks can go that way. [woman drives red sports car]

02:35

so he just turned uncle Larry's life savings that he gave to you and that you

02:40

invested in this risky new company into nothing. yeah nice job they're. a big fat

02:45

hundred grand smoking hole in your bank account .so yeah stocks carry a lot of

02:49

risk it can be good but oh it can be bad. check out this chart for the S&P 500 for

02:54

the last hundred or so years. well the S&P 500 is just an index or the

02:58

500 largest companies in the world generally speaking. but with a high

03:02

Western lean. on the selection of the company there goes Westerners who built

03:06

the index. well it's the most common representatives of performance when

03:09

investors ask so how's the market doing? anyway back to the chart. well you

03:14

can see from the early 1950s until the mid 1960s or so not much went on and

03:21

just kind of flat they're paying dividends then we had 70s and basically [stock market chart shown]

03:24

the market was flat for a decade but dividends went up and up and up. it's the

03:28

company still we're making a lot of cash profit.. and Reagan came into office in

03:32

the early 80s now 1980 there said give us our Iran hostages back and all that

03:37

and then the market took off and it went nuts. there's a little bit of correction

03:41

there nineteen eighty eight nine there is sell them and then blam the greatest

03:47

bull market in history all the way up until 2000. when things burst and yeah

03:51

it's been quite a ride. so you can see up down up down

03:54

but generally from 1950 to 2017 change up and up is really nicely up. that's

04:00

what we do here. alright but the main takeaway is that over time stocks went

04:04

up on average from here to here about eight or nine maybe ten percent a year.

04:08

so what does that tell you about stocks? well that risk is less generally [stock market chart shown]

04:12

speaking if you're able to hold stocks for a long time. that is over time the

04:18

markets in the capitalist system basically bail you out of problems if

04:22

you can hold the stocks long enough .so if you're 20 think lots of stocks. it's

04:26

you know you won't need the money for decades if you're a newly retiring 75

04:30

year old not so much. you just can't afford to live through a bad bear market.

04:34

so instead maybe you do halfsies with stocks and bonds or you go all-in just

04:39

on bonds. and live on a budge.t all right so what is a bond well take your

04:42

friendly cable and internet provider Comcast. they borrow money all the time

04:47

from the public so they can buy smaller cable companies and TV companies and

04:51

content companies or pay for programming you know or buy gum.

04:55

well the lion's share of Comcast bond offerings have paid about 5% a year

04:59

which isn't much but on the upside none have ever not paid their interest. in

05:04

fact waste fewer than 1% of bonds in the u.s. don't fully pay up.

05:08

meaning that in general for decently rated bonds that is bonds which are

05:12

rated by experts as being safe bets to fully pay off both principal and [bonds examined by experts]

05:16

interest almost never default. as Shakespeare said default is not in Our

05:21

Stars but in ourselves. and it's close enough. well but think about the

05:25

difference on an investment which compounds ie grows exponentially each

05:29

year at a rate of 5% for 20 years versus an investment that compound at 9% over

05:35

20 years. the difference is about 4% a year doesn't sound like much maybe, but

05:40

over time that's a really big difference. let's pull out of our handbag our handy

05:45

dandy rule of 72. which is a simple back-of-the-envelope calculation tool

05:48

that helps you figure out how many years it takes an investment to double .if an

05:52

investment grows at 10% a year it doubles in 7.2 years which means we lose

05:56

a full doubling in value of our investment here using the 5% bond. in 72

06:02

divided by 4 there we go for 18 years .so said a different way after 18 years have

06:07

just investing in bonds for suggest investing in stocks we end up with half

06:12

as much money if history repeats itself and it doesn't always. but it's something

06:16

think about. anyway that notion feels like a lot to pay for

06:19

the greater safety or certainty of a bond. all right so now you know your

06:23

stocks from your bonds and it'll come in handy if you're ever robbed by one of

06:26

them at gunpoint and have to you know pick them out of a lineup. [lineup shown]

Up Next

Finance: How Do You Judge the Performance of an Index Fund?
132 Views

How do you judge the performance of an index fund? For index funds, they're really just a reflection of the stocks and bonds they, uh... reflect. S...

Finance: Who Invests in Stocks?
141 Views

Who invests in stocks? 401k plans, pension funds, institutional investors, banks, traders, clients of Schwab, Fidelity, and Franklin. Joe Blow buys...

Finance: What Are Mutual Funds?
189 Views

What are mutual funds? Mutual funds are an aggregation of stocks, professionally managed for a "small" fee. Investors wanting exposure to a given a...

Finance: What is the S&P 500?
45 Views

What is the S&P 500? It's Standard & Poor's 500 generally largest companies, with a U.S. domestic bias. The S&P 500 is usually what investors think...

Find other enlightening terms in Shmoop Finance Genius Bar(f)