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Only long-term funds (those with a 5+ year time horizon) should be invested in equities. For long-term investments, the stock market is the best ‘wealth creation machine’. Dollar cost averaging into a low-cost, diversified global equities vehicle arguably the best approach. Given my long-held passion for investing, I am often asked by friends and acquaintances for stock tips specifically or investment advice in general. The first thing I say in response is that one should never put in the stock market even one cent one might need within the next five years. Equity investing is a long-term proposition. Having said that, I immediately move on to advocate the stock market as the best wealth creating “machine” known to humankind. I am passionate about investing in the equity market with a bottom-up, long-term orientation. However, most people don’t have the time or passion for the extensive security selection work required for diversified bottom-up equity investing. This does not mean that they cannot outperform most professional fund managers over the long haul. For people who have a long-term (5 years or more) investment horizon yet don’t have the willingness or ability required for diversified stock picking and portfolio management, I advocate using a low-cost diversified equity ETF (exchange traded fund). ACWI is currently my favorite for the long term given that it gives investors, no matter how small, the ability to purchase a diversified global equity portfolio very efficiently. Given that most professional fund managers do not manage to beat the broad global benchmark over the long haul, particularly net of fees, simply buying ACWI (that is actually the global ETF’s ticker) gives even the small investor a good shot at outperforming most managers long term. Just over two years ago, I came up with the following thought. If your goal is to be unhappy, you will be miserable, no matter what you have. If your goal is to be happy, you will succeed, no matter what you lack. The saying is at the heart of my general optimism – my strong belief in focusing on what I have, not on what I could have had. Because of my strongly optimistic nature, I have at times been accused of being a “permabull.” In trading and short-term oriented market calls (which one should actually not even attempt!), I am truly not always optimistic. When it comes to long-term investing in the stock market, if you are not optimistic, the odds are actually stacked against you. See in the equity market (particularly in a broad, deep bourse such as that of the United States, let alone the aggregate global equity market), it pays to be optimistic in the long run. Equities are indeed the best, most secure investment path to long-term wealth – long have been and always will be. The key is a true long-term orientation. I believe that one of the key reasons for this is that a well diversified portfolio of global leaders will, in the aggregate, have the pricing power to pass on inflation, and then some. In addition, I also have the following hypothesis. As I implied in a previous note, the news media, to attract eyeballs, has a permanent pessimistic bias. Bad, scary news always sold newspapers, got audiences for radio and TV newscasts and now generates click-throughs. Thus, long-term equity investing gives us sort of a “time arbitrage opportunity.” In the long run, there will be more negative than positive news headlines. A dollar-cost averaging approach to long-term stock investing (in a global equity marketplace where the long-term trend is up, but punctuated by periodic sell-offs, often triggered by such negative news) is the best path to invest for wealth creation. This frees the small investor from having to dedicate the time and effort to individual security selection (let alone even attempting to time the market). The dollar cost averaging method simply entails investing the same amount of currency on a periodic basis (say monthly) in the same stock or basket of stocks (say the ACWI exchange traded fund). This approach enables the investor to buy more shares when they are down in price, fewer when they are up, optimizing the investor’s average cost basis. Finally, I would also advocate automatically reinvesting the dividends, in order to fully benefit from the compounding effect (particularly if you can put your ACWI investment in a tax deferred or after-tax investment vehicle, such as an IRA, 401k, Roth IRA or Roth 401k). Scalper1 News
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