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4 Reasons the Rational Investor's Financial Strategies Include Stocks

By Ron Ross | December 05, 2015

Clients often ask us for stock market investment guidance; after the events of 2008 - 2009, many wonder if investing in stocks is part of a strategic wealth managment plan.

Ron Ross is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyWe understand their trepidation, but also know that stocks have much to offer the rational investor. Here are a few reasons why our investment firm says "yes" to stocks.

Wealth Advisors Know the Importance of Gaining Earnings

What's the ultimate reason why anyone would ever consider buying and owning stocks as part of a comprehensive financial plan?

One word: Earnings.

The fundamental -- and tangible -- benefit of buying into a company is the chance to share in its current and future earnings. Yes, it's simple common sense, but it's also borne out by numerous research studies.

But reality isn't that simple. If stock prices were determined by a company’s current earnings, they'd all have the same price to earnings ratio. But good (and bad) things happen to the company, the industry -- and the economy as a whole -- and because investors are always looking forward, a wide range of price to earnings ratios exist.

As your wealth advisor will tell you, you should expect a flow of returns, but the rate of flow is not fixed. When a company's earnings are expected to grow, its stock prices are bid up -- and vice versa. It's this amazing flexibility of stock prices that produces a nearly perfect match of willing buyers and willing sellers.

Your Financial Strategies Should Flex a Little

One particularly noteworthy feature of stock prices? Flexibility. Prices can change multiple times in a single day, allowing for the instantaneous establishment of equilibrium prices. As a result, stock  shortages or surpluses on the major exchanges are relatively rare.

Willing buyers are continuously matched with willing sellers, allowing stock exchanges to maintain near-zero inventories, a quite-different situation from the rest of the economy. For most dealers and middlemen, prices change infrequently, and inventory levels reflect unbalanced supply and demand.

Homogenity and Strategic Financial Planning

Ron Ross is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyStocks are homogenous. One share of GE common stock is exactly identical to all the other shares in the same class, because they're all equal divisions of the same underlying entity.

The real estate market, on the other hand... not so much. Even two houses constructed using the exact same floor plan aren't homogenous (location-wise), because the laws of physics dictate that no two houses can be in the same place at the same time.

Thanks to homogeneity, all buyers and sellers of a particular stock at the same time pay or receive a uniform price, no matter where they are. Plus, the market's enormous scale drives price uniformity to very close tolerance levels. For the successful investor, that means that -- because of the magnitude of money involved -- profits can be achieved with very small price discrepancies.

Add Liquid Courage to Your Comprehensive Financial Plan

Stocks' flexibility and homogeneity contribute to another important feature of the stock market: Liquidity. The ability to convert an asset into cash quickly and with relatively little loss of value confers advantage. 

Again, compare stocks to real estate. It can take months to sell a property, and if you need to sell quickly, you may have no choice other than to reduce the price and take a loss.

However, stock liquidity isn't perfect. If a large number of people decide to liquidate their stocks rapidly, as they did in 2008 and early 2009, the value of a particular stock or the overall market can drop rapidly, too. The desire to convert to cash quickly and with little loss of value isn't always an option, but on the major stock exchanges, lack of liquidity is rare.

These characteristics have made it possible for more people to own stock. Today, if an investor wanted they could buy shares in more than 4,500 corporations in the U.S. alone although through our investment firm, we would advocate a well-diversified global portfolio that consists of a little more than 9,000 companies world wide. 

 

Posted in The Rational Investor

   
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