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  • Experts say that a long-term investment strategy in the stock market can yield significant benefits. Historical rates of returns show how the stock market can be a useful tool for personal financial planning.

    Background

    The U.S. stock market has three major indices: The Dow Jones Industrial Average (or the Dow 30); the Standard & Poor's 500 (or the S&P 500); and the Nasdaq (or the over-the-counter market). There are also mutual funds and exchange-traded funds that enable investors to spread risk by owning shares in numerous companies. The various stock markets enable you to invest in the future success of specific companies. Some companies pay dividends that provide you with quarterly or annual income on your investment. The stock market mechanism allows you to take an active role without working for the actual company or investing significant sums of money.

    Investing

    Albert Einstein once said, "The most powerful force in the universe is compound interest." The best way to take advantage of this force is to invest in the stock market. Your money cannot compound, let alone grow, if you leave it underneath your mattress or in a safe deposit box at your bank. According to Peter Lynch, author of "One Up on Wall Street," no other investment has had the greatest rate of return than stocks. From 1927 to 1987, common stocks averaged 9.8 percent return a year. Lynch illustrated his point in the following scenario from his book: "In 1927, if you had put $1,000 in each of the four investments listed below and the money compounded tax-free, then 60 years later you'd have these amounts: Treasury bills: $7,400 Government bonds: $13,200 Corporate bonds: $17,600 Common stocks: $272,000 There is a logical explanation for this. In stocks, you've got the company's growth on your side. You're a partner in a prosperous and expanding business." As you can see, the magical force of compound interest is best experienced in the stock market.

    Expert Opinion on the Stock Market

    William J. O'Neil was the founder of "Investor's Business Daily" newspaper. It is a publication dedicated solely to personal investment and stock analysis. O'Neil had the following views on investing in the stock market: "Since the market tends to go in the opposite direction of what the majority of people think, I would say 95 percent of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless. Facts and markets are far more reliable." "The whole secret to winning and losing in the stock market is to lose the least amount possible when you're not right." "What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower." As you can see, the risk is not the stock market itself. The real risk is not investing at all.

    Source:

    "One Up on Wall Street" by Peter Lynch, Simon & Schuster, 1989, page 57.

    ThinkExist.com: Quote on Compound Interest by Albert Einstein

    Investopedia: William J. O'Neil

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