“Save your money,” your Mother said when you received your allowance for mowing the lawn and running errands. This was in 1986. The idea was to teach you to be frugal. So, you put money in your piggy bank and eventually took all of the change to the bank and put it in your Junior Saver account. Over the years you got a paper route and other jobs and following your Mother’s advice you saved your money. By the time you were ready to move out on your own you had saved up a couple thousand dollars. Along the way you bought a PC and Windows software and entered the computer age. And you read about how Microsoft was growing and its stock prospering. While Mom was telling you to save your money what Mother never told you about stock investing is that stocks often outperform other investments over time. Mother taught you all about fundamental analysis as it relates to balancing a checkbook, making smart purchases, and saving your money. What Mother never told you about stock investing is that a well-chosen stock purchase can change your life. But, maybe Mom did not know about stocks.
What Microsoft Was Doing when You Were Putting Money in the Piggy Bank
On March 13 of 1986 a small computer software company went public. You could have purchased a share of its stock for $25. To date Microsoft has split nine times and an original share of stock is now worth $25 x 200 = $5,000 and pays dividends of just under $20 a year for each original share, considering splits. What Mother did not tell you about stock investing is that if you do your homework, pick the right stock, keep track of what is going on that you can end up years later with yearly dividends that nearly match your initial investment and a stock that is two hundred-fold more valuable than your initial investment. And, if you are not impressed by Microsoft, would you like to have invested in Wal-Mart when it went public? Its stock has multiplied a thousand fold since it went public in 1970. Apple is up two hundred fold in the last thirty years and sixty-fold in the last nine years. What Mother never told you about stock investing is that you can let smart and industrious people grow your money for you and with dividend stocks even send you quarterly checks.
Portfolio Diversification vs the Piggy Bank
Do stocks always go up? Certainly not! What Mother perhaps never told you about investing is how her grandfather lost money in the stock market crash that ushered in the Great Depression. Because stocks do not always go up and because some stocks go up in a good economy and other tend to go up when times are bad sound investing principles dictate that you diversify stock investments. Thus many investors seek to develop a stock portfolio that contains well-chosen stocks from various market sectors. Read more about this strategy in our up-coming article, What Mother Never Told You about Portfolio Diversification.