The stock market has everyone scared right now. If you're trying to get rich, though, you still need stocks in order to succeed. It's just more important than ever to make sure you pick the right ones.
Words that will doom your finances
Many people are questioning the long-held belief that stocks are the best way to make money in the financial markets, with a well-worn argument: "This time, it's different." A decade of flat returns for broad market measures like the S&P 500 certainly bolster that argument, as anyone who put their money in even simple bank CDs has dramatically outpaced the overall stock market. Gold, a historical safe haven in times of turmoil, has quadrupled from its lows a decade ago, and investors have responded to that uncertainty by buying up shares of precious metals investments like specialized gold ETFs. The SPDR Gold Trust (NYSE: GLD ) holds almost 42 million ounces of gold worth more than $50 billion.
Believing that history won't repeat is a dangerous position to take, though. According to research from Jeremy Siegel, a 10-year period where stocks trailed bonds is far from unprecedented: It has happened about 20% of the time. Over the length of a typical worker's career, 30 years or more, stocks have always done better. And with bonds on top of the world while stocks are stuck in the doldrums, do you really think that an investment in bonds today is going to do better than money put in the right stocks?
Get the stocks you need
For money you can invest over a fairly long time horizon -- that is, money you don't need within the next five to seven years or so -- you should concentrate on stocks and other higher-risk, less conservative investments. You can afford to weather the occasional market storm with this money, as we've seen with 2009's big gains after 2008's staggering losses. You may not always end up a big winner with stocks, but you'll greatly increase your chances of maximizing your returns over an ultra-safe, low-growth portfolio.
What stocks should you pick, though? The simple way out is to use index funds or ETFs to give you broad, low-cost exposure to the overall market.
But if you'd prefer to take a stand on some particular stocks, I'd urge you to consider some broad trends that will develop in the coming decades. Here are a few.
1. Buy the essentials that people need.
Whether you think emerging markets will bring the next global boom or are simply overhyped, the rise of billions of people in emerging economies means one thing: More people are going to need more things. In particular, companies that produce raw materials that go into all sorts of necessities will be poised to profit in the decades to come.
For instance, Titanium Metals (NYSE: TIE ) provides efficient materials for airplane production, which should see continuing gains as emerging economies become more travel-intensive and create an expansion in global transportation. The ETF United States Natural Gas (NYSE: UNG ) is designed to track the price of futures contracts on natural gas, which could become a key to clean energy use in the future. Be careful here, as commodities are cyclical and this ETF in particular hasn't tracked the spot price of gas, but over time, natural gas holds a great opportunity for growth.
2. Grow old with your stocks.
Companies respond to demographic trends. The ones that do the best job can profit the most.
An aging population will need more health care, which supports not only obvious picks like Merck but also riskier plays. Dendreon (Nasdaq: DNDN ) is well known for the ups and downs of its prostate cancer drug Provenge, but its huge reliance on that drug's potential success makes it more prudent to combine with other high-risk startups. Intuitive Surgical (Nasdaq: ISRG ) is on the cutting edge of medical technology, with tools that surgeons can use to improve their results and be more efficient. As people need more medical services, stocks like these will help medical professionals provide them.
3. Stick with survivors.
Just because you should take risk doesn't mean you should take too much risk. It makes sense to balance risky plays like the ones above with some more secure picks.
Companies with a long history of paying ever-increasing dividends are a good place to round out your stock portfolio. Procter & Gamble (NYSE: PG ) and 3M (NYSE: MMM ) have each raised their dividends each year for the past 50 years. More importantly, each still has a strong stable of products that people use and rely on. That doesn't mean you can buy them and forget about them, but you don't necessarily have to keep an eye on them as much as you might with less established companies.
Stocks will play an important role in whether you can retire rich. If you get off on the right foot, you'll have the best chance to have the retirement of your dreams.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.